Big Oil: Dealmaking Back on the Menu

Big Oil companies used their windfall from surging energy prices last year to pay down debt and reward investors with buybacks. Where to from here?

While lower oil and gas prices mean a repeat of 2022’s record profits is unlikely, cash flows remain above historical norms. Growth through purchase might be a good way to grow for the majors.

“Combined, the biggest western oil companies are forecast to have made adjusted net income of $36.5 billion in the first quarter of 2023,” reports Bloomberg. “While that’s down more than 40% from the peak in the second quarter of 2022, it would still mark the seventh-highest level recorded since the mega-mergers of the 2000s created the companies in their current form.”

With the potential for consolidation, there comes an opportunity for companies to deliver volume growth to take advantage of the supercycle—a prolonged period of high prices and strong demand. Tensions between Russia and the West seem here to stay and will likely continue to keep fossil fuel prices high in the long term.

On the other hand, the industry's cash bonanza could spur for investments in more ambitious projects, but the industry has an uneven track record of good returns from such ventures. So far, the industry has been disciplined in the face of the glut—but that could change.

“Leverage targets have now been achieved, paving the way for surplus free cash capacity likely opening a window for M&A, either in energy-transition or oil & gas,” said Will Hares, an analyst at Bloomberg Intelligence. “Energy majors are in a golden age of free cash flow.”

Recycling Cars?

Eastman Chemical, an American chemical company, showcased their gasification process, which is capable of managing automotive shredder residue (ASR).

“While single-use plastics get the most attention (because they're thrown away after a single use), multi-use plastics eventually face the same fate. The same thinking applies to the plastic used in our cars, which usually ends up in the dump with what remains of the car,” reports The Column. “As a result, some 25 million tons per year of non-recyclable automotive waste (which we call ASR) goes to waste. We're mostly talking about stuff like plastic dashboards, body parts, seat belts, and airbags, but contaminated with various inorganic matter.”

Eastman Chemical partnered with USAMP and PADNOS to demonstrate their gasification process's ability to handle a plastic-rich fraction of ASR and produce syngas. The company aims to use the syngas to create chemicals and materials instead of fuels.

Chad Nationalizes a Pipeline

Chad has recalled its ambassador to Cameroon due to "entrenched disagreements" over the sale of Exxon Mobil's oil assets in both countries to Savannah Energy.

“Exxon closed the sale of its operations in Chad and Cameroon to Africa-focused oil and gas producer Savannah in a $407 million deal in December,” reports Pipeline & Gas Journal. “But the Chadian government has challenged the agreement saying the final terms of the deal were different from what had been presented to it. Chad has nationalized the assets on its side of the border, including Exxon's share of the over 1,000-km (621-mile) Chad-Cameroon oil pipeline.”

Chad has accused Cameroon officials of taking "unfriendly actions" and undermining relations between the two countries.

For its part, Savannah Energy claims it will pursue its legal rights over Chad's nationalization play. Recently, the company sold a 10% stake of the share capital of the Cameroon Oil Transportation Company, which owns and operates the 903km (561 mile) Cameroon section of the Chad-Cameroon pipeline, to Cameroon national oil company (SNH).

“According to the deal, Cameroon's SNH will pay a cash consideration of $44.9 million to Savannah Energy,” reports PGJ. “Chad said in its statement that it was not informed of this sale which was contrary to the status of the pipeline company.”

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Conversation Starters

1. The Biden administration plans to lean on carbon capture. “The U.S. government may soon require natural gas-fired power plants to install technology to capture carbon emissions, sources said, as President Joe Biden's administration enacts new rules to help decarbonize the power sector in 12 years,” reports Reuters. “The Environmental Protection Agency as soon as this week is expected to unveil standards for new and existing power plants, which belch roughly a quarter of U.S. greenhouse gas emissions, two sources said. The rules will replace former President Donald Trump's American Clean Energy rule and former President Barack Obama's Clean Power Plan, both of which were invalidated by courts.”

2. FERC agrees to more cybersecurity for the grid. “Utilities will be able to receive financial incentives for making certain cybersecurity investments and taking part in threat information sharing programs under a decision released Friday by the Federal Energy Regulatory Commission,” reports Utility Dive. “The rule, approved, 3-1, was required by the Infrastructure Investment and Jobs Act. It largely tracks a proposal issued in September, but the commission dropped a proposed 2% return on equity adder that was supported by investor-owned utilities.”

3. Hydrogen for steel production? “Tata Steel, the giant Indian steelmaker, on Monday said it had started injecting hydrogen gas at a major plant in the world’s first test of such a large quantity of hydrogen gas continuously injected in a blast furnace. The trial, part of Tata Steel’s plan to reduce coke consumption and carbon dioxide emissions, is injecting record-high volumes of hydrogen gas and is expected to continue for a few days,” reports Oilprice.com. “The trial involves the injection of hydrogen gas using 40% of the injection systems of the blast furnace at Jamshedpur Works. If successful, the use of hydrogen gas has the potential to reduce the coke rate by 10%, which would mean around 7-10% reduction in CO2 emissions per ton of crude steel produced, Tata Steel said on Twitter.”

Crom’s Blessing