A few years ago, practically no one wanted to
touch oil-and-gas stocks with a ten-foot pole. A production glut had pushed
down prices and fossil fuels were seen as quickly going the way of the candle,
typewriter, and horse-drawn carriage. The price of a barrel of oil briefly
went for less than zero in spring 2020 and Exxon Mobil
was booted out of the Dow Jones Industrial Average.
What a difference a pandemic, a war in Europe,
and some fiscal discipline by oil-company management teams makes. Energy is by
far the best-performing sector in 2022, and Exxon's stock has soared 60% over
the past year, to a record high and a market value of more than $440 billion.
The transition to clean energy remains in
progress, but it won't be putting oil-and-gas producers out of business just
yet. It's going to take years, and traditional energy companies are going to
participate in it.
"Instead of being destroyed by the energy
transition, Big Oil has emerged in a remarkably strong position to profit from
it," writes Avi Salzman in Barron's latest cover story. "Because of deals
signed in just the past year, companies like BP, Shell,
Exxon, and Chevron are building enough
offshore wind farms to supply millions of homes on the East Coast with
electricity and are preparing to produce hundreds of millions of gallons of
fuel made from plants, garbage, and kitchen grease. They’re increasingly
confident that they can get greener without sacrificing profits."
A gusher of cash this year makes that an
easier task. Oil companies are taking advantage of sky-high commodity prices to
pay down debt, fund capex and shareholder returns, and invest in low-carbon
businesses of the future. Worldwide, total investments in renewable energy
is on track to exceed oil and gas investments for the first year ever this
year, according to Rystad Energy.
Avi writes:
The size of the checks that big oil companies
are signing today makes a compelling case that their investments aren’t just
window-dressing. Earlier this month, Exxon inked a contract to help a corporate
customer capture and store millions of tons of carbon dioxide underground,
equivalent to switching 700,000 cars from gasoline engines to electric motors,
the company says. BP just agreed to pay $4.1 billion for a company that
replaces fossil-fuel gas from wells with naturally occurring biogas from
landfills, one step in its goal to produce zero net-carbon emissions from the
products it sells by 2050; some others have only said they’d reduce the
emissions from their own operations.
Both stocks, however, trade as if the oil
businesses are on the decline and the new projects will mostly be busts. BP
fetches less than four times expected 2022 earnings, and Exxon, for less than
eight, or about half of the multiple of the broad market. That could make for
good entry points to the stocks.
The companies say their
climate projects are likely to reward investors, though they will take time to
scale up. “We see an opportunity for a lot of growth and solid returns,” says Dan
Ammann, who leads Exxon’s low-carbon efforts.
The U.S. companies have announced much less
ambitious emissions-reduction projects than their European counterparts, and
seem much less willing to invest in wind and solar, where they say they don’t
have competitive advantages.
Still, there's some cognitive dissonance to
hearing about fossil-fuel producers participating in the clean-energy
transition, and investors will likely want to see the returns from companies'
low-carbon projects before giving their stocks credit.
But with gobs of cash to throw at the problem
and rock bottom price/earnings ratios, the pitches are at least worth listening
to.
Read Avi's cover story here.
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