Doha, Qaatr: COVID-19 has only added to the woes of a global oil and gas (O&G) sector, with the largest demand shock in history increasing the pressure being felt due to persistently low Total Shareholder Returns (TSR). Yet despite long-term turbulence and steadily worsening TSR performance over the past decade, some companies have maintained their status as O&G value creators, according to a new report by Boston Consulting Group (BCG). The report, titled ‘Diversification Versus Discipline: Value Creation in Oil and Gas 2021,’ shows that WOQOD was recognized as one of the top 20 TSR-performing organizations over the past three, five, and ten years.
The companies in the study were those valued at more than $6 billion (as of January 1, 2020), had a free float of at least 20%, and existed before 2015. The study
looked at TSR performance over a ten-year price cycle from July 2010 through July 2020. These analyses provided additional insights into how companies’ performance changed during different oil price and market environments.
“Value creation in the industry has been a challenge for several years due to a host of factors, and O&G has fallen behind other sectors,” said Juan Vazquez, Managing Director and Partner, BCG. “It is important to recognize the top TSR performers in the O&G industry, such as WOQOD as they demonstrate consistency in their operations, despite the persisting industry challenges. Profit growth, change in valuation multiple, and cash flow is the capital gains behind the company’s top 20 positioning, aspects which have been driven through business, investor, and financial strategies.”
TSR is measured as the return from a stock investment – with the assumption that all dividends are reinvested in stock – and a product of multiple factors, namely profit growth, change in valuation multiple, and cash flow contribution. First, fundamental value changes are assessed through a combination of revenue growth and margin shifts. Second, the impact of investor expectations is determined when factoring in changes in a company’s valuation multiple, which can entail risk factors, financial policies, portfolio changes, and growth and profitability expectations, to name a few. Finally, the distribution of free cash flow to investors and debt holders is tracked in the form of dividends, share repurchases, and debt repayments, with the contribution of free cash flow payouts to a company’s TSR.
BCG’s study found that International Oil Companies (IOC) have underperformed the S&P 500 in TSR for more than a decade. After outperforming the S&P 500 in annualized TSR over the preceding five years, global IOCs achieved a median annualized TSR of 7% - less than half of S&P 500 constituents – from January 2009 to December 2015. Furthermore, the sector delivered median annualized TSR – share price appreciation plus dividends – of -2 percent for the five years from November 30, 2015, through November 30, 2020.
“Changes in strategy and external factors help to explain the industry’s underperformance,” said Jean-Christophe Bernardini, Partner & Associate Director, BCG. “Since 2009, companies have overinvested in higher-cost assets, which have delivered weaker returns. Moreover, growing investor concerns, greenhouse gas (GHG) emissions, and competition from renewable energy sources were weighing on share prices even before the ongoing pandemic.”
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.
“O&G players must be proactive to start making important decisions on degrees of diversification, portfolio optimization, and performance excellence in their operations (e.g. through building Digital Capabilities) to create value and regain unanimous investor confidence,” said Tomas Estevez, Principal, BCG. “As they prepare for the future, they must place shareholder value creation at the heart of their operations if they are to win and be successful.”
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