Oil investors show they want more than just profit

They’re willing to punish companies that don’t meet their standards, and their standards are awfully high. On their wish list: immediate returns, spending discipline, and, at the same time, more production. Here are three big takeaways from a mixed earnings season, where demands on Big Oil were laid bare.

Profit isn't enough

The world’s biggest companies from Royal Dutch Shell Plc to Chevron Corp. are starting to churn out profit like it is $100/bbl oil again. They have trimmed a lot of fat built up during the heady days of oil as they raced each other to construct hyper-engineered mega-projects.

But, that’s no longer enough for investors. The goalposts have moved and now they mostly care about cash.

Shell’s first-quarter earnings soared 42% from a year earlier, beating analysts’ estimates. Still, cash flow from operations was lighter than expectations and the shares were hammered.

Only half of the companies reporting dazzling earnings saw their stock rise. The problem? Investors are looking for immediate gratification after enduring the oil-price downturn. They also do not fully believe the companies can continue to keep a leash on their purse strings now that crude is rebounding.

“The investment community still is not sure we’re going to handle these higher prices with discipline,” BP Plc CEO Bob Dudley said at a conference last week. A longer track-record of prudent action is more important.

Caution not rewarded

Dudley and his counterpart at Shell, Ben van Beurden, are among oil-company bosses who have pledged to maintain their hard-earned cost discipline. So, investors should be happy, right? Not necessarily.

Shareholders think Shell’s cash-flow issues are likely to affect something close to their hearts: buybacks. CFO Jessica Uhl was swamped with questions about the timing of the $25-billion share repurchase program by both analysts and reporters. All they got was that she wanted to focus on reducing borrowings. Earlier, debt was investors’ primary concern after Shell’s $50-billion acquisition of BG Group Plc in 2016.

Demanding more oil

If delayed buybacks make investors mad, then missing earnings estimates makes them furious. Ask ExxonMobil Corp.

The world’s biggest publicly traded oil company reported that while profit increased, it fell short of forecasts. It even missed the mark on production, the first sub-4 MMbpd figure for that time of year since Bill Clinton was president. It couldn’t even keep pace on chemicals.

The result is partly the consequence of one bad bet. The company invested heavily in exploring Russia, only to shelve all of its plans when the country was hit by U.S. sanctions after the annexation of Crimea. Exxon responded to investor concerns by saying earlier this year it will boost spending to unlock more barrels of oil.

However, that’s not passing muster either. Its shares have dropped in all three trading days after the first-quarter earnings. The company has lost about $53 billion in market value since it posted disappointing fourth-quarter results three months ago. That’s more than the market capitalization of the Ford Motor Co.

“The quarter did not quite live up to high expectations following strong” oil prices, said Rob West, a London-based analyst at Redburn (Europe) Ltd.