EvOilution

Rock-bottom oil prices have wreaked havoc on energy firms, and the upcoming “green revolution” could make things even tougher. But with oil companies adapting to survive, you might find plenty of new investment opportunities starting to emerge.

 

🕰 Recap

  • Low oil prices – mostly because of coronavirus – turned once profitable oil companies into loss-making machines in 2020.
  • And by the end of the year, OPEC and its allies said they’d up their oil output by less than they’d previously agreed.
  • Fast forward to this month, and oil giants Shell, Exxon, and Chevron reported weaker-than-expected earnings updates.
  • But France’s Total bucked the trend last week, announcing its own surprisingly strong results.

 

✍️ Connecting The Dots

Let’s begin with the slippery elixir at the heart of the debate. A barrel of crude oil was worth almost $70 at the start of 2020, falling to $20 at the height of the pandemic when demand – just like the global economy – collapsed. Its price has since recovered to $60, but any hopes it’ll stay put or climb higher depend on a rebound in economic growth of at least as much as economists are hoping for.

Then there’s the long-term threat to oil prices: renewable energy. A world where oil’s no longer a primary energy source is a world where the commodity’s price stays permanently low. And the prospects for a greener economy have risen substantially: green agendas are set to accelerate globally, thanks to the recent string of executive orders from the new US president and the mooted $2 trillion of clean energy spending expected to follow.

That’s partly why analysts are expecting governments and companies to issue $500 billion of green bonds this year. They’re an increasingly popular way to finance environmentally-focused initiatives, and they could catalyze a wave of climate change-related spending. And since they typically reward borrowers for hitting their environmental targets – and penalize them if they miss – the hope’s that they’ll lead to a positive impact on the world at large.

Integrated oil companies – a.k.a. “Big Oils” – don’t plan on being left behind by this transition. European firms are leading the charge: Total’s clean energy spending in the last five years, for instance, represented a quarter of the world’s biggest oil companies’ low-carbon investments put together. And Anglo-Dutch Shell last week revealed it expects its “traditional energy” production to more than halve by 2030 as it transitions to cleaner output. Still, oil companies don’t seem to think their shareholders will lose out from the shift – quite the opposite, in fact.

 

🥡 Takeaways

1. Love ‘em or hate ‘em, Big Oils are on top.

No matter which way you cut it, there’s a strong argument to be made in favor of Big Oils’ stocks right now. Near term, their earnings are likely to rebound with the oil price, potentially making their shares – which have dropped 13% over the last year versus the US stock market’s 16% rise – look like good value. And if the long-awaited rotation away from high-growth stocks comes to pass, they have the potential to outperform the wider stock market. If oil companies’ eco-friendly efforts are successful in the longer term, meanwhile, they could attract a fresh wave of climate-focused investors – whose buying could push their share prices up.

2. Investing in Big Oils can create change from the inside.

Some environmentally focused investors pick stocks based on exclusion. In other words, they’ll outright refuse to buy a company’s shares if it’s in a business that risks harming the environment. But activism might be a far more effective approach. Just look at BlackRock, which – as the world’s biggest investment manager – owns substantial stakes in almost every company out there, including energy firms. It’s planning to use its massive influence to push companies toward more sustainable business practices – hopefully to the benefit of all shareholders and the world at large.

 

🎯 Also On Our Radar

European initial public offerings have had their busiest start to a year since 2015, which is in line with the record number of new January listings globally. Not all analysts are sold on the craze, mind you: some are worried it’s like the height of the dotcom bubble all over again – and we know how that ended…

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