2023-03-25 08:57:41 ET
Summary
- BP and Exxon have adopted contrasting approaches to renewable energy, with BP investing heavily in the sector while Exxon remains more focused on its core business.
- While the sustainable energy transition is inevitable, the profitability of green energy investments is far from certain, distorting oil and gas companies' risk/reward profiles.
- BP has outperformed Exxon in the natural gas price realization, but Exxon consistently demonstrated higher profitability and more dividend payments.
Investment Thesis
Multinational oil and gas companies are finding themselves at a crossroads as the world transitions toward a more sustainable economy. The contrasting approaches taken by BP p.l.c. ( BP ) and Exxon ( XOM ) in the renewable energy sector offer a fascinating case study of diverging strategies. While BP has made significant investments in renewable energy, XOM has remained more cautious, focusing on its core business. Only recently, and after a vicious proxy fight, Engine No. 1 succeeded in having a seat on XOM's board on an environmental agenda. Nonetheless, the distinction between the two company's approaches toward the green energy transition remains crystal clear. The question that comes to mind is whether BP's gamble on renewables is a visionary move or a costly mistake.
Last year, the British oil giant nearly doubled its Electric Vehicle charging points to 22,000, up from 13,000 in 2021. Although these chargers seem a natural fit for BP's gas station network, the return on investment is far from certain. Unlike gas fuel stations, the barriers to entry to this market niche are low. In the parking space of my local superstore, there are nearly a dozen EV charging stations, not to mention my neighbors, who also have EV charging units in their garages. The same goes for biogas and clean hydrogen, where BP's political edge in navigating complex geopolitical dynamics becomes obsolete. In its annual report, BP management stated that it plans to spend about half of its Capex on renewables by 2030, compared to a 14% commitment by XOM.
For me personally, investing in the fossil fuel industry represents a calculated bet on the continued demand for oil and gas, at least for enough time to make a decent profit. This demand, combined with high dividend pay-outs, makes oil and gas stocks an attractive investment. In this context, I believe that XOM is a more compelling choice than BP primarily due to its focus on its core business and its superior financial performance, as discussed in more detail below.
Reserves
BP boasts an impressive 7,183 million barrels of oil equivalent "BOE" of crude oil, natural gas, and natural gas liquid "NGL" reserves. Exxon, however, dwarfs its competitor with a staggering 17,742 million BOE.
In terms of geographical distribution, both companies have significant reserves in the United States and Asia. For XOM, the largest crude oil reserves are in Asia (3,550 million barrels), followed by the United States (2,323 million barrels). Meanwhile, BP's most significant crude oil reserves are in the United States (1206 million barrels) and Asia (1,073 million barrels). However, it is worth noting that BP's presence in other regions, such as South America, Canada, Australia, and Africa, is relatively limited compared to Exxon. This might point to a focused approach by BP, while XOM seems to be spreading its interest more broadly and highlights the strategic importance of these regions for XOM. However, while the benefits of diversification are undeniable, especially given the shifting regulatory landscape for exploration and production licenses, the recent news of Chad's nationalization of XOM assets today is an example of the geopolitical risks both companies face.
As for the composition of reserves, the ratio of crude oil to natural gas BOE is comparable between the two companies. However, XOM has a sizable exposure to bitumen and synthetic oil, which provides some reserve diversification benefits, but at the expense of higher extraction and processing costs.
BP's Reserves (Millions Oil-Equivalent Barrels):
- Crude Oil: 3,531 (50%)
- NGL: 466 (7%)
- Natural Gas: 3,080.17 (44%)
- Total: 7,077.17 (100%)
XOM's Reserves (Millions Oil-Equivalent Barrels):
- Crude Oil: 7,167 (40%)
- NGL: 1,531 (9%)
- Natural Gas: 6,271 (35%)
- Bitumen: 2,420 (14%)
- Synthetic Oil: 353 (2%)
- Total: 17,742 (100%)
Finally, as mentioned in previous articles, differentiating between developed and undeveloped reserves is crucial when assessing reserve valuation. Proven Developed Reserves "PDR" refers to those oil and gas deposits that have been discovered, verified, and are ready for extraction using existing facilities and infrastructure. They represent a stable and reliable source of energy. In contrast, Proven Undeveloped Reserves "PUR" are deposits that have been confirmed but lack the necessary infrastructure for extraction. Although they hold potential, their development requires additional investment, time, and effort before they can contribute to the energy supply. Thus, PDR has an economic edge over PURs.
