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Big Oil Accelerates Transformation Plans to Rebuild Shareholder Value

BCG Study Finds That International Oil Companies Have Underperformed the S&P 500 in Total Shareholder Returns for More Than a Decade. O&G Companies Today Stand at a Crossroads as They Define the Path Ahead

WASHINGTON—Weak shareholder returns in the oil and gas sector, coupled with a pandemic-induced demand shock, are challenging the industry. O&G companies are under pressure to choose between increased diversification and greater discipline as their primary strategy for creating value and winning back investor confidence, according to a new report released today by Boston Consulting Group (BCG).

The pandemic has caused international oil companies (IOCs) to accelerate their plans to reinvent themselves for a new energy landscape. With less capital available to spend, they face starker decisions on how to allocate it. Regardless of their approach, companies must prove to investors that they can create sustained value. BCG’s report, Diversification Versus Discipline: Value Creation in Oil and Gas 2021, analyzes total shareholder returns (TSR) across large oil and gas companies globally and offers insights gained from a survey of 150 institutional investors in oil and gas.

Two-thirds of the investors surveyed anticipate that demand will return to pre-COVID-19 levels in the second half of 2021, and that oil prices will rise. Nevertheless, few investors expect companies to capture this upside, with 60% predicting that the sector’s median TSR over the next two years will be no higher than it has been over the past two years. Indeed, in recent years, some leading IOCs’ stock market capitalization has fallen below that of large renewables players.

“To overcome structural challenges and investor perceptions, oil and gas companies are fundamentally changing their businesses,” said Rebecca Fitz, a senior director at BCG’s Center for Energy Impact and one of the report’s coauthors.

While many European players are becoming broad-based energy companies and expanding into growing low-carbon markets, North American IOCs remain focused on hydrocarbons as the starting point for increasing efficiencies, investing in new technologies, and lowering greenhouse gas emissions. Despite pursuing these sharply different strategies, US-based Chevron and France-based Total were TSR winners in the time periods that BCG analyzed, thanks to balance sheet strength and payout sustainability.

“Across the world, oil and gas companies are making important decisions on degrees of diversification, portfolio optimization, and excellence in oil and gas operations as levers in their transformation,” said Clint Follette, a managing director and partner at BCG and a coauthor of the report. “Only time will show whether companies have the ability to extract sufficient value from their efforts and meet investor demands for better shareholder returns.”

BCG’s report concludes that IOCs should make plans to compete in a bigger arena against a broader array of energy providers, using TSR performance as the yardstick. In adapting to the new energy landscape, companies must place shareholder value creation at the heart of their strategies if they are to win the future.

A copy of the report can be downloaded here.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

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