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Energy
Big oil faces big challengers on climate change
Darren Peers
Equity Investment Analyst
Craig Beacock
Equity Investment Analyst
KEY TAKEAWAYS
  • Oil companies are facing pressure from western societies to reveal how they intend to contribute to societal goals of net zero emissions by 2050.
  • In many parts of the energy chain, cleaner energy is more costly and that’s the challenge many companies face.
  • Government policy is an important tool that can influence the rate of change at oil companies and alter consumer demand patterns.

After surviving a steep collapse in oil prices in 2020, major oil companies are being pressed by louder calls to figure out their contributions to societal goals of net zero carbon emissions by 2050.


In recent months, activist shareholders led by hedge fund Engine No. 1 elected three new members to the board of Exxon Mobil; Royal Dutch Shell was ordered by a Dutch court to reduce global net carbon emissions by 45% by 2030; and Chevron shareholders voted in favour of the company cutting its total greenhouse gas emissions. (As a reminder, net zero refers to the balance between the amount of greenhouse gas produced and the amount removed from the atmosphere.)


Clearly, Western society is voting for lower emissions. That said, the path to reducing carbon emissions remains somewhat opaque and in the interim, society will need hydrocarbons for transportation, energy, chemicals, plastics and lubricants.


As ‘Big Oil’ faces unprecedented structural and societal pressures, we spoke with two of our equity oil analysts to get their views on recent developments and their thoughts on some potential implications and outcomes in the short and long term.


What do these latest developments tell you?


Darren: There's this incredible tension in the world right now, primarily taking place in Western societies. We want affordable energy, and we also want clean energy. Sometimes you don't have to make a choice - for instance, onshore wind and solar are both affordable and clean. But in many other parts of the energy chain, cleaner energy is more costly.


And as costs escalate, so do the challenges. This is possibly less true for relatively wealthy regions, but for the global economy as a whole, that's a real tension. All these companies are trying to walk a fine line, to varying degrees. You have the European majors that sit at the epicentre of this and have solid plans to try and work with society to decarbonise. The major US oil companies have been less proactive.


I would be a huge proponent of a carbon tax that sets a price on carbon. I think that would help level the playing field. Right now, we are dealing with a byzantine set of subsidies and regulations and different sets of risks.


BP, for example, is moving aggressively into renewables, setting up the possibility that the company may not make good returns on those investments. Chevron and Exxon Mobil, on the other hand, have been less willing to move into what have been so far unprofitable areas of alternative energy, but they might run the risk of society saying that is just unacceptable.


And if the Royal Dutch Shell court ruling is an example, companies are being asked to take action to reduce emissions ahead of changes to existing laws and policies. It means that they will have to reduce their carbon footprint – both in emissions and in carbon intensity – at a more rapid pace.


All three equity units at Capital voted for the activist shareholders to join the Exxon Mobil board, and it was widely supported by most asset managers. What is that telling us?


Darren: It is as much about the transition to a business model emphasising sustainable energy sources as it is about profitability. The two have become inextricably linked. A company cannot have industry leadership and a sustainable bottom line if it does not have a long-term, strategic and well-articulated plan for investment in lower carbon energy.


Craig: Exxon Mobil shares have been under pressure for several years. I supported the slate of new directors, but I also believe that the successful action of the activist fund had to do with more than just climate change. Exxon’s financial performance has lagged in recent years, resulting in increasing debt, credit downgrades and questions about its ability to sustain the dividend.


 

Risk factors you should consider before investing:
  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
  • Depending on the strategy, risks may be associated with investing in fixed income, derivatives, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.


Darren Peers is an equity investment analyst at Capital Group with research responsibility for integrated oil & gas in the US and Europe, oil & gas exploration and production in the US and Canada and oil & gas refining and marketing, as well as large-cap machinery companies in the US He holds an MBA from the Tuck School of Business at Dartmouth College and a bachelor’s degree in economics from Dartmouth College. Darren is based in Los Angeles.

Craig Beacock is an equity investment analyst at Capital Group with research responsibility for energy and as a small- and mid-cap generalist in Canada, as well as US and Europe integrated oil, midstream and oil refiners. He holds a bachelor’s degree in business administration from the University of Southern California. He also holds the Chartered Financial Analyst® designation. Craig is based in San Francisco.


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Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.