The United Nations Framework Convention on Climate Change (UNFCCC) recently held its twenty-sixth meeting of Conference of the Parties (COP 26) in Glasgow. It was aimed at further defining protocols for reducing global greenhouse gas emissions ― principally, carbon dioxide and methane. Global Carbon Atlas reports that the fossil fuels, oil and gas (55%) as well as coal (40%) account for the largest proportion of carbon dioxide emissions that are unrelated to land use.

While some participants were satisfied with the protocols agreed, others, including campaigners, maintained that they were not far-reaching and have led calls for divestment from fossil fuels. Institutional investors with assets worth about US$39 trillion have pledged to divest from fossil fuels. Just recently, Reuters reported that New York’s state pension fund ― the country's third-largest ― is set to sell stock and debt worth US$238 million which it holds across 21 shale oil and gas companies, citing their slow movement to a low-carbon economy. The companies include Chesapeake Energy Corp (CHK), Hess Corp (HES) and Pioneer Natural Resources (PXD). The fund however will be retaining other fossil fuel assets including ConocoPhillips (COP), CNX Resources Corp (CNX) and EQT Corp (EQT).

Big Oil, however, has been reporting impressive earnings lately.

Trends  

Fossil Fuels: Under tightening Environmental, Social and Governance (ESG) protocols, oil and gas majors have shed US$44 billion worth of assets since 2018, and consulting firm Wood Mackenzie reports that an additional US$128 billion worth of assets would be shed in the next few years.

While part of Big Oil’s rising earnings have come from assets divestment, higher oil and gas prices were the principal drivers. With oil prices reaching their highest since 2014, Chevron (CVX) and ExxonMobil (XOM) for example, reported free cash flows of US$21.1 billion and US$48 billion respectively over the past year. For ExxonMobil, it was the most since 2012. TotalEnergies SE (TTE), after posting record fourth quarter profit, is planning to increase its dividend and buy back more shares.

United Kingdom’s oil giant BP (BP) has also benefited from high oil prices but has decried the windfall tax being mooted by the government. It said such taxes will severely affect its low-carbon strategy.

Oil producers in the United States have in the main, kept a rein on capital expenditure, in spite of rebounding oil prices. They have been prioritizing profitability over production. Chevron shares saw record values in January. ExxonMobil, which initially scheduled its share buyback worth US$10 billion for 2023, is currently expediting the pace.

Publicly-traded Exploration and Production (E&P) companies have mostly adhered to their CAPEX guidelines, with investors insisting on debt-reduction, maximizing of free cash flow and adequate capital returns to shareholders. However, it remains to be seen if production volumes will increase with sustained, higher oil prices. The majors ExxonMobil (25%) and Chevron (10%) have already announced output increases from their Permian portfolios; independents, however, are urging caution, especially with the prospects of another bruising price war with Organization of the Petroleum Exporting Countries, OPEC.

The U.S. Energy Information Administration (630,000 barrels per day) and market intelligence firm, Lium LLC (1,000,000 barrels per day) have projected increased output this year, from the U.S. shale patch.

Canada’s oil patch is also profiting from high oil prices as companies swing from losses to profits. Suncor Energy (SU), in the latest quarter for example, reeled in C$1.5 billion in profits, reversing losses from a year ago.

Private equity funds have found profitable niches in the oil and gas sector, particularly the midstream assets such as transmission (oil pipelines, gas grids, etc.) and storage (tank farms, etc.) facilities. Since these assets are under contract with major corporations such as utilities among others, they are considered safe, low risk investments by these private equities, which in the past two years have bet US$60 billion on fossil fuels, a third more than they have on renewables.

Fiscal discipline, aggressive cost-cutting and surging oil prices ― driven in the main, by imbalance in fundamentals ― have enabled many oil and gas companies to return to profits. Oil prices may well reach triple digits, raking in sizable investor returns; and while oil and gas will probably be part of the global energy mix for quite some time to come, the sector’s long-term growth prospects remain uncertain.

Several municipalities have been enacting laws aimed at mitigating effects of climate change; and with cheaper alternatives driven by the steep decline in the cost of clean energy’s front-end components (solar panels, wind turbines, power storage systems, etc.), utility companies mostly in the United States are rapidly closing coal-fired power plants. Coal accounts for 85% of total U.S. power capacity scheduled for retirement in 2022.

Duke Energy (DUK), which earlier planned to stop burning coal by 2048, now plans to retire its coal fleet by 2035.

Green Investments: The growth in sustainable investment over the past few years has been frenetic. From seemingly insignificant levels just a few years ago, aggregate investment has grown through US$30.7 trillion in 2018 to US$35.3 trillion in 2020, according to Global Sustainable Investment Alliance.

Under the European Union’s (EU’s) Sustainable Finance Disclosure Regulation, a total of €4.03 trillion (about US$4.63 trillion) worth of assets was marketed as sustainable at the end of 2021, ratings agency Morningstar reports. Representing almost 40% of all assets managed in EU-domiciled funds, and up from €2 trillion in April last year, it is seen as a nod by investors to ESG-focused products.

With US$368 billion, the Asia Pacific (APAC) region attracted the largest green investment by volume in 2021, recording the highest growth rate of 38% (BloombergNEF). Investment in Europe, Middle East & Africa (EMEA) region grew by 16% to US$236 billion, while the Americas witnessed a growth of 21% to US$150 billion.

In profiling 2021’s US$775 billion of energy transition investment (a 20-fold increase from 2004), Bloomberg reports that renewable energy led all sectors by investment volume, followed by electrified transport; the latter however, has been growing at ten times the rate of the former.

Data from European Automobile Manufacturers’ Association, ACEA, show that electric transport has been taking increasing proportions of all newly-registered passenger vehicles across the European Union. In 2021, plug-in hybrid electric vehicles (70.7%) and battery electric vehicles (63.1%) recorded significant increases over 2020 levels; and for the first time, hybrid electric vehicle sales (with 1,901,239 units) overtook those of diesel (1,901,191 units).

In 2021, more than 3 million units of new electric vehicles were sold in China, according to International Energy Agency; and that translates to a 51.5% share of the global market for that year.

In the United States, several states and regions, with a view to reaping manufacturing benefits, have joined the race to construct electric vehicle and battery plants, providing such incentives as subsidies among others.

Clean energy stocks took some hits early in the year, due mainly to supply chain and materials production disruptions but also to political wranglings in the U.S. legislature over president Biden's climate change agenda. For many analysts however, the outlook is a significant rebound.

Stock photo by Vecteezy