US executives in Big Oil tend to look down on their European rivals. They may not say it publicly, but the bigwigs at Exxon Mobil Corp. and Chevron Corp. believe they run superior enterprises. There is, however, one piece of the business that the Europeans have mastered and the Americans very much envy — oil and gas trading.
European majors Shell Plc, TotalEnergies SE and BP Plc are best known for their oilfields, refineries and gas stations. But all three also have Wall Street-like trading units taking speculative positions on the prices of oil, gas and power, making billions of dollars each year in much the same way as hedge funds generate profits.
After disdaining trading for years, Exxon and, to a lesser extent, Chevron, want a piece of that action now. It won’t be easy to beat the Europeans. But their newfound enthusiasm is easy to understand: Trading has become a fabulously profitable business.
Shell, BP and Total keep their exact trading results secret. But under pressure from shareholders trying to understand what’s happening inside the black box, BP released some data that allows a back-of-the-envelope estimate of how much money it’s making. The results are staggering.
BP told shareholders in February that trading lifted its annual return on capital employed by an average of 4 percentage points during the last three years. “So you can calculate the numbers now, I’m sure,” BP finance head Murray Auchincloss told analysts. We can indeed. According to its annual report, BP’s adjusted average capital employed was $111 billion per year between 2020 and 2022. If BP generated trading profits of 4% on that amount, that suggests it made almost $4.5 billion each year — producing a cumulative total of $13.5 billion in three years. How does that compare with its total profitability? Over the last three years, BP has made adjusted profits of $34.7 billion — suggesting trading may have contributed almost 40% of the total.
Can Exxon and Chevron replicate that performance?
For the Europeans, trading is part of their DNA: They have been doing it for decades, top executives cut their teeth in those units, and the risks and rewards are well understood — including the need to pay Wall Street-sized bonuses to hire and retain top traders. Exxon and Chevron don’t share the same pedigree.
Once upon a time, there were mighty American oil trading businesses, namely Mobil and Texaco. But during the oil mega-mergers of the late 1990s and early 2000s, Mobil was bought by Exxon while Texaco was subsumed into Chevron. The non-trading cultures of the acquirers prevailed.
Right now, both Exxon and Chevron do some trading, but largely plain vanilla stuff to smooth supply and demand in their core businesses. Increasingly, both are trying to move into the more aggressive — and speculative — trading the Europeans favor and dominate. Last month, Exxon announced it would create a new division, called Global Trading, with a focus on “ultimately delivering industry-leading trading results.” While Chevron is heading in the same direction, its pace of travel is slower.
Both US firms face large obstacles.
First, it’s unclear whether senior management — and their respective boards — are truly comfortable with a business that’s so high risk, albeit potentially high reward. The experience of Exxon over the last five years, with several pushes into trading followed by quick retreats, suggests they aren’t. To make money, you have to also endure periods of losing. And BP and Shell have in the past lost money. Still, by creating a new unit to house all of its disparate trading efforts, Exxon is signaling that it recognizes the size of challenge.
Second, Exxon and Chevron will struggle to attract the best talent. In BP, a select group of traders take home every year more than the company’s chief executive. I have a hard time seeing that happening at either of the American companies. Even run-of-the-mill European traders take home eye-watering bonuses — significantly higher than engineers at Exxon and Chevron make running oilfields or refineries. Headhunters tell me, however, that Exxon seems to finally understand it needs to pay up for the best people.
Third, trading can be highly profitable, but it’s also costly. Commodity traders need cash upfront to take positions, consuming quite a lot of working capital. At times, that could strain the balance sheet, reducing free cashflow. Shell, with its very capital-intensive liquid natural gas trading desk, has found that can be problematic, as its traders consume capital before the profits arrive. The mismatch creates balance-sheet volatility that Shell has struggled to explain to shareholders.
Is it worth the effort? Looking at the profitability of BP, the answer should be a clear yes. But there’s a reason why the Europeans say little about their trading divisions: Shareholders give them a very low price-to-earnings multiple. Ironically, for Big Oil, trading is a business that’s best kept under wraps.
At both Exxon and Chevron, the culture is about minimizing risks, not embracing them. It remains to be seen whether executives, board members — and, ultimately, shareholders — are willing to house hedge fund lookalikes in their businesses.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former reporter for Bloomberg News and commodities editor at the Financial Times, he is coauthor of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”
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