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The world of big oil is inherently conservative. After being burned by renewable investments, many companies are hesitant to make substantial investments in new fuels. Even in the midst of these challenges, some companies are breaking the mold.
After the Deepwater Horizon disaster, BP (NYSE: BP ) was stuck with a bill in the $42-billion range. To help pay this bill, BP put 2.6 gigawatts of wind capacity up for sale. This came just a couple years after the company sold its solar assets. In the long run, renewables are becoming cheaper. It seems like BP may have been in the right place at the wrong time.
BP has decided to go back to the basics. It is focused on growing its bottom line in Russia through its investment in Rosneft, its new Angola LNG facility and its Atlantis North Expansion in the Gulf of Mexico.
On the positive side, its asset sales have helped to keep its total debt-to-equity ratio at a reasonable 0.4. BP's effort to return to fossil fuels and improve its upstream program should fend off any substantial volume decreases in the next couple of years, but in the long run its decision to leave renewables may limit its cash flow .
ExxonMobil (NYSE: XOM ) is famous for its ability to efficiently allocate capital to drive its excellent 2012 return on capital employed of 25.4%. In the past, the company has only made small investments in renewable projects, and not all of those have worked out. While it originally said in 2009 that it would invest $600 million to develop biofuels, those plans are being redrawn after a $100 million investment. ExxonMobil is not looking to drop the research altogether, but after disappointing results, its investment partner has decided to purse more basic experimentations.
ExxonMobil may have been investing with the wrong company. Solazyme (NASDAQ: TVIA ) is a biotech company that uses genetically engineered algae grown in special vats that are fed with various feedstocks. It is one of the few companies that have completed large commercial-scale demonstrations. For now, Solazyme is focusing on high-margin niche markets like oils for anti-aging products, but it hopes to eventually create a line of commercially viable bio-diesel.
Like most big oil companies, ExxonMobil is struggling to maintain its reserves. Over the past 10 years its liquids reserve replacement ratio averaged 102%, meaning that the company just barely maintained its liquids reserves. . To try and maintain production levels, it is pouring capital into the Canadian oil sands with its Kearl project and off the coast of Newfoundland with its Hebron project. Its Papua New Guinea LNG facility will boost its earnings when it comes online in 2014.
ExxonMobil only has a token interest in renewables, and it looks like its current experiments with bio-diesel have left a bad taste in its mouth. For now, the company is happy putting its capital expenditures in traditional LNG and oil sands projects.
French giant Total (NYSE: TOT ) holds some surprises. The company owns a $1.7 billion majority stake in the solar manufacturer SunPower. Its stake is relatively small, as it works out to be a little more than 1% of Total's market cap, but put it in the context of renewable investments by the oil industry and it is pretty significant.
While BP sold its renewable assets and ExxonMobil has only made token investments in biofuels, Total decided to invest in SunPower when solar's future was very grim and China was putting great pricing pressure on the industry. SunPower has been able to differentiate its products through high efficiency panels and strong warranties.
Total's capex still goes toward traditional projects like King Lear in Norway and its recent discovers in Uganda, but its decision to invest and stick with SunPower shows that it has strong foresight.
In 2012, Total's reserve replacement ratio was 93%. Even in the midst of new discoveries, Total still needs help to fight declining reserves. With an EBIT margin of 10.8%, Total is throwing off enough cash to pay its dividend and support new exploration, but in the coming decades its renewable investments may be critical to fight falling income from a falling reserve base.
Total's billion-dollar investment in SunPower shows that the company is willing and able to consider alternatives to traditional fossil fuels. ExxonMobil and BP have both backed off of renewables, but they are stuck drilling in expensive ultra-deepwater fields, expensive oil sands or politically volatile nations. In the long run, Total's willingness to put its money in renewables may prove to be one of the wisest choices it has made.
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