XOM has slightly larger PDR reserves as a parentage of total assets compared to BP, but overall, the difference is too small to provide a meaningful discrepancy in valuation. Out of BP's total oil and gas reserves, 60% are developed, compared to 63% for XOM.
A Closer Look At The Evolving Sales Dynamics Between BP and Exxon
The energy industry has seen some significant changes over the past few years, with fluctuating oil prices and shifting market conditions. Gaining insight into pricing dynamics is best achieved through the lens of historical context. Examining the price per unit sales for both companies in 2020, we see that prices of crude oil, NGL, and natural gas were quite low, which can be attributed to the global pandemic and its impact on the energy market. BP realized a notably lower NGL per barrel ($12.9 for BP and $16.1 for XOM), but a much higher price for natural gas ($2.8 for BP and $2 for XOM)
Fast forward to 2021, and the sales per unit for both companies increased significantly, reflecting the gradual recovery of the global economy and energy market. It is interesting to note that while BP sales per unit NGL were still lower than XOM ($30 for BP and $33.7 for XOM), and BP's lead in natural gas remained strong ($5.2 for BP and $4.3 for XOM), the gap has narrowed during the period.
In 2022, the average sales per unit for both companies continued to increase, with crude oil per barrel sales for BP and XOM reaching $95.7 and $96.2, respectively. The gap between their crude oil sales per unit remains relatively small, and the same can be said for their NGL per barrel sales ($37.0 for BP and $39.4 for XOM). However, BP has outperformed XOM in price realization of natural gas, with the gap difference increase by 400 bps compared to 2021 ($9.3 for BP and $7.5 for XOM), as the UK's Brexit exacerbated the European gas crunch in the aftermath of the Russia/Ukraine invasion. From my understanding, 15% of BP's sales are in its home market in the UK.
To sum it up, the sales per unit data for BP and XON show that both companies have experienced similar growth patterns in the past few years, with slight differences in their respective market segments. Both companies realized comparable crude oil prices while BPO has taken the lead in the gas market, with the gap widening in recent quarters subsequent to the Russian/Ukraine war, demonstrating the importance of geopolitical risks in the oil industry. As the energy landscape continues to evolve, it will be interesting to see how these two giants adapt and position themselves to remain competitive in an increasingly dynamic market.
Profitability
In 2022, BP faced a significant setback as it had to write down assets of its Russian subsidiary, resulting in a loss of $2.5 billion. While this financial blow may seem disheartening, a deeper analysis of the company's adjusted return reveals a meaningful increase in cash flows during the period.
However, when comparing cash flow margins with its American counterpart, XOM, it becomes clear that BP has some catching up to do. Over the years, XOM has consistently outperformed BP in profitability, even when factoring in non-cash impairments. This could be attributed to XOM's scale, diversified portfolio, or simply superior commercialization operations.
Summary
While it is true that renewable energy sources are gaining traction, the global demand for fossil fuels is far from waning, increasing by 2.3% in 2022, despite the global economic slowdown, continuing an upward historical trend. The driving factors behind this demand include population growth and increasing GDP per capita, which have historically led to increased consumption of energy resources. By investing in oil and gas, I am placing my bets on the likelihood that these trends will persist in the coming years, long enough for me to generate a profit on my energy portfolio through dividends and buybacks.
XOM's financial performance has consistently outpaced that of BP, with higher profitability and more stable dividend payments. While BP has focused on expanding its renewable energy portfolio, its financial performance has suffered, making it a less appealing option for investors seeking reliable returns.
For further details see:
Exxon Vs. BP: Navigating The Green Energy Transition