
Charts that make you go……hmmm!
Years of zero interest rates, central bank money printing and government bail outs appear to have created a stock market defined by speculative excesses…
Portfolio manager
European oil & gas majors and the energy transition
Over the last few months, we conducted a deep dive into our portfolio energy holdings, reassessing their plans for the transition to a low carbon economy and meeting their obligations under the Paris Agreement. This transition holds a lot of risk, as well as potential reward, for shareholders like us. Recently, we have seen risk materialise in dividend cuts, impairment to equity and share price declines; driven by the Covid-19 demand shock and the oil price war supply shock, but also due to divestment motivated by climate change, accelerated by environmental and social issues taking centre stage during the pandemic. What we are looking for are companies that can navigate the transition and be in a strong position to supply what will be a growing demand for energy through and beyond the transition period. Population growth and the quest for rising standards of living will drive demand; the landscape on the supply side will change radically.
Across our different mandates we own shares in Total, Royal Dutch Shell, bp and Eni. First the good news; in our opinion the European majors ‘get it’ – they get that climate change is happening, that regulation is coming down the track, that carbon pricing and carbon tax is very much on the horizon in a meaningful way and that they have to communicate the fact that they ‘get it’ to retain their social licence to operate. This contrasts with their American peers, particularly Exxon Mobil, who are well behind on these issues.
However, while they now acknowledge the issues, publish lots of reports and set lots of long-term targets, there is an amount of work still to do. Here are ten takeaways from our analysis and communications with the four companies mentioned:
With any transition, particularly with one as important and large as the transition to a low carbon economy, the risks are very high. What we see is that the large European energy companies understand the transition is happening and understand that they must move with it. While Eni has detailed plans on how they will make the transition, the other three under review are short on detail (albeit bp is moving fast) and place the burden of transition, the real heavy lifting, on future management. They are due to hold investor days in the coming months to set out more detail. We will then have a chance to assess whether they are making meaningful plans to meet their obligations and targets because, ready or not, climate change is happening, more regulation is coming, and society is becoming increasingly impatient.
The statements and opinions expressed in this article are those of the author as of the date of publication, and do not necessarily represent the view of RWC Partners Limited. This article does not constitute investment advice and the names shown above are for illustrative purposes only and should not be construed as a recommendation or advice to buy or sell any security. No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment.
Years of zero interest rates, central bank money printing and government bail outs appear to have created a stock market defined by speculative excesses…
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Share on facebook Share on twitter Share on linkedin We have previously written about Apple whose lacklustre earnings have parted company with
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