It’s a tough time for companies going through the energy transition, and equally tough for investors interested in this sector’s stocks to know where to turn.
Some see value in safe havens, wanting to squeeze every last drop of oil and gas out of the ground whilst the price of oil and gas is eye-wateringly high.
Increasingly, many private and institutional investors are bracing for a new world where renewables are the dominant energy sources.
This is all with the spectre of the pandemic in the rear window where the price of oil was in freefall, and hitting lows not seen for decades in early 2020.
Which path to tread?
Times are changing and the artists formerly known as ‘oilers’ are keen to reinvent themselves. BP (LSE:BP) wants to be seen as an integrated energy company, with CEO Bernard Looney stating that the company is “putting its money where its mouth is”.
Recent investments in renewable projects seem to confirm BP is a serious contender in the renewables space. It has taken a 40% stake in the Asian Renewable Energy Hub (AREH), touted as having the potential to be the world’s largest hydrogen hub. In early November, the company signed a Memorandum of Understanding with the Government of Mauritania to explore large-scale production of hydrogen. The company also recently acquired Archaea, a US biogas producer.
Whilst demand for hydrogen worldwide remains relatively low, it is set to soar by 2050, with biogas consumption set to double by 2040. Biogas and hydrogen are cited by the International Energy Agency as central to achieving net zero.
BP’s share price is making a steady comeback, yet it is not the trajectory expected by many investors given the price of oil and need for energy security. A cautious dividend strategy, reinvesting bumper profits into longer-term investments, and a reduction in oil and gas has deterred some investors.
It is worth noting, however, that the share price has risen a third (year to date) and is unlikely to see the lowest lows of 2020 again.
Exxon, however, rose to its highest of highs at market close on 20 October, $105.86 up 66% this year and is very clearly on a different trajectory, with CEO Darren Woods stating Exxon is not attempting to match the green investments of its peers.
In the short term, Exxon’s strategy is clearly paying literal dividends; in the longer term, underinvestment in the energy transition could mean latecomers to the party pay more, particularly as investors divest from fossil fuels.
As with all stocks, only time will tell who are the winners and losers. There are no certainties, yet we do know the need for energy is growing exponentially — particularly renewable energy.
President Joe Biden’s Inflation Reduction Act sets the US on a pathway, and perhaps the world, to a green economy, with $369bn of spending earmarked for the transition to a low carbon economy.
With this in mind, I believe BP’s prudent approach to the energy transition would make it a good addition for me to a balanced energy portfolio