Oil and gas take a leading role in low-carbon investments in the first half of 2022, according to WoodMac

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In the wake of the current geopolitical crisis and growing energy security concerns, market volatility and high oil and gas prices marked the first part of 2022, impacting investor motivation energy. Instead of the expected acceleration of the shift to green investments, Wood Mackenzie, an energy intelligence group, points out that pure oil still plays a major role in low-carbon diversification.

Like investing in low carbon economy was a huge stock market theme through 2020 and 2021, the political support following the net zero pledges at COP26 in November 2021 only seemed to seal a structural shift towards green investments and out of the fossil fuel sectors , explains Wood Mackenzie .

However, this trend did not maintain its momentum and a very different story unfolded in the first half of 2022, as the war in Ukraine and the changing economic climate turned the situation upside down. Due to Russia’s attack on Ukraine, the supply, demand and price outlook for hydrocarbons is constantly changing, leading to a rewrite of energy trade flows.

Furthermore, the energy market, in particular the oil and gas sector, was a stellar stock market performer for the first five months of the year, with the rising tide of oil and gas prices lifting all boats, based on research by Wood Mackenzie, which examines whether this has changed investors’ perceptions of different strategies decarbonization in the sector.

The energy intelligence firm points out that investors have crowded into the pure play oil and gas producers which are most influenced by oil prices in the first five months of 2022, as they would in any bullish cycle. In this regard, US independents led the sector up until early June before the price of oil and equities retreated over the past month.

Wood Mackenzie points out that the persistence of capital discipline has paid off in 2022, with high prices transform upstream players into ATMs. This is best demonstrated by financially strained companies that had to take up to five years to pay off their debt to “Ordinary” levels at $60-70/bbl, which suddenly could do it in two years at $100/bbl. At the same time, earnings and cash flow skyrocketed and stock prices rose.

However, Wood Mackenzie points out that free cash flow is not being invested in growth in this cycle, as most companies are aiming for low to mid-single digit production growth, well below targets of yesteryear. Investors don’t seem to want companies to spend more, as a tight upstream supply chain has diluted the value for money of extra spending. In addition, there is also a personal interest, according to the energy intelligence provider, because management has found that the “The less they spend, the better the company’s stock performance.”

The company expects dividends and redemptions to remain high at $100/bbl while variable and special dividend bonuses have been a “a boon for employee shareholders who have never had it so well.”

The American majors against the European majors

Additionally, the integrated businesses are less leveraged to price but also performed well in 2022 as strong upstream and commercial earnings are boosted by record refining margins – a rare triple. Wood Mackenzie advises that share prices for the American Majors ExxonMobil and Chevron have kept pace with the creeping peer group of independents in the first five months of the year and have held up better in the sell-off since early June.

Whereas European Majors are also reaping the boom in earnings and cash flow, with stock price performance strong relative to the broader stock market, most lagging behind their US counterparts. The energy intelligence provider points out that US majors have long been rated higher than their European counterparts, in part due to the relatively high rating in the US stock market. Although that gap has now widened.

Based on Wood Mackenzie’s research, an important differentiator is the pace of decarbonization since US majors are still in their infancy, “provisional” stage of committing to investing in decarbonisation, while Europeans are already well advanced in diversification and accelerating investments. Instead, budgets for new energy have doubled over the past two years, and by 2030 the most aggressive, like PBcould devote 50% of the total investment to low-carbon projects.

The logic of the strategies of the European majors is reinforced by the REPowerEU plan, the EU policy to accelerate the energy transition and make Europe independent of Russian fossil fuels before 2030, the result of the EU’s desire to put an end to its dependence on Russian fossil fuels, the intention to ban nearly 90% of Russian oil imports by the end of the year.

Despite this, investors continue to harbor the same doubts about Big Energy: Big Oil’s ability to execute low-carbon strategies, modest returns from investing in low-carbon opportunities, and sustained cash burn at as the new business grows, as Wood Mackenzie explains.

Failure to embrace a low-carbon world will lead to downgrading

Wood Mackenzie also questions when and how investor perceptions might change, saying it could take longer than expected in the aftermath of COP26, as Russia’s invasion of Ukraine put in highlighted the world’s current dependence on oil and gas and cast doubt on the rate at which the world is ready to accommodate decarbonization.

With the structural dislocation of the oil and gas markets, the energy intelligence firm now expects high oil and gas prices for the next years. The company says this has transformed the financial outlook for the sector and the attractiveness of pure players and oil and gas-focused players for investors, as they are making a lot of money now.

Although the company confirms that its long-standing vision is still valid “the transition will happen” and oil and gas companies have significant value at risk, whether due to increased implementation of carbon pricing or future declines in oil and gas demand – or both. To that end, Wood Mackenzie pointed out that companies that fail to adapt to the emergence of a low-carbon world will suffer a “gradual downgrading” on the market.

Source: Wood Mackenzie

Change takes time and the milestones of the business transformation journey that European majors have embarked on are still far in the future, says WoodMac. Firm forecasts suggest that it will take until 2028 for free cash flow from the current renewable energy project pipelines will turn positive, but even then these assets will only contribute about 10% on average to the operating cash flow of the group of European majors, based on this research.

Wood Mackenzie further said that abundant cash flow allows diversified majors to appease investors with higher payouts and redemptions while continuing to invest in low-carbon issues and building a sustainable future.

In the meantime, the trick will be to demonstrate value, says the energy intelligence firm, noting that an IPO would be the “big reveal” provide the new high energy multiples dreamed of by some European majors. While it appears this particular ship has sailed for the time being with the stock market downturn, Wood Mackenzie concludes that there still seems to be plenty of private capital out there looking for opportunities to access renewable energy portfolios. .

The energy intelligence group anticipates more bottom of the farman option that Repsol, TotalEnergies and Equine used “with success” to unlock gains and perhaps even go further, as Repsol did last month by selling 25% of its renewables unit for 0.9 billion euros (about $964 million).

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