Industry Deep Dive: Oil – what is the future of this $3.3 trillion industry?

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce, and as always, I'm joined by my equity buddy Ren. How's it going? 

Alec: [00:00:31] I'm very good. Bryce very excited for this episode. We're back with our first industry Deep Dive of twenty twenty two, and we're talking about an industry that has a real place in your heart. Your black heart. 

Bryce: [00:00:45] Not true. But it is an industry that it's it's a fascinating one, and it's going through a lot of change at the moment, which we're going to dive into. And that is the oil industry. 

Alec: [00:00:54] That's it. That's it. 

Bryce: [00:00:55] Oil industry a lot going on. But before we jump into that, just very briefly, we spoke about our community survey that is now live. It's an opportunity for you guys to give us direct feedback on how you think our content is going. Everything Equity Mates media related, and it gives us the chance to create better content for you guys going forward. So please, the link will be in the show notes. It'll also be on our Instagram bio. So make sure you go and fill that out. If you fill it out all questions, it'll only take 15 minutes. You're going in the running to win $500, so it would be greatly appreciated if you could spend that 15 minutes on your way to work or wherever it may be filling in the survey. It does close, I think, in the end of this month. 

Alec: [00:01:41] Yeah, so yeah, do it while you're listening to this episode. 

Bryce: [00:01:44] Yeah, well, don't do that because anyway, we're concentrating 

Alec: [00:01:46] the the Equity Mates community can multi-task. So yeah, if you could, that would be really helpful. It'll help us make better content, even if it's just to tell us what industry we should do. A Deep Dive on next. Just tell us because we want to know. 

Bryce: [00:02:02] That's it. So if you've been hanging out to give us feedback now, see chance to do it. 

Alec: [00:02:06] Yeah, but let's get into this industry Deep Dive, because this is one that's particularly relevant at the moment. A lot of people probably wouldn't think about investing in the oil industry. I definitely don't have any oil in my portfolio. I'm going to hazard a guess you dont have any. Fair enough. Well, only you've had a tough few years, but you're having a very good sort of six months 

Bryce: [00:02:31] swimming in it at the moment. 

Alec: [00:02:35] But it's particularly relevant because of this conversation around inflation that we're all living through to kick off 2022. And it's also relevant because oil is an input into everything, namely an industry that doesn't have oil or energy as an input. And I'll name you, a software company. What? Well, I was thinking about like what? But even they are sort of exposed to the oil industry. Not really as much, but software. Yeah, yeah. Like some of their equipment, they still need to get. 

Bryce: [00:03:10] You know, you're going in every single industry, somewhere along the supply chain. Yeah, yeah. Because they involved because if you're 

Alec: [00:03:17] if you're unless you're building something on a computer and and shipping it via the internet, like, you know, cloud software or something like that, you're exposed to oil even in the the most basic form of like transport. 

Bryce: [00:03:30] Well, surely oil goes into producing a computer? 

Alec: [00:03:32] Well, yeah, that's why I was like, There's still are, but it's, you know, it's tenuous. Yeah, yeah. Yeah, it's pretty weak. But yeah, every industry is exposed to the cost of energy and as much as the world is trying to transition away from the oil industry. Oil is still the biggest form of energy. I was actually listening to something earlier today. Nine percent of cars sold in America now are electric, which I think is pretty exciting. Yeah, yeah, yeah. Well, it was either America or nine percent of the world. That's a big difference. Still, apparently either way. In 2010, it was zero 

Bryce: [00:04:07] percent could change, so it could 

Alec: [00:04:09] change in a decade made a big change in the next decade. But what that means is that 91 percent of cars being sold today while still oil, let alone every used car that's being resold. So oil plays an integral role in all of our lives, and it's probably time that we understand this industry a little bit more. But it's also really relevant because of all this conversation around climate change. What are these oil companies? How are they positioning themselves for the future? They're saying record profits, which we'll get to in this episode. Yeah, they're saying the best profits they've seen in, you know, eight years for some companies. What are they doing? They have some of the best executives, best businesspeople in the world running these companies. Are they investing in alternative forms of energy, low carbon carbon capture? Are they doubling down to find more oil reserves? What are they doing with this cash? So that was a question that we wanted to know, and so we're going to answer that towards the end of this Deep Dive. But let's start with setting the scene. Where are we today? Bryce Where are we today? 

Bryce: [00:05:14] Well, speaking of profits, I'm pretty sure at the time of recording this, Santos just released their earnings and it's a record cash flow and underlying earnings for them, one of the Big Oil oil players here in Australia. So I'm sure we'll touch on a lot of the companies a bit later. But but where are we? We're about to see oil price back to over $100 a barrel. Ren To put that into context, if if you're like me and have been long an oil only since the day I was born. 

Alec: [00:05:41] Not true. 

