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Big Oil’s Surprisingly Bright Future. The Case for BP and Exxon.

Just two years ago, the world’s giant oil producers seemed to be going the way of the typewriter industry. No one wanted oil—the price of a barrel fell below zero early in the pandemic. Exxon Mobil ’s stock crashed hard and was dumped from the Dow Jones Industrial Average after 92 years. It was starting to look like a prelude to the real extinction—the world’s transition to clean energy.

So much for that. The plunge turned into a surge, and the top oil-and-gas companies ended up rolling in cash. Exxon (ticker: XOM) is now a stock market star, with a gain of more than 60% in the turmoil of the past 12 months. Chevron (CVX) is up nearly 50%. What’s more, the future has brightened considerably. Instead of being destroyed by the energy transition, Big Oil has emerged in a remarkably strong position to profit from it.

Because of deals signed in just the past year, companies like BP (BP), Shell (SHEL), Exxon, and Chevron are building enough offshore wind farms to supply millions of homes on the East Coast with electricity and are preparing to produce hundreds of millions of gallons of fuel made from plants, garbage, and kitchen grease. They’re increasingly confident that they can get greener without sacrificing profits.

Photograph by Jamie Chung; Styling by Tierney Oberhammer

What saved the companies was a rebound in commodity prices, which climbed gradually before ripping higher when Russia invaded Ukraine. Those premium prices don’t look like they’re going anywhere. Most analysts expect oil to stay above $80 for the foreseeable future because demand is set to exceed supply. Generally, oil producers can deliver handsome profits as long as oil trades above $60 a barrel, analysts say.

Big Oil, which also includes France’s TotalEnergies (TTE) and Norway’s Equinor (EQNR), went from having problems to having options. In the next few years, the companies will have enough money to fund all of their drilling, pay off debt, send dividends to shareholders, and still place large bets on low-carbon businesses. New government subsidies for carbon-reduction technologies, both in the U.S. and Europe, will give those investments a nice kick.



Already, the transition is well under way. Renewable energy could account for 60% of power generation in Western Europe and 35% in the U.S. by 2030, up from 35% and 23%, respectively, according to S&P Global Commodity Insights. Companies everywhere are rushing to keep pace: Total capital investments in renewables in 2022 are on track to exceed oil and gas investments for the first year ever, according to Rystad Energy, a research firm based in Norway.

Still, convincing investors and the general public that Big Oil is changing won’t be easy. Two companies that could profit from clean energy, Exxon and BP, happen to be associated with the most notorious environmental disasters of the past 40 years—the grounding of the Exxon Valdez tanker and the explosion of the Deepwater Horizon drilling rig. And Big Oil long has been accused of misleading the public about the danger of climate change and slow-footing their transition efforts.

The size of the checks that big oil companies are signing today makes a compelling case that their investments aren’t just window-dressing. Earlier this month, Exxon inked a contract to help a corporate customer capture and store millions of tons of carbon dioxide underground, equivalent to switching 700,000 cars from gasoline engines to electric motors, the company says. BP just agreed to pay $4.1 billion for a company that replaces fossil-fuel gas from wells with naturally occurring biogas from landfills, one step in its goal to produce zero net-carbon emissions from the products it sells by 2050; some others have only said they’d reduce the emissions from their own operations.

Both stocks, however, trade as if the oil businesses are on the decline and the new projects will mostly be busts. BP fetches less than four times expected 2022 earnings, and Exxon, for less than eight, or about half of the multiple of the broad market. That could make for good entry points to the stocks.

The companies say their climate projects are likely to reward investors, though they will take time to scale up. “We see an opportunity for a lot of growth and solid returns,” says Dan Ammann, who leads Exxon’s low-carbon efforts.

The U.S. companies have announced much less ambitious emissions-reduction projects than their European counterparts, and seem much less willing to invest in wind and solar, where they say they don’t have competitive advantages.

In Europe, politics and social pressure have helped force more-aggressive moves. London-based Shell, for instance, says it will spend about half of its capital budget on low-carbon divisions by 2025. TotalEnergies and Equinor have also set lofty goals. Uncertainty about the results of those investments, and the shock of the European economic crisis, have caused their stocks to trail those of American energy companies over the past year.

Exxon has said it will invest only in low-carbon businesses that it thinks can generate returns on capital of at least 10%. BP has said it’s targeting 8% to 10%. At today’s sky-high oil prices, several companies are earning returns exceeding 20% on their fossil-fuel businesses, which can make those 10% levels look puny. But remember, oil producers spent 2016 to 2019 earning 0%, because they spent too much money on the wrong projects at the wrong time.

Oil and gas drilling is a volatile business—there’s something to be said for a safe 10% return over a risky 20% one. “The reality of how these [fossil fuel] projects play out isn’t always as” financial models predict, says McDermott. Renewables businesses have less commodity exposure and are more likely to be buttressed by government support or longer-term utility-style contracts.

