Despite the turmoil of 2020, our second Strategic Alignment of Investors and Oil and Gas Leaders study sees that, for the oil and gas sector, some things have not changed. The fundamental misalignment between investors and executives we identified in 2019 still exists and continues to be an obstacle to attracting capital back to the industry. In short, investors remain weary and leary of the industry’s “overpromise and underdeliver” track record.
In this second installment of our study, PwC surveyed over 120 institutional investors, analysts, and oil and gas executives. Below you will find key themes from the study as well as our own observations.
The market for investors is competitive and the industry has not delivered. Investors have made it clear that oil and gas companies must compete with companies outside the industry to attract investment. Despite clear messages delivered by investors—by both their words and their capital—oil and gas leaders continue to remain hesitant to open the aperture and evaluate themselves against a broader peer set. This has not changed since our 2019 survey of oil and gas business leaders and industry analysts, which made it clear that the peer group for oil and gas companies has expanded, i.e. S&P 500 practice.
Investors and leaders agree that balance sheet improvement and free cash flow are top goals for 2021. But what else? Oil and gas leaders would answer, “growth,” while investors would say, “return on capital employed.” According to our survey, 50% of oil and gas leaders prioritize growth—illustrating how oil and gas companies are more focused on barrels than cash and returns, and haven’t fully shifted into “value-based” organizations. In fact, the number of oil and gas leaders who list return on capital employed (ROCE) as a top priority has actually decreased by 24% since the previous survey.
60% of companies are still below the mark.
Investors have reached a clear consensus on the minimum dividend yield required to be attracted to oil and gas: between 4% and 5%. Company leaders are much more varied in their responses to the same question—indicating a clear expectations gap between management and investors. This remains consistent with our findings from the 2019 survey where more than 50% of oil and gas leaders believed a minimum dividend yield between 0% and 4% would draw the interest of generalist investors.
Looking across the industry today, few companies meet the 4-5% investor target, and only 28% of companies have met or exceeded that target over the past five years.
2020 challenged the best-run oil and gas companies and accelerated several industry trends including consolidation, focus on cash and investor shift. In responding to these challenges, companies undertook significant changes to their workforce, portfolios and operating practice. (See PwC’s Upstream Playbook for 2021 & Beyond for our perspective on how to survive and thrive in this environment.) Additionally, 30% more oil and gas companies have taken steps on digital implementation compared to 2019, as they continue to leverage advancements in technologies to achieve their primary goal of free cash flow.
Looking to the future, companies and their investors both see significant headwinds. Unsurprisingly, commodity prices and the outlook for hydrocarbon demand continue to be top of mind. But that’s not all. As companies continue to invest in digital and gain analytical capabilities on par with other industries, we expect to see a greater focus on talent. There will likely be greater urgency and more attention given to finding, attracting and retaining the top talent required to unlock value from these investments.
Environmental remains important and continues to be the primary focus in the public square, and is the foundation of most companies’ sustainability reporting and stakeholder communications. Companies have undertaken a range of strategies to address the “E” and investors recognize the progress and trajectory of these efforts.
Social, despite being overshadowed by “E”, continues to be an area that oil and gas companies consistently demonstrate significant impact.
Governance is the area in which investors are demanding more from oil and gas companies. Investors view oil and gas companies as having made little progress in this area and are demanding greater transparency and accountability from management teams.
“Boards have to set up the right incentives and hold CEOs accountable for value creation and positive shareholder outcomes.”
As we dig deeper into this misalignment, PwC will provide additional perspectives on the workforce transformation, the digital transition, the energy transition, ESG and more in the coming months.