Bryce: [00:05:44] Not true. It's been an incredibly cyclical journey with prices, I guess on a bit of a rollercoaster for a very long period of time.

Alec: [00:05:55] Yeah, but I think the important thing to stress is that oil prices have cracked $100 a barrel four times in the last one hundred and fifty years in, like the US Civil War. They got to like one hundred and twenty a barrel would have been a good time to be investing in oil there. But then in the supply shocks of the late 70s, early 80s, in the early 2000s and then again around the early 2010s, you noticed that that's accelerating. 

Bryce: [00:06:25] Yeah, I was just going to say it's it's interesting to say the concentration in the last 20 years, and now we're almost going to say it again. 

Alec: [00:06:32] Yeah. So and it is just an incredibly volatile commodity. Mm-Hmm. Do you remember eight months ago oil was negative? Thirty seven dollars a barrel? Yeah. 

Bryce: [00:06:42] You couldn't pay to get rid of it. 

Alec: [00:06:43] Had to get rid of it. So if you had gone long oil in the depths of Covid, when oil traders were literally paying people to take oil contracts off their hands, you would have made a fair bit of money. Yeah, interim. Yeah. Before we get to why oil has spiked so much, let's just set the scene on the industry. Let's talk about how the price is set, how big it is, but some of the numbers are pretty staggering. So the oil industry is one of the largest sectors in the world, generating three point three trillion dollars in revenue annually. Huge. 

Bryce: [00:07:21] Humans consume 97 million barrels of oil daily, and I think we had a bit of a game in the office when we were doing this, and that's just a staggering number. 

Alec: [00:07:32] Put it in context for me, Bryce what's a barrel? 

Bryce: [00:07:34] A barrel of oil is equivalent to 42 gallons if you're here in Australia and you're not sure how that converts to litres. So it's about fifteen point five billion litres per day. Yeah, I 

Alec: [00:07:46] think day it's like it's a bit less than four litres to a gallon, fifteen point four billion litres a day, or 

Bryce: [00:07:52] five point six trillion litres of oil a year. And that's how much we consume. That's huge, huge amount of oil. That's what that's hard to conceptualise, to be honest. As you said, at the top, oil is a commodity and the price is set purely by supply and demand, and we're going to get into the. Mechanics of that and who's controlling what a little bit later on, but. And you may have heard on the news, it's reported quite often Brent crude oil, that's one of the major global benchmarks that we that we look at when it comes to prices. And West Texas Intermediate is another one that you'll often hear. It's America's benchmark. 

Alec: [00:08:30] Yeah. So the Brent crude is sort of seen as the global benchmark. It's based on the oilfields in the north, say West Texas Intermediate is used as America's benchmark and then one that you don't really hear. But the third index, the Dubai Oman Index, is used as the Gulf States benchmark into the Asia-Pacific. But the three prices all move in concert. They'll never be the same. Yeah, well, rarely will be the same, but they'll all sort of move directionally in the same way. Yeah, they they're just based on different oil fields, different regions. That's that's a bit of a primer on how big this industry is 3.3 trillion dollars in revenue annually of $5.6 trillion litres of oil consumed. 

Bryce: [00:09:17] No wonder everyone wants to be in it. 

Alec: [00:09:18] Well, a lot of people haven't wanted to be in it for the last few years. It's been a very easy trade for active managers to get out of oil because they say, you know, even if you said it was because of ESG, it's also just a terrible investment because oil prices are so low and are losing money, all of that. The really interesting thing is to any active managers recycled back into oil when they're saying, just like super normal profits. 

Bryce: [00:09:44] I would have to call some and find out. 

Alec: [00:09:47] But anyway, let's talk about why they're saying super normal profits. What's going on with oil prices at the moment? 

Bryce: [00:09:52] So we've had Covid and the demand side has kicked in faster than we anticipated. The recovery side, what I mean by that people are coming back online and what I mean by online travel, they're back out and about economies picking up. We're seeing fast growth in states Australia. We're seeing economy picking up here. And of course, with all of that comes a greater demand for oil consumption, more people driving, more planes flying, you know, more cargo being shipped, all that sort of stuff. So we spoke at the top that it's a demand and supply relationship. So the demand side is is really picking up. So that's one reason and Ren, do you want to touch on the supply side? 

Alec: [00:10:34] Yeah. So this, I think, is a lot of this is a supply side story and this is where we get introduced to OPEC+. 

Bryce: [00:10:42] Don't own 

Alec: [00:10:43] the Organisation of Petroleum Exporting Countries 13 countries involved in this oil cartel joining them 

Bryce: [00:10:52] Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates and Venezuela. 

Alec: [00:11:03] Now and then we get introduced to OPEC Plus, which is just the more kind small country. And so that's 

Bryce: [00:11:14] what's the difference. The other 13 countries, the biggest producers and then the No. 