Ironically, high fossil-fuel prices are the biggest reason that producers have the wherewithal to fund the energy transition. The world’s oil-and-gas companies are on pace to generate $1.4 trillion of free cash flow this year, according to Deloitte’s estimates. Free cash includes money left over after the companies pay for their operations, but before they spend money on dividends and buybacks, and pay off debt. Even after accounting for all of those costs, oil and gas producers should still have $1.5 trillion left over by 2030, with 70% of that excess cash piling up by 2024, according to Deloitte. That’s more than the entire size of the renewable-energy industry today, excluding electric vehicles.



The oil-and-gas companies won’t spend it all on renewables, of course, but they’ve now got the funds to make serious bets without bankrupting their core businesses. Deloitte projects that oil majors will spend 15% to 30% of their capital funds on low-carbon projects by 2030, up from 5% today—with some, including Shell, spending 50% or more.

There’s some cognitive dissonance, of course, in listening to “low carbon” pitches from fossil-fuel companies. Arguably, the best thing the companies could do for the environment would be to quickly wind down their operations. All new drilling would have to stop immediately for the world to avoid the most catastrophic impacts of climate change, the International Energy Agency said last year. But as long as demand exists for oil and gas products, the disappearance of some producers, even some of the biggest, wouldn’t change the climate equation much. Demand has already rebounded nearly to its old highs and is expected to hit records next year.

Some critics of Big Oil’s push into renewables object on financial grounds. “We’re concerned about the returns from these projects,” said Cole Smead, president of Smead Capital Management, which owns shares of Chevron, ConocoPhillips (COP), and other oil companies. Renewables are diluting the financial power of the big oil companies, he argues. Smead would rather that companies like Chevron spend the money to buy other oil companies.

Chevron, for one, says that it can invest in both new and old energy quite profitably. “These businesses need to generate attractive returns,” says Jeff Gustavson, the president of Chevron New Energies. They just may take time to come to fruition. “It’s not dissimilar from our exploration business where we’re drilling exploration wells that have different probabilities of success.” Gustavson previously oversaw some of Chevron’s drilling operations.

Some climate-conscious investors, meanwhile, say they’ll wait and see if these companies do more than just test new business lines. “This rhetoric has been going on for long enough that I think investors are going to wait till there’s steel in the ground,” said Andrew Logan, senior director of oil and gas at Ceres, an environment-focused shareholder advocacy organization. Ceres played a role in a successful effort to flip three board seats at Exxon in 2021 in the hopes of making the company more climate-conscious.

Still, the notion of Big Oil playing a major part in the transition to clean energy seems more plausible with each passing month. “These are not names that the average consumer associates with clean energy. But ultimately, these incumbents do bring certain positives to the mix, particularly their balance sheets,” Logan said. Despite piling on debt to make it through the depths of the pandemic, the companies have since paid off much of it. The big players are less levered-up than they were at the end of 2019.

Big Oil also will be helped by the way the green transition is being built and funded. Governments are contributing hundreds of billions of dollars to the effort, but for the most part, they’re not drilling the holes and pounding the steel. Companies with the equipment and staff to complete those tasks, and historical knowledge of how to handle and transport gases and other fuels, are in a strong position. The U.S. government is spending $369 billion on energy subsidies, loans, and tax credits, the result of the big climate and tax bill that President Joe Biden signed in August. Europe has already started spending what will amount to hundreds of billions.

The companies’ financial clout means they can afford to take their time and even make some mistakes. Investors have a margin of safety, too, since the stocks are trading at such low price/earnings ratios.

Part of the problem for the stocks is that they can’t seem to attract generalist investors, who don’t like their history of weak returns and the damage the companies do to the climate. But some climate-concerned institutional investors have signaled that they’re open to a different approach—forceful engagement, rather than divestment.

New York State Comptroller Thomas DiNapoli has vowed to prune fossil fuels from the state’s $226 billion pension fund, but has opposed full divestment. Instead, a committee is reviewing which of the big oil-and-gas companies really are aiming to move toward cleaner fuels; the state plans to keep investing in those. “Some companies that are at greatest climate change risk are also capable of providing the greatest investment opportunities” because they can adapt, his office wrote in response to questions from Barron’s. “Simply wiping away an entire sector, that has a significant diversity of companies within it, is not usually viewed as thoughtful investing.”

BP makes a solid case that it’s really changing. The London-based company has said that by 2025 it will invest at least 40% of its capital budget in five areas meant to transition away from oil and gas production—bioenergy, convenience (which includes an expansion of gas stations), electric-vehicle charging, renewables, and hydrogen. BP and Norway’s Equinor are installing wind turbines off the East Coast of the U.S. capable of providing 4.4 gigawatts of power, or enough to power more than 2½ million homes. With its agreement this past week to purchase leading renewable natural-gas producer Archaea Energy (LFG), BP is on track to become one of the key biofuels producers in the U.S. Its oil production, meanwhile, is set to decline by 40% by 2030 from the level in 2019, the last year before the Covid-19 pandemic.

