Green Energy Throws Fossil Fuel A Life Line

  • The world goes green. Is that bad for conventional energy producers?
  • Game plan for a gravy train collapse
  • Supply response vs. higher prices may be different this time
  • As convoluted as this might seem green may be good for fossil fuel producers for some time to come.

No Question: the world is going green

Climate change is real. Some may debate the cause but, excepting a few Luddites, this has become a consensus. Hydrocarbon emissions are front and center, the main source of blame for our current environmental issues and the major target for reduction or elimination. This fact is not lost upon oil-producing countries or the companies that find, produce, and market the ‘black gold.’

What to do when your gravy train begins to collapse

My advice-begin to look for a new gravy train! If you are Saudi Arabia, stop investing in new production or worrying about maintaining market share and start doing everything possible to maximize cash flow and investment in alternative industries that will take you into and finance the future. This may very well be an explanation for the current discipline we are seeing in OPEC+.

If you are Chevron (CVX) or Exxon (XOM) you may want to adopt the same strategy. Exxon in particular may want to think about this as three of their twelve directors are now green beans.

If you are Apache Corporation (APA) (be careful … I own this one), you may want to hold your maintenance capital expenditures flat and use any excess cash flow to pay down debt. This is exactly what they are doing. Prior to the Covid 19 collapse in oil prices, the company had been paying a quarterly dividend of $.25 (annually $378 million).  It was cut to $.0625 during the crash. In the first quarter of 2021, the company generated $502 million in free cash flow (an amount well over that needed to fund the entire old annual dividend at $1 per share). During the quarter-end conference call they were asked about increasing their dividend. Their response was that that was not even in the cards until they returned their debt rating to investment grade. They have about $8 billion in debt. If that level of free cash flow continues (no big bumps in spending to increase production, which they stated would be the case), my armchair analysis says that they could pay off 25% of that debt this year.

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Disclaimer: The information presented here represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain ...

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