Alec: [00:11:19] Okay. So that's like, let's put it this way Russia creates drills more oil than Algeria. 

Bryce: [00:11:26] Yeah, Equatorial Guinea. Yeah, yeah. So how'd they miss out on the top 13, I guess. 

Alec: [00:11:32] Oh, it's Russia, I don't know. Well, know when OPEC was created, it was the USSR. Yeah. Anyway, let's get a history lesson. So there's twenty four countries in OPEC, plus the other 11 Russia, Azerbaijan, Bahrain, Brunei, Ecuador, Kazakhstan, Malaysia, Mexico, Oman, South Sudan and Sudan. Now, when we think about oil and when we think about Big Oil, we think about the companies like Exxon, Chevron, BP, Shell, those oil majors, which we'll talk about in a little bit. Control six percent of the oil and gas reserves, whereas OPEC and other state owned companies. So that includes the big ones, are Venezuela's state owned oil company and China's state owned oil company owned 88 percent of the world's reserves. So when we talk about oil supply, the supply side opaque and some of these other sort of state owned oil companies control the lion's share of 

Bryce: [00:12:32] does that include Saudi Aramco? 

Alec: [00:12:35] Yeah, yeah. Because there are no. Yeah, yeah. So they control the lion's share of the supply of oil. And the important thing is that OPEC either have been unwilling or more likely unable to meet their production quotas. So we're seeing big shortfalls at the moment from OPEC. Plus they haven't been able to basically hit the production quotas. And some people cynically could say they want to drive the price up. Yeah, which definitely has. I've definitely done in the past, but apparently so I mean, I was just researching this to try and understand what the goal is, and it's all a little bit opaque, but a lot of the, you know, the JPMorgan analysts and stuff think that they actually just can't they can't ramp up supply and production enough. Either way, there's a shortfall from OPEC who sets the quotas. OPEC. OK, well, why don't they just reduce the quotas because there's so many 

Bryce: [00:13:37] the dynamics are 

Alec: [00:13:38] a big thing is they don't want prices to go too high because if prices go too high, then American shale starts to become viable again. Yeah. And when then that is put pressure back? Yeah, yeah. So there's a lot of geopolitical factors at play here that I want to sort of keep a price at the level that they want to keep it out. But yeah, there's an OPEC shortfall. So for the purposes of this, demand has recovered faster than expected and supply hasn't been able to increase as fast as required. Yeah. And when demand is high and supply can't keep up price gas prices, price goes up,

Bryce: [00:14:17] price goes up. Another impact on price is geopolitical tensions. We're seeing obviously talks of Russia invading Ukraine, which which will lead to pushing up prices, and this really encourages companies around the world to stockpile. If there's uncertainty, they're going to start buying more and more oil. And that really brings forward a lot of a lot of the purchasing that they would be doing. And so again, you're putting demand pressure on the supply of oil. So it's it's interesting to see what's going on there. 

Alec: [00:14:52] Yeah. And that's in particular with the Russia and Ukraine situation. If Russia got sanctioned, if they invaded Ukraine and then Western businesses couldn't buy Russian oil, then again, that would drive the price up. So JPMorgan put out a prediction. I think oil could reach as high as one hundred and twenty five dollars a barrel this year. Barron's reported that some analysts I can't remember who suggested that oil could go as high as $150 a barrel, which would be the highest price ever recorded. Yeah. Do you know what the highest price ever was? 

Bryce: [00:15:26] I'm thinking just over 120, I think, from memory. 

Alec: [00:15:29] One hundred and forty seven in 2008. Oh, wow. Yeah, that's the situation. Oil prices are high. They will probably go higher. It's a supply and demand game at the moment, but it's always important when we talk about these commodity prices, when we look at these commodity industries, the cure for high prices is high prices. And what do we mean by that? Well, on the supply side, as prices rise, more and more marginal projects will come online because they'll be viable. You know, there might be a U.S. shale oil project that's only viable if oil reaches $120 a ton. But when it reaches one hundred and twenty dollars a ton, they start drilling there because it's profitable for them for any commodity business. As prices rise, more and more marginal projects become viable. And that increases supply. And then on the demand side, at some price point, we start to find demand destruction where people, businesses, governments start to change their behaviour because prices are too high. And that's as simple as Bryce walking to work rather than driving his car to work because petrol prices are too high all the way to businesses stopping non-essential business travel because airline tickets are too high. So you start to see that demand destruction, which then levels off, demand a little bit. So the cure for high prices is high prices. That's always the mantra to remember when we're talking about commodity businesses, and at some point that will happen here as well. 

Bryce: [00:17:04] Nice. Ren Ren. Well, that's the context of the industry. We're going to take a quick break and then come back and look at the three main segments of the industry upstream, midstream and downstream. So let's take a quick break in here from our sponsors. All right, Ren, will there are three key segments to the oil industry. There's the upstream, midstream and downstream. What do we mean by that? 

