Energy Musings - February 5, 2026
The difference in financial strength between U.S. and European oil companies may lead to significant differences in future shareholder returns. Low oil prices are the problem.
European Oil Company Strategies Questioned
Last Friday, Exxon Mobil Corporation and Chevron Corporation reported their fourth quarter and full-year 2025 earnings. Both companies posted their lowest profits in four years, despite record oil and gas production. Profits were hurt by the steady decline in oil prices last year. The companies reiterated their plans to grow production, cash flows, and returns to shareholders despite the low oil price. Each company has made strategic acquisitions and investments to sustain and grow its oil and gas businesses in the past few years. This strategy draws attacks from climate activists, while shareholders reap the rewards of higher dividends and healthy stock buybacks, boosting returns.
Share buybacks and increased oil and gas investments by European oil and gas companies are being attacked by shareholder activists and major pension funds for their anti-climate-change impact and “undisciplined capital allocation.” BP is the current target, and the attacks are being carried out by an activist group that previously targeted Australia’s Woodside Energy. Meg O’Neill, the incoming BP chief executive officer, was previously the CEO of Woodside, where the Australian Centre for Corporate Responsibility (ACCR) repeatedly challenged her.
She assumes the role of BP CEO on April 1 and will face shareholders at the April 17 annual meeting. With sixteen days in the top seat, we expect her to demur on proclamations about strategies and target returns beyond statements previously made by the chairman of the board, the directors, and other senior executives.
The ACCR shareholder proposal calls for BP to set out a plan for “a disciplined approach to capital expenditure in order to generate an acceptable return on capital.” This is a rebuke of BP’s decision to pursue a “fundamental reset” of its corporate strategy that has been adrift for the past five years. BP is shifting its focus away from renewable energy toward oil and gas. In its reset strategy, BP said it plans to increase its oil and gas spending by $1.5-$10 billion a year while cutting clean energy spending from $7 billion to $1.5-$2 billion.
When he discussed the reset, BP’s former CEO, Murray Auchincloss, pledged to increase the company’s return on average capital employed from 12% in 2024 to more than 16% by 2027. Gordon Birrell, BP’s head of production, said the next generation of BP’s oil and gas projects would have an internal rate of return on capital of more than 20%. This suggests more targeted projects and greater attention to their execution.
ACCR last year garnered about 20% shareholder support for questioning Shell’s natural gas expansion strategy. ACCR successfully won the support of more than half of Woodside’s voting shareholders for a resolution calling for ambitious climate targets in 2020.
ACCR and the various pension funds aligned with it only hold 0.42% of BP’s market capitalization. So, will this be like ExxonMobil’s battle with hedge fund Engine No. 1, when the company lost two seats on the board of directors in a contested election? That was at the same time Shell suffered a legal defeat in the Netherlands, its home domicile. A Dutch court ordered Shell to increase its pledge to drastically reduce its greenhouse gas emissions. Shell left the Netherlands for the U.K. and re-emphasized its traditional, profitable oil and gas business.
The past decade is almost ancient history in the energy and climate change worlds. In 2020, the world was engulfed in a global pandemic that forced economic shutdowns, that crippled the oil and gas industry. That turmoil occurred five years after the last OPEC price war sent oil prices crashing, prompting significant cost-cutting and consolidation in the global oil and gas industry. The past decade has been one of the more tumultuous for the oil industry in decades.
It was a period when fears of climate change drove emissions policies that mandated reduced use of oil and gas. As a result, the International Energy Agency (IEA) ditched an energy model based on existing clean energy policies because it projected a favorable outlook for fossil fuels. The agency adopted a more aspirational model, which called for a peak in global oil consumption before 2030. Such a forecast caused shareholders and regulators to worry about stranded assets and investments, as well as the impact on energy companies’ balance sheets.
In 2020, BP appointed Bernard Looney, a longtime executive, as CEO. Looney devised a strategy for BP to lead the energy transition from fossil fuels to renewable energy. In a February 2020 BP publication introducing Looney, he wrote, “We know the world is not on a sustainable path. We want a rapid transition. Society has to deliver the Paris goals.” That was the prevailing mood after nations failed to deliver on their investment and policy goals consistent with pledges made at the 2015 Paris COP meeting. Looney further told the public that “Very few companies have both the skill and will to drive the real system change that the world needs and wants to see. BP is one of them.”
