• 99 days Could Crypto Overtake Traditional Investment?
  • 104 days Americans Still Quitting Jobs At Record Pace
  • 106 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 109 days Is The Dollar Too Strong?
  • 109 days Big Tech Disappoints Investors on Earnings Calls
  • 110 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 112 days China Is Quietly Trying To Distance Itself From Russia
  • 112 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 116 days Crypto Investors Won Big In 2021
  • 116 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 117 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 119 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 120 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 123 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 124 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 124 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 126 days Are NFTs About To Take Over Gaming?
  • 127 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 130 days What’s Causing Inflation In The United States?
  • 131 days Intel Joins Russian Exodus as Chip Shortage Digs In
  1. Home
  2. Investing
  3. Stocks

Big Oil Is Paying The Price For Investing In Renewables

Big Oil Renewables

Big Oil has been frequently lambasted for trying to burnish its green credentials through half-hearted investments in renewables. That might have been true for much of the past decade, but it appears to be changing as the oil and gas majors have started putting down big money into clean energy. For instance, European oil majors including BP Plc. (NYSE:BP), Royal Dutch Shell (NYSE:RDS.A), Eni SpA (NYSE:E), Total SA (NYSE:TOT), and Norwegian national oil company Equinor ASA (NYSE:EQNR) have already invested billions of dollars in renewable energy and made big clean energy commitments.

Yet, Big Oil just can’t seem to catch a break, with stocks of oil and gas companies that are investing heavily in renewables being punished by the markets.

A good case in point is BP, one of the oil majors with some of the largest clean energy commitments. BP has announced plans to achieve net-zero status by 2030 by dramatically increasing its renewables spending. BP stock has, however, cratered 48% in the year-to-date, considerably worse than Europe’s oil and gas benchmark STOXX Europe 600 Oil & Gas Index (SXEP) which is down 32% in the year-to-date or even the Energy Select Sector Fund (XLE) which has lost 41%. 

BP’s European peer Shell has probably done more than any other supermajor as far as investing in renewable energy goes. Recently, Shell CEO Ben van Beurden told investors that the company no longer considers itself an oil and gas company but an energy transition company. Shell has been vocal about the shift to renewables, frequently issuing the clarion call for the industry to switch to cleaner energy sources. In 2016, Shell set an ambitious goal to invest $4bn to $6bn in clean energy projects by 2020. Shell stock is down 44% YTD.

Meanwhile, ENI has the most ambitious climate change pledge with plans to lower its greenhouse gas emissions by 80% by 2050. ENI also says that its renewable portfolio will reach an installed capacity of 3 GW as early as 2023 and 5 GW in 2025. ENI stock has tanked 38%.

Clean energy transition

What’s going on here clearly is a case of damned if you do and damned if you don’t. 

The big problem here stems from the way the renewable sector operates. 

Green energy requires heavy upfront investments with longer payback periods compared to fossil fuel investments. In fact, green infrastructure is 1.5-3.0x more capital- and labor-intensive than hydrocarbons.

Oil and gas firms are still grappling with the best way to presently use dwindling cash flows; in effect, they are still weighing whether it's worthwhile to at least partially reinvent themselves as renewables businesses while also determining which low-carbon energy markets offer the most attractive future returns.

Most renewable ventures, like solar and wind projects, tend to churn out cash flows akin to annuities for several decades after initial up-front capital expenditure with generally low price risk as opposed to their current models with faster payback but high oil price risk. With the need to generate quick shareholder returns, some fossil fuel companies have actually been scaling back their clean energy investments.

By investing their cash flows in clean energy projects, the oil majors are likely to reap the benefits in the future--but at the expense of today’s dividends and buybacks. In other words, it’s a bit like the markets want to eat their cake and still have it.

Clean energy spinoffs

Obviously, pure-play renewable companies get a lot more leeway from the markets despite the majority still being unprofitable. For instance, the solar sector boasts a median P/E GAAP (FWD) of 31.3 vs. 10.9 for U.S. oil and gas companies thanks to the former’s much better top-and bottom-line growth prospects. In contrast, even the most bullish oil outlook calls for only anemic growth for oil and gas demand over the next decade, meaning pretty limited growth runways for Big Oil. Further, renewables still make up a minuscule fraction of their revenues for most oil majors, meaning it might take many more years of clean energy investments before they can reflect on their valuations.

But maybe Big Oil won’t have to wait too long before they can reap the dividends. 

RBC Capital Markets analyst Biraj Borkhataria has told Barron’s that the oil majors are likely to start spinning off their renewable businesses once they achieve scale if this valuation disconnect persists. Indeed, Biraj says that standalone valuations of Equinor’s, Energia’s, and Total’s low-carbon businesses currently clock in at 17%, 15%, and 10%, respectively, of their enterprise valuations. Given how aggressively these companies have been investing in renewables, it probably won’t come as a surprise if the value of their clean energy portfolios double in the next five or so years.

That represents a huge amount of value that these companies will no doubt be looking to unlock several years down the line.

By Alex Kimani for Oilprice.com

More Top Reads From Safehaven.com:

Back to homepage

Leave a comment

Leave a comment