Alec: [00:17:30] Yeah. So upstream are the guys and girls, the companies, if you will actually explore for oil reserves and then extract from the ground or from 

Bryce: [00:17:43] shale, they're the ones getting their hands dirty. 

Alec: [00:17:45] Literally, they're the ones we drilled. Yes. Then midstream are those that transport the crude oil. Yes. Less dirty, less dirty. So their pipelines, tankers, trucking, they get it from where it's extracted to where it's refined. Yeah. Which leads us to the downstream players, which are the refineries themselves. They take crude oil and turn it into everything that we love today. Yes. Petrol, diesel, jet fuel, kerosene, plastics, petrochemicals, you name it. They make it. There's oil in everything. And so when we think about the oil industry, we mainly think about the upstream players. So let's start there. There are three types of companies that you'll come across international oil companies. So these are entirely investor owned. They're interested in increasing shareholder value. Most of them are listed ExxonMobil, BP, Shell, Chevron in the big dogs. 

Bryce: [00:18:48] You've seen them all. 

Alec: [00:18:49] You think about the companies that you think are evil so that the international oil companies. Second one, national oil companies and that's government owned oil companies. They operate as extensions of the government or a government agency usually provide fuel domestically at a discount, and they use their profits to financially support government programmes. Not necessarily market orientated, not necessarily shareholder value creation focussed. We're talking here 

Bryce: [00:19:23] country wealth creation. 

Alec: [00:19:24] Yeah, we're talking here. China National Petroleum Corporation biggest in the 

Bryce: [00:19:28] world, isn't it? 

Alec: [00:19:28] I think so. But don't quote me on that. Think it is Saudi Aramco? Although they are listed, there's still government owned and then Pemex in Mexico is another one. And then the third type of oil company that you'll come across is our national oil company with strategic and operational autonomy. So these these guys function as corporations, but they're they're not purely shareholder value creation driven. They're still focussed on national goals and supporting the country's government, and they often balance the desire for profit with national concern. So Petrobras in Brazil, Statoil in Norway are a couple of examples given there. Hmm. 

Bryce: [00:20:13] So Ren. In 2020, five countries accounted for over 50 per cent of the world's total crude oil production, who you reckon is the largest. 

Alec: [00:20:25] I know a lot, but it's surprising a lot of people would be surprised. I think the UAE, U.S. 

Bryce: [00:20:31] types are coming in at 15 percent. You know, we see a lot of the oil wealth over in the Arab Emirates and those sorts of countries, and they do account for it. But Russia comes in second at 13 per cent of crude oil production. Saudi Arabia 12 percent, Iraq six percent and Canada, which surprised me five percent. 

Alec: [00:20:50] Yeah, Canada is a fascinating one. They have a lot of them. It's like oil in sand in like tarry sand. 

Bryce: [00:20:59] And when we extract, when we 

Alec: [00:21:00] talk about marginal projects like, that's more expensive. Oh my goodness, the hole in the ground and there was a lot of controversy. We're about to get to midstream about a big pipeline that ran from the oil sands in Canada all the way down to, I think, ports in like New Orleans, in the Gulf that Obama, I think, stopped and then it was a big political thing. But yeah, Canada, massive oil producer, Canada and Australia are very similar. We are British colonies that are seen as pretty progressive and love dirty energy digging stuff. 

Bryce: [00:21:36] So we'll do a quick whip around around the world. Middle East the biggest company of their Saudi Aramco. China has China National Petroleum Corporation Russia. You most likely would have heard of Gazprom, and then America and Europe are home to the seven super majors what, as they call them, otherwise known as Big Oil. [00:21:55][18.7]

Alec: [00:21:56] Yeah, when you hear Big Oil like that is a term used for these either bone to pick with the oil industry. The different articles you read, they either talk about seven super majors, six super majors or five super majors. And it seems no one can agree if ConocoPhillips and no should be counted as part of Big Oil or not, so sort it out. Other industries have sorted it out, you know, in accounting, they've agreed on the big four in Australia. No, no, globally, isn't it? Is it probably say Deloitte or KPMG? Yeah. In Australia, we've agreed on the big four banks. Macquarie is not saying make it the big five. There's an agreed upon Big Four and we settle on that. The oil industry, it's confusing. But let's talk about the the broadest definition of big. Let's go to the 

Bryce: [00:22:44] big board, which 

Alec: [00:22:45] is the big seven. So talk me through them. 

Bryce: [00:22:46] BP Britain heard of it. Massive ExxonMobil, US, Chevron, us. Any yeah. Is in Italy. Shell is is Britain. Total energy use is a French company and then ConocoPhillips over in the US. So. So that's the big seven super majors. And they control six percent of global oil and gas reserves, as we said at the top, while OPEC and the state owned companies control 88 percent. So despite these companies being huge, some, if not all publicly listed, all publicly listed in the grand scheme of things, they don't have a whole lot of control. 

