The fiscal year of 2020 was certainly rough on the financials of energy companies, specifically those of oil&gas firms. The unexpected fall in the oil prices and duration the prices stayed at those levels had numerous negative effects on energy firms' fiscal balances and future business plans. One of the most attractive aspects of oil firms was the generous dividends that attracted institutional and retail investors seeking a good return on their investments. Naturally, the high demand for the stock also led to content shareholders. However, 2020 led these firms to follow different approaches to their dividend strategies. Some went the way of cutting their dividends to promote internal financial discipline, while some went the way of modest increases on their dividends that were not on par with expectations. Of course, investor sentiment to both of these strategies varied greatly as turbulent as those times were.
Adding the environmental, social and corporate governance (ESG) concerns on top of financial constraints, the $80+ barrel combined with a recovering global economy gives the energy firms a golden opportunity to win back investor sentiment and reshape their operations. Naturally, to tweak their earnings-per-share statistics, the producers will focus on profiting off the lowest cost barrels and creating a comeback story. Most retail investors do not care whether the profit is coming from the world's deepest well or the shallowest one; they focus on one thing- the return on their investments. Against this backdrop, there seems to be a global producer consensus forming to keep barrels at reasonably high levels for some time. On a different note, technology is progressing faster than most can adopt, and previously unviable reserves can now be drilled into and be brought onto the market. So when might the next record-breaking ultra-deepwater well be coming?
Engineering-wise, ultra-deepwater wells are extremely complex operations. It's also not unusual to see producers of subsea equipment also utilizing military-grade technology. Considering this, one can easily imagine that the cost of the equipment utilized is of immense amounts. Logistics are also another hurdle that companies have to deal with, adding the geographically remote and harsh nature of ultra-deepwater well locations globally. Increased lead times that lead to prolonged downtimes and the establishment of intricate logistical hubs at such spots add up to create one giant enterprise. The expenses to be undertaken and the job to be accomplished is generally greater when compared to shallow water projects. As most of the fields at such depth are untouched, some gems of fields are probably out there to be discovered, and the prospects of ultra-deepwater drilling projects serve to create long-term value for these energy firms. But, to take such liability of engaging in these projects, the energy firms must determine that the oil prices will be staying stable at such levels for the foreseeable future. Additionally, the cash flows must have balanced out by then to weather any possible fluctuations in the prices.
Looking at it from another perspective, the recent push for climate-friendly development scenarios and activist investor pressure at the energy firms have had vastly visible effects. Not only are individual companies finding it harder to raise cash through banks and financial institutions, but even some of the major names of the private equity industry have also had tough luck raising capital for their hydrocarbon energy businesses lately. But on a different note, there has been a rise in private investors funding such business. Of course, the names are usually High Net Worth Individuals and prefer to remain confidential. The expansion of shale drilling in the U.S. has even caused discomfort in some local towns, and tax rates for the domestic drilling projects have been on the increase recently. Offshore projects are usually out of anyone's sight, and the developing nations in their vicinities are usually highly welcoming of such projects. Another point to note would be the experience gained in offshore drilling projects also led to easier transformation to offshore wind projects, as had been the case in the U.K. A considerable part of the logistics are similar to one another, and given that some of the oil majors have resorted to offshore wind energy as part of their decarbonization plans, offshore operations will likely be favored in the future. So when can we expect to see these projects back on the agenda again? Probably not any time soon, but the conditions are certainly coming back together to set the stage for them.