Dirty oil companies could lead low-carbon transformation, new Goldman report says
By Steve GoldsteinWaldo Swiegers/Bloomberg News
It is hard to imagine a less-loved sector than energy.
The energy members of the S&P 500 XX:SP500.1010 have dropped 42% this year, compared with the 37% advance for the index’s information technology components XX:SP500.45. That is even worse than the 30% drop in front-month light sweet crude oil futures CRUDE OIL – ELECTRONIC this year, and the bonds of energy companies also have performed better, which “suggest to us that investors think that they will be less profitable, even if they are less likely to go bust,” according to Oliver Allen, markets economist at Capital Economics.
There is a whole host of worries. In the short term, there is less of a need for energy of any sort, since economies are still running well below capacity due to the coronavirus pandemic. There is also the potential of higher taxes in a Joe Biden administration, and, bigger picture, climate change, which not only makes the sector unpopular to environmentally-focused investors but also is likely to prompt tougher regulation.
Which is where an interesting piece of research from Goldman Sachs comes in. Entitled “Reimaging Big Oil: The Age of Transformation,” the bank says a new European Commission rule kicking in by the end of next year can actually drive this shift. It will require companies to classify their activities with regard to sustainability.
“Big Oils have always been vertically integrated in oil, from production to downstream processing, trading and retail, and have been able over recent years to develop and manage complex energy supply chains in natural gas. We believe that they have the capability to transition from international oil companies to integrated energy companies and see them integrating vertically in low carbon power, leveraging their brand and trading capabilities to acquire power customers,” say the analysts, led by Michele Della Vigna.
Under what is called the EU taxonomy, Goldman analysts see five categories that are eligible to be labeled as sustainable in which Big Oils have a material or growing presence: low-carbon electricity; petrochemicals manufacturing; biofuels manufacturing; clean hydrogen and carbon sequestration.
They estimate European big oil companies could increase their share of taxonomy-eligible revenue to 25% by 2030, from 7% now, and 50% of capital expenditure, from 10% today.
Repsol ES:REP and BP BP, both with ambitious targets to expand their low-carbon business, could have 20% of their enterprise value made up of these activities by 2030, the Goldman analysts say. The report also analyzes Exxon Mobil XOM, Chevron CVX and Saudi Aramco SA:2222.
One issue: most of these low-carbon businesses aren’t consolidated and remain off balance sheet at the moment, the analysts say. “We therefore view that as the low carbon electricity business expands, it will become more important for these businesses to be consolidated and for sufficient visibility over these businesses to be provided by the companies,” say the Goldman team.
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