Alec: [00:23:29] Yeah. And because of that, the Financial Times tried to get the news. They call them the news seven sisters, but tried to get the news like super majors going. I don't think it really took off. But finally, but they the Financial Times based on who actually controls the most oil they think the super majors should be. China National Petroleum Corporation Gazprom, which is Russia national Iranian oil company Petrobras, which is Brazil PDVSA, which is Venezuela Petronas, which is Malaysia and Saudi Aramco. So you can sort of say again, it's just like the idea that we have the big oil control this industry is a perception that we need to change because there some of the biggest companies. In the world, but they still pale in comparison to some of those state owned enterprises. 

Bryce: [00:24:23] So Ren, when we're thinking about these upstream companies, the oil producers and explorers, it's important to consider their revenue and revenue is tied directly to the price of oil. 

Alec: [00:24:35] Yes, they sell based on the international price and they. That becomes incredibly cyclical for all the reasons that we spoke about above. But yes, they are directly exposed to the price of oil. Their revenue is dependent on it. 

Bryce: [00:24:49] So if you're in it, you're in for a rollercoaster if the price of oil is going up and down and up and down. Yeah. So then we move to the midstream and these are the oil transporters, the truckies, the boats, the everything that moves from the oil producers through to the refineries. 

Alec: [00:25:05] Now I've pulled out a few names. Yeah. I want you to tell me if you've heard any of them. All right. Enterprise Midstream. No Kinder Morgan. No Enbridge, no Trans Canada, no Williams Companies Plains. All American energy transfer partners. No Magellan Midstream, which Magellan. I think my biggest takeaway from looking at these oil transporters is I just don't know any of them. Yeah, one of the biggest unlisted pipeline companies globally is Coke Industries. Yeah, people probably heard of the Koch brothers if they follow American politics as well. 

Bryce: [00:25:42] KOCO not say Okay. 

Alec: [00:25:45] Correct. Yes, yes. But yeah, so this is an industry that I don't know a lot about. I am not familiar with any of the companies, but I think the important thing here is revenue is driven by throughput. So in the same way that if you're in Australia, you think of mining services companies, they make their revenue from how much mineral, how much or they service rather than the actual price per ton of the oil. That's the same here with oil transporters. Their revenue is driven by how much oil moves through their trucks or their pipelines, rather than what the price of that oil gets on the market. But they are indirectly exposed to the oil price because if oil prices are high, the upstream producers are going to try and get more out of the ground. If oil prices are lower, they're going to try and get less out of the ground so they're indirectly exposed, but their revenue is driven by throughput. 

Bryce: [00:26:38] Pipelines are an interesting one. Very, very political. Over in Europe and Russia. So right, it's like gas, natural gas. 

Alec: [00:26:45] But yeah, incredibly, the Nord Stream two pipeline from Russia to Germany is a big reason why Germany was a pretty weak hand in this. Russia trying to get the energy security is tied to Russia. Russia, yeah, but also pipelines massive political issue in the states. Obama stopped a couple of key ones Keystone XL, you may have heard. Yeah, yeah, yeah. Then Trump basically greenlit all of them. Biden comes in, stops a bunch of them. Pipelines are incredibly controversial. Yeah, it's [00:27:18][33.5]

Bryce: [00:27:19] crazy. All right. Well, then let's move to the downstream. And there the refineries, they're the ones taking on the oil and turning it into useful stuff. They remove impurities, converting it into, as we said, at the top gas jet fuel, heating oil, Asheville, you name it, whatever oil goes into. All right. And I'll play the games. You got five oil refineries in the world. Have you heard of them? Jim Nanga Refinery, Reliance Industries Ltd. in India. 

Alec: [00:27:47] I have heard of Reliance Industries biggest listed company in India. Yes. I'm going to just just frontline you and say, I want a heard of any of the specific refineries. Oh, OK. All right. So does that ruins go? Yes. All right. 

Bryce: [00:28:00] Typekit about one point twenty four million barrels a day. Then we've got the Olsen Refinery, a South Korean company. S.K. Energy 1.1. Two million barrels a day. 

Alec: [00:28:10] I haven't heard of surprising. 

Bryce: [00:28:12] Then we've got Paraguayan refinery complex. The Venezuelan company PDVSA. Yeah, 971 K barrels. You've heard of them. 

Alec: [00:28:22] Oh, well, yeah, I have, because they're one of the major upstream producers that we were talking about earlier. Yeah. 

Bryce: [00:28:28] Then yes. Refinery GS Caltex, which is owned by Chevron South Korean company 730 K barrels a day. 