Environmentalists have applauded BP’s net zero announcement, but they want verification that the company will follow through. This isn’t the first time the energy giant has said that it would transition to cleaner energy. Twenty years ago, the company dubbed itself “beyond petroleum” and announced aggressive plans to invest in wind and solar. Although it bought renewable assets, the effort didn’t amount to much. BP sold many of its wind and solar assets a decade ago, before its recent turnabout.

“We were ahead of where society was in terms of acceptance,” says Dave Lawler, chairman and president of bp America. “This time, though, if you look at the climate, if you look at the Rivians, the Teslas, the focus on carbon capture, the latest laws that have been passed, this is the inflection point for society. We think we’re in step with that.”

BP has begun detailing the financial impacts of the shift. By 2030, the company expects its earnings before interest, taxes, depreciation and amortization, or Ebitda, from the new businesses to top $10 billion. To put that in perspective, the company’s total Ebitda in 2019 came to $34 billion.

Assuming that its profit margins from fossil fuels stay consistent, the company should be able weather declining production and pull in at least $30 billion annually by 2030—$20 billion from the traditional businesses and $10 billion from the new one. And given the rate at which it’s buying its own stock—at least $4 billion in annual repurchases through 2025—those earnings will be spread across a smaller number of shares, helping earnings per share.

Perhaps the biggest draw for now is a 4.8% dividend yield, and the company’s plans to increase the payout by 4% a year. Longer term, BP’s renewable plans look realistic and clearly profitable, wrote Morgan Stanley analyst Martijn Rats earlier this year in upgrading the shares to Overweight. The company is investing in “well-defined markets where BP has increasingly well-defined plans,” he wrote.

That, combined with strong returns from oil and gas, makes the shares look undervalued. Rats sees the London-traded stock rising to 566 pence, or $6.35, for a 23% gain before accounting for dividends.

The outlook for Exxon also seems strong, though low carbon is a smaller part of the business and is likely to stay that way for the next several years. The company has pledged to spend $15 billion on hydrogen, biofuels, carbon capture, and a few other areas by 2027, roughly 11% of its expected capital budget. The August climate bill offered substantial support for several of its plans. Most notably, Exxon aims to become one of the biggest players in carbon capture and storage, a process of harnessing carbon emissions from fossil-fuel plants, compressing them and storing them underground indefinitely. It’s one of the few ways to decarbonize heavy industry like steel-making, but it does face challenges. Critics say that most carbon-capture projects have failed to reach their goals, and that the money could be better spent on other technologies that they view as more effective. Major carbon emitters should be replaced, not just mitigated, the critics say.

“This idea that we should invest in ways to prolong the use of fossil fuels, when you can have cleaner, cheaper energies—the jury’s still out, but the indications don’t seem promising,” says Danielle Fugere, president of As You Sow, a nonprofit that helps shareholders advocate for climate policies.

Fans of carbon capture say that enhanced subsidies and better technology mean it’s more likely to succeed now. Exxon, which has already been capturing carbon to use in oil pumping, is ready to bet big.

Earlier this month, it announced its first commercial project to store carbon underground, working with a pipeline company and fertilizer producer CF Industries to capture and sequester two million metric tons of carbon a year at a Louisiana plant. The companies didn’t release the economics of their deal, but the government subsidies alone should provide $170 million of support annually. “We have a tremendous amount of internal existing expertise on this,” says Exxon’s Ammann.

Given the “relatively modest amount of capital” the company is deploying and the amount of carbon that will be kept out of the atmosphere, “I think that has a very high payback, not just from a financial point of view, but in terms of the environmental benefit,” Ammann says.

Exxon’s 10% low-carbon profit hurdle, experts say, should be achievable for a fertilizer project like this (decarbonizing steel and coal will be less profitable).

And this is just the start. With over a dozen partners, Exxon has ambitions to capture and store 50 million metric tons of carbon from industrial companies along the Gulf Coast near Houston by 2030.

McDermott, the Morgan Stanley analyst, thinks Exxon stock is worth buying primarily for its oil-and-gas potential, which remains strong because of projects in the U.S. and overseas that the company started in recent years. But he thinks the low-carbon work will also pay off, and that Exxon will get more aggressive, raising its capital investments to $22.4 billion by 2027 from the current target of $15 billion.

The new law “opens up a broader set of opportunities in the low-carbon market,” he says. He also thinks the company can earn returns closer to 15%, and generate low-carbon earnings of $4.1 billion by 2030 and $8.2 billion by 2035. He sees the stock climbing to $113 over the next year from a recent $104.

Asked why Exxon isn’t investing as much as BP, given the prospects for renewables, Ammann says that more substantial investments are on their way. “You should measure the progress on the projects and the results from those projects. We have a very large backlog of projects that we’re working on, and you’ll see more to come from us.”

Consumers may never associate Big Oil with a green world. But if renewables bring real profits, the companies’ dirty baggage will weigh less heavily on their stocks.

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