Opaque reporting of trading profits is a problem for Europe’s oil majors
European oil supermajors have been raking in strong earnings from their trading divisions in recent years amid volatile commodity prices. Yet, Big Oil hasn’t been reporting just how strong their trading profits have been, depriving investors and analysts of a proper view of all sides of their business.
The opaque reporting of trading profits could be an issue for Europe’s top oil and gas firms, which are unhappy with the discount at which their stocks trade compared to the U.S. supermajors Exxon and Chevron.
Putting exact figures on the profits from trading could help investors and analysts put a more exact valuation on the shares of BP, Shell, and TotalEnergies, the Financial Times’ David Sheppard argues.
Everyone now knows that European majors made “exceptional” profits on trading in the first quarter, as the companies themselves described those earnings in the Q1 results earlier this month. But no one really knows the exact numbers because none of those oil majors is disclosing the profits on trading.
For example, BP reported in early May $5 billion in profits for the first quarter, higher than the earnings for the fourth quarter of 2022 and above consensus estimates, thanks to what it described as “exceptional” gas trading and “a very strong oil trading result.”
“Compared to the fourth quarter 2022, the result reflects an exceptional gas marketing and trading result, a lower level of refinery turnaround activity and a very strong oil trading result, partly offset by lower liquids and gas realizations and lower refining margins,” BP said in a statement, but did not go into any details about the “exceptional” results.
Shell’s Q1 adjusted earnings were driven by “strong trading and optimisation margins for gas and power due to continued price volatility primarily in European and American markets,” the other UK-based supermajor said last week.
Neither Shell nor BP went into much detail about trading, giving investors a feeling that they were not receiving all the information about the vast trading operations.
In 2022, when Big Oil smashed all earnings records with the highest profits ever seen, the European oil giants made more money from trading than the world’s top traders, according to estimates from Bernstein.
Europe’s oil giants saw their trading arms rake in some $37 billion in pre-tax earnings last year, overtaking the estimated $34 billion made by the world’s largest energy traders, per Bernstein’s research cited by FT.
Shell generated $16 billion in pre-tax earnings from energy trading in 2022, while TotalEnergies took in $11.5 billion, and BP earned $8.4 billion.
These figures compare to Vitol’s record energy trading profits of nearly $15 billion, followed by Trafigura’s $8.5 billion, Gunvor’s $5.4 billion, and Mercuria’s $4.9 billion.
According to Bernstein, the trading operations at the biggest oil and gas firms should be viewed as “increasingly material and sustainable source of value creation.”
More value creation could help Europe’s majors bridge the gap in their stock valuation compared to their American peers.
Executives at Shell, BP, and TotalEnergies have been frustrated with the lower multiples at which their stocks trade compared to Exxon and Chevron.
The primary listing on a stock market in Europe is the main reason for the discount at which TotalEnergies’ stock trades relative to the market value fundamentals of its U.S. competitors, TotalEnergies’ chief executive Patrick Pouyanné has said at meetings with investors in recent months, FT reported last month.
However, TotalEnergies does not consider moving its primary listing to the United States, Pouyanné has said during recent meetings with investors, with the executive reportedly telling shareholders that “if Total was US-listed it would be much better but, of course, it is impossible for Total to move its listing so it’s not on the cards.”
Two years ago, Shell’s executive leadership discussed relocating to the U.S. in order to boost the company’s valuation, FT reported earlier this year.
In recent years, there has been a stark difference in the valuations of European and U.S. majors. According to analysts, there are two primary reasons for this: the first is the greater clout that ESG investing has in Europe, and the other is that neither ESG-focused nor traditional investors seem to be particularly convinced of European Big Oil’s transition plans.