Alec: [00:28:37] I have heard of Chevron. Yeah, I. Yeah. 

Bryce: [00:28:40] Then the Unsane Refinery SE Oil, another South Korean company, pumping out six hundred and sixty nine thousand barrels a day. 

Alec: [00:28:49] I haven't heard of it, but I am. I'm noticing, noticing an interesting trend here. 

Bryce: [00:28:54] And then ExxonMobil has one called Singapore refinery in Singapore. And it does 600 and 5000 barrels a day. It's interesting that South Korea are in there, but not part of, oh, they're not producing their refineries. 

Alec: [00:29:08] Yeah. So the big takeaways you named six there. Yeah. Three in South Korea. Three of the biggest. In South Korea, but also five of the biggest in Asia, India, South Korea, Venezuela, North and in South Korea, South Korea, Singapore,

Bryce: [00:29:24] so we dig it up in the Middle East and other parts of the world and ship it all the way through to Asia and South Korea to refine it. Yeah, that's interesting. What's going on over there that gives them the edge over, 

Alec: [00:29:38] maybe closer close to China? Yeah, I guess. I mean, the 

Bryce: [00:29:43] biggest, the biggest customer, 

Alec: [00:29:44] they would all have a lot of ports like Singapore, South Korea, they're all they've all got coastline. 

Bryce: [00:29:48] Why don't the producers also refine it? Just double down? 

Alec: [00:29:51] Maybe not. 

Bryce: [00:29:52] The technology can't be that hard. They've got the cash to figure it out. Anyway, we have to give Saudi Aramco a ring. 

Alec: [00:30:00] Maybe it's not worth it for them. Yeah, yeah. Anyway, I think the thing to say about downstream refineries is their revenue is driven by end markets. So, you know, they're selling all the products that create kerosene, jet fuel, all that stuff to end markets. But they're obviously quite exposed to the oil price in terms of their costs if they're buying from upstream producers to then refine refine it so that profitability is tied. 

Bryce: [00:30:29] The oil price, that's a bit of a Deep Dive on the supply chain of of the oil industry. 

Alec: [00:30:34] We should we should say we're Australian. There's Woodside and Santos there upstream producers. There's a couple of oil explorers balloon. We're talking about a global industry. They're small. 

Bryce: [00:30:46] Yeah, yeah, tiny. Sorry, sorry, guys. So let's have a quick look at how the industry's playing out today. We mentioned at the top there's profits galore at the moment, obviously directly tied to the oil price. But then we'll we'll turn our attention to the transition of some of these companies and how they're positioning themselves for the future. Given what's going on in the climate space,

Alec: [00:31:09] yeah, so no surprise. We've said the oil price is high so many times in this episode that the most recent earnings season, so Q4 for 2021, we've seen massive profits Exxon, Chevron, Shell, BP and Total all return to profitability and reported the biggest profits in eight years eight years 2014. Last time, oil was over $100 barrel. But those five super majors, so say here we're talking five super majors rather than seven. They posted a combined loss of six billion in 2020, and now they're all reporting record profits. So it just shows how cyclical the industry is. Shares in oil companies are up around 20 percent year to date across across, like the average across the board. But it's important to note that we could be reaching peak cycle. So in the same way that in 2014, profits paid to the oil price peaked and share prices peaked in a lot of cases. And then oil price came down. We could be reaching the peak cycle again. But right now, today it's a good time to be in oil and gas. Let's give you an example. EXONMOBIL In 2020, they made a loss of twenty two point four billion, and in 2021 they made a profit of twenty billion by 

Bryce: [00:32:26] making the finance department the 

Alec: [00:32:28] $5 billion turnaround in a year on a 

Bryce: [00:32:30] forecast. That's us. 

Alec: [00:32:31] Oh, well, you don't feel like we're in the money, you know? 

Bryce: [00:32:35] So I just feel like, yeah, anyway, that crazy. But here's 

Alec: [00:32:39] here's my quote of the day I don't often do a quote of the day, but this was too 

Bryce: [00:32:43] good. I think you've ever done one. 

Alec: [00:32:44] OK, here's my quote of the four and a half years we've been doing this podcast. BP's chief financial officer Murray Otuoke on to close or can close off, yeah, told investors on an earnings call. It's possible that we're getting more cash than we know what to do with. Unbelievable. Must be nice. 

Bryce: [00:33:05] But also like, come on, give it a crack. There must be something you can do with it. That's lazy. 

Alec: [00:33:14] Well, we will get to that because that's the question that we set out to answer at the top here. What are they doing with all those profits? And Murray is honestly overwhelmed by the amount of profits he's getting. 

Bryce: [00:33:26] The number one thing a CFO should be doing is allocating capital, and he's like, I don't know how to do that. 

