TSR Consulting, or Total Shareholder Returns (TSR) consulting, focuses on helping public companies maximize shareholder returns. A company can deliver shareholder returns via stock price appreciation, dividends, or some combination of the two. Unfortunately for the big oil industry, a recent study by Boston Consulting Group (BCG) finds that it has underperformed the S&P 500 in TSRs since 2010. The industry must choose between diversification (i.e., movement into broader energy markets) or improved operations (i.e., cost reduction) to create value.
Big Oil Industry Under Shareholder Pressure to Realize Greater Returns
TSR consulting by BCG revealed that the big oil industry had been delivering weak shareholder returns even before the pandemic hit in March of 2020. The reduction in demand for oil (e.g., no international travel) caused by the pandemic, led to a decline in oil prices that put further pressure on the stock prices of major competitors in the big oil industry.
About 66% of investors surveyed by BCG believe that oil demand will return to pre-COVID-19 levels in the summer of 2021. They believe this will cause oil prices to rise. But 60% of these investors don’t expect big oil industry companies to capture this upside. Instead, TSR consulting analysis suggests TSRs for Oil and Gas players over the next two years will be no higher than over the past two.
How Oil & Gas Needs to Pivot
Rebecca Fitz, a director at BCG’s Center for Energy Impact and a co-author of the BCG report, stresses that players in the big oil industry must fundamentally change their business models to overcome investor perceptions and deliver higher TSRs.
European Oil and Gas competitors seem to be outmaneuvering U.S-based players when it comes to evolving their business models. European players are more likely to be focused on transforming themselves into diversified energy companies and expanding into growing low-carbon markets. But U.S.-based O&G players remain focused on 2 things:
- Investing in new technologies that increase efficiency
- Lowering greenhouse gas emissions with a framework of primarily existing hydrocarbon-based fuels (e.g., coal, natural gas, etc.)
But interestingly, the TSR consulting conducted by BCG reveals that the top two TSR performers, Chevron (U.S.) and Total (France) each pursued one of these sharply different strategies.
Simple TSR consulting analysis conducted by BCG reveals that shareholder value creation in the big oil industry has lagged the S&P 500 for over a decade. The pandemic put further pressure on these businesses. To change course and improve returns will likely require careful and serious consideration of new business models. These new models almost certainly will need to address participation in the broader energy landscape, including renewable energy.
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