This was a time when the diminutive BP was getting back on its feet following the Deepwater Horizon accident in 2010, which had nearly destroyed the company. The Macondo Prospect blowout spilled an estimated 4.9 million barrels of crude oil into the waters of the Gulf of Mexico and cost the lives of 11 workers. It was the largest oil spill in the history of the petroleum industry. BP paid $4.5 billion in U.S. fines for the accident and for lying to Congress. It later paid nearly $21 billion in fines for environmental damages. After eight years, BP had spent more than $65 billion in cleanup costs, charges, and penalties.
The ACCR and pension funds may have grounds to question BP’s return metrics. However, they seem to have missed the latest IEA report, which now projects that oil use will not peak by 2030. In fact, the IEA projects oil use will continue to grow until 2050. Moreover, it warns that the oil industry must increase its investments in new resources to avoid a significant rise in oil prices, which could derail economic growth.
These petitioners should also review Looney’s presentation of the new BP strategy in early 2020. During it, he acknowledged that renewable energy returns were not equal to those of oil and gas. Therefore, he warned BP pensioners who depend on the company’s dividends that they might not see them grow as they have in the past. That was an unsettling revelation for shareholders. The latest fallout from Looney’s strategy was disclosed in January when BP said it would take a $5 billion impairment charge for the value of its gas and low-carbon business.
With BP re-emphasizing its core business, it has the potential to achieve Auchincloss’ pledge to boost the company’s return on capital employed. Such an improvement may boost the company’s share value, even during a period of weak oil prices. The industry’s underinvestment in new oil and gas resources is likely to drive up oil prices in the future. Higher oil prices will be needed to generate the cash flows oil companies need to fund expanded exploration and development budgets. That also means higher earnings and shareholder returns that traditionally lift share prices.
However, the current low oil prices and weak cash flows have produced the latest challenge for European oil companies. The European investment community questions whether companies can continue paying their dividends while aggressively buying back shares. The combination is how oil and gas companies satisfy shareholder demands after the 2015 oil price collapse and industry recession. Shareholders demanded an end to increased production at reduced profitability. They demanded that cash flows be invested in sustaining current production levels, gradually increasing production, strengthening the balance sheet, and rewarding shareholders with higher returns through dividends and share buybacks. This collection of strategies has guided the industry since that era.
Recently, when the Financial Times asked several investment analysts and fund managers about the status of European oil companies, the view was best summarized by Josh Stone, a UBS analyst. “There was a very strong argument to prioritize buybacks when valuations were cheap, balance sheets healthy, and the perceived risks around peak oil were growing,” he said. “That is not the case today.” Analysts do not expect the companies to fund buybacks using debt, given their current balance sheets and low oil prices. Employing such a strategy would likely cause share prices to fall.
Neither ExxonMobil nor Chevron suggested cutbacks in their shareholder return approaches when they reported earnings last week. They both emphasized the strength of their balance sheets in helping them navigate this low-oil-price environment.
Two European oil companies have indicated that they will reduce their stock buybacks. TotalEnergies SE has said it will reduce its quarterly share buybacks by $500 million to $1.25 billion in 2026, assuming oil prices average between $60 and $70 a barrel. An investment bank has stated that Equinor ASA, Norway’s state-controlled oil company, is expected to reduce annual share repurchases from $5 billion in 2025 to $2 billion in 2026.
When we examine the financial positions and market capitalizations of various international oil companies, the challenge European companies face due to low oil prices and reduced cash flows becomes clear. Our table shows these metrics for the four U.S. and the five European oil companies, highlighting the problem.
U.S. oil companies have debt-to-equity ratios ranging from 16% to 36%, except for Occidental Petroleum Corporation, which has a 62% ratio. Occidental reached an agreement last year with its largest shareholder, Berkshire Hathaway, to sell its chemical business, OxyChem, for $9.7 billion. The company plans to use $6.5 billion to reduce its debt-to-equity ratio significantly.
European oil companies have debt-to-equity ratios ranging from 41% to 76%, except for BP, which has a 96% ratio. These substantially higher debt-to-equity ratios and smaller market capitalizations leave European oil company management with less flexibility to weather a low-oil-price environment, especially if it lasts for a long time.
European oil companies face challenges.
Given this distribution of companies by market capitalization, it is not surprising that the largest are less affected by low oil prices. It will be interesting to see what Shell and BP announce about their shareholder return strategies.