Alec: [00:33:32] So well, yeah, there's a whole other part of this conversation that we haven't put in this episode about how the UK government, where they pay is based, want to do a one off super profits tax because inflation is really biting. There's some really sad stats coming out of the U.K. while they pay, like sitting on piles of money, not knowing what to do with it. So on one hand, they're saying super profits. On the other hand, we all know what the future holds for Big Oil. There will always be demand for oil. That's an important thing to stress. The world's oil consumption isn't going to go to zero, even if we completely change our transport systems, including, you know, if we can create a hydrogen powered planes. And like all of that stuff, there will still be demand for oil in plastics and petrochemicals and a bunch of other stuff. Inputs in so much in the economy, but demand is going to drop. The International Energy Agency Agency expects demand will peak in 2025 and settle somewhere between twenty four and seventy seven million barrels a day by 2050. Keep in mind the word about ninety seven million barrels a day today, so pretty wide range from the International Energy Agency. Reuters thinks demand. Will be about 40 to 64 million barrels per day by 2050. So again, you know, probably around half of what we're consuming today. The US government is pretty bullish. The US Government Energy Information Agency put out a prediction that oil would remain the top source of energy in 2050 and that we would be consuming more. Today we consume about ninety seven million barrels a day. The US thinks will consume 120 million barrels a day by 2050. 

Bryce: [00:35:26] Classic energy from the state. 

Alec: [00:35:27] Yeah, so predictions vary. But on the whole, we expect probably oil consumption to drop maybe half by 2050, and the pressure's on. The pressure's on for Big Oil to change. Last year, a Dutch court ordered Shell to cut carbon emissions by 45 percent by 2030. An activist investor group won two seats on ExxonMobil's board and investors outvoted Chevron's management as shareholders around. I think it was around climate concerns. But yeah, where was saying a lot of pressure on these companies? We sort of know what the writing on the wall is around the shift to electric vehicles and stuff like that. And these companies are saying stupid amounts of profit at the moment. So the question is, how are they spending their big profits? Where are they investing for the future?

Bryce: [00:36:18] Well, BP don't know what they're doing, but let's have a look at the other companies. The first thing you would probably want to do is repay down, repay some debt, and that's what they are doing. They're repaying debt that they accrued over COVID 19. Remember that in 2020, when oil dipped to its negative $37, these companies would have been in a world of hurt, probably would have had to have borrowed a lot of money, either increasing their dividends. The Guardian said that thirty six point five billion dollars has been paid out over the first nine months of 2021. And in other ways of returning shares, share value back is buying back shares, the Guardian said. Eight billion in buybacks over the first nine months of 2021. ExxonMobil, for example, they had a profit of $23 billion in 2021. Back from that loss of twenty two point four billion in 2020, and they've raised their dividend and repurchase $10 billion in shares, so 

Alec: [00:37:20] they're returning capital to shareholders. What we're not seeing are two other things which they could be doing with their cash. They want a transition, but they could be well, yeah, they could be investing in expanding oil production. Yeah, or they could be investing in low carbon technologies, carbon capture technologies. But interestingly, we're not seeing either of those things. In 2014, you saw a lot of investment in new oil production. So you're not saying that this time around, but you're not saying the transition to a low carbon stuff. So what you're actually saying is a lot of the oil majors scale back their capital spend and their investments overall. ExxonMobil said they were looking to spend between 30 to 35 billion dollars a year in 2019. They've scaled that back to 21 to twenty four billion. Chevron said they were looking to spend 20 billion in 2019. Now they're looking to spend 15. You're saying, you're saying that sort of across the board, the Europeans are willing to spend more than the Americans. But I think it's just a really interesting dynamic that these companies are sort of returning money to shareholders. Shrinking their share capital base, strengthening their balance sheet. So trying to become make themselves really attractive investment options. But it feels like they're not really investing for their future. Yeah, but the one final thing to note is the divergence between the Europeans and the Americans. I think because while the Americans, the Americans being ExxonMobil and Chevron aren't, they're investing tiny amounts in some of this low carbon technology. The Europeans are doing a little bit more. I think BP, the company that doesn't know what to do with all their money, is probably leading the way. They've got plans to dedicate 40 percent of their budget to low carbon investments by 2025. They want to wrap that up to 50 percent by 2030, and at that time, they want to be earning between nine and $10 billion a year from the low carbon sector. So they're pretty bullish. They've committed to net zero by 2050. They're building a 250 megawatt solar farm in Spain. They've acquired a wind energy company, AOL Fi. They've announced they're going to reduce their oil output by 40 percent by 2030, which is about a million barrels a day. So there's plans. There's plans in the works. 

Bryce: [00:39:49] So Ren, there's another one in Europe for the French company total. So they are putting $3.5 billion into renewables. Love to say it in 2020. They won Europe's largest electric vehicle, ChargePoint contract in the Netherlands. Wow. And invested in both onshore and offshore wind. So they're really getting into the EV game. They're love to see it show they've committed to net zero by 2050. That's massive. They're probably just going to be buying bulk carbon credits, you would imagine. Hmm. How will they otherwise achieve that? [00:40:27][38.3]

Alec: [00:40:28] Great question. Maybe we should get the sell. Say on to do a retail earnings call, ask them. We set out to answer what are these companies doing with their super profits? The answer is shoring up their balance sheet, returning money to shareholders. The second question is, what are they doing in response to climate change? I think we can say the European companies Total BP and Shell are doing a little. The Americans, ExxonMobil and Chevron are doing less. Yeah, I think overall, so the International Energy Agency have basically come out and said, Come on, guys. Yeah. They've said that investment to date by oil and gas companies outside their core business areas of oil and gas is less than one percent of their total capital spend, and that's not going away. 

Bryce: [00:41:21] It's hard to convince companies that are seeing record profits and so much cash that they don't know what to do with to think beyond the oil, I think, you know. You know what I mean? 

Alec: [00:41:33] Yeah, they might argue that we think carbon capture technology is going to save us an oil. Yeah, output is going to drop. Yeah. Or that we're going to find a new way of refining. You guys

Bryce: [00:41:46] have got it over 

Alec: [00:41:46] drilling it. Yeah. For me, it's pretty interesting because I mean, not being an oil and gas executive, but maybe just thinking about where the world is going. If I was a BP CFO with no idea how much money, no idea what to spend all my money on, I would probably be thinking about like, what's the businesses that we can acquire that can get us into acquisition a competitive space in the new energy sector? Or like, what can we build internally ourselves? Or how do we leverage our gas pipelines to start moving hydrogen? And, you know, like similar to 

Bryce: [00:42:18] Fortescue here in Australia and the Green Fund? 

Alec: [00:42:21] Yeah. And I'm sure I'm sure those conversations are happening in boardrooms. I guess we as public market investors looking from the outside in. And I guess the International Energy Agency is outside experts looking from the outside in probably aren't saying as much as we would want to say. Yeah, but if you're not worried about the sustainability concerns of Big Oil and all you care about is the profits, you're pretty happy at the moment. Yeah, you're happy with the dividends, you're happy with the buybacks and you're happy with the share price.

Bryce: [00:42:55] How long will it last? 

Alec: [00:42:57] Unknown until OPEC sort the supply ship that 

Bryce: [00:43:01] quotas or decide to? 

Alec: [00:43:03] Yeah. 

Bryce: [00:43:03] Anyway, that's a great summation of the oil industry. We covered a lot of ground there, but no doubt that there is plenty plenty going on, both from a geopolitical point of view, demand and supply. There's just so many interesting factors that go into the oil industry and plenty of ways to invest in it and get access, be it through, you know, the upstream, midstream, downstream players. And yeah, it's fascinating. Such an integral part of our, you know, our economy. 

Alec: [00:43:37] And if you don't want to pick a winner, this stupid amounts of ETFs, I was going to put a section in here of the ETFs you could invest in, but there's too many,

Bryce: [00:43:46] too many, way too many. 

Alec: [00:43:47] There's ETFs of the oil companies, there's ETFs on the oil price, those levied ETFs, those inverse ETFs. So if you want to go. 

Bryce: [00:43:56] I think that reminds me. I think at one point I did go like a

Alec: [00:44:00] triple 11 oil. Yeah, yeah. 

Bryce: [00:44:04] Yeah, I've definitely done that. Yeah, yeah. I can't remember what the ticker code was. It was over in the states. It did pretty well, actually. But again, it goes off and on and then bank straight back down. And so it's very cyclical. You just it's yeah, it's so hard to know what to do anyway. Ren that was a lot of fun. If you would like to know more about the macro economic environment beyond just oil, make sure you go and check out Canadian Way Economist there. Another one of the shows in our network hosted by brothers Thomas, the economist, and Adam, the comedian. They unpack everything that you need to know that's going on in the macro economic landscape, so go and check that out. But Ren, it's been fun. If you would like to suggest an industry for us to dive into. Hit us up at contact@equitymates.com or we're on socials. You'll find us anywhere and you can hit us up there. We'll do our best to reply. But Ren, it's always great to chat stocks and industries and there's a lot of fun. We'll pick it up next week. It sounds good. Hey, thanks for listening to this episode of Equity Mates. We love hearing from you, so drop us a line at contact@equitymates.com or even better, go to your podcast player and leave a five star review. Also, a reminder that the Equity Mates content train doesn't stop when you've run out of episodes to binge. We've got a brand new website, a Facebook discussion group. We're on Instagram, YouTube and slowly making our way as an influencer on Tik-tok. That's Ren. So come and say hello and join the community. We'd love to welcome you. Until next time.