OILS’ COMEBACK (WITH ESG AND NUKE)

Oils gained nearly 5% last week in a context of weaker Brent prices. So much for the correlation between the oily stuff and oil groups. More interesting is that this confirms Oils as the third best performer ytd. Should Chinese news turn a bit more negative and impact Luxury/Consumer Durables, Oils would close 2021 second only to Semi-Conductors.

As Oils is also on the receiving end of the ESG stick, it is likely that most money managers with such ESG commitments will have missed that performance. 

Oils on its way to be the second 2021 sector performer?

Looking ex post at reasons for the performance is always easier and would include the crude prices strength even if it is not a perfect correlation, continuing capital discipline (leaving aside the money thrown at greening up efforts) and a floor to dividends with a 2021 yield at 4.6% or 50% more than European equities average (3%). This is always good to have when the TINA words in equities become a worry.

We would venture that for ESG investors considering the way business models change as opposed to buying flat data from aggregators, Oils are on a fast-paced effort to cut their carbon content. On the ESG front, Big Oils do well the bigger they are. Some of that is virginity ticket buying through box ticking but it is hard not to recognize that society at large will benefit more from Big Oils carbon emission reduction efforts than from efforts from, say Banks.

The table below using the AlphaValue proprietary and independent metrics with a priority given to the dynamic of cuts is making that point (scope 3 not included). 

Sustainability: Can certainly do better but a good start

Beyond the vagaries of the crude prices amplified in 2021 by the global gas tightness and all sort of arbitrages with coal as part of the global recovery process, Big Oils are about transition from dirty to cleaner energies. None of the players has been considering a strategy of paying out what it still has in the ground and wind down the shop. So that valuations are likely to be determined by how much of a capital waste it is to double down on capex for offshore wind turbines or H2 electrolysers. Big Oils can deploy so much capital that they can only destroy future returns in such narrow fields.

To nurture growth in the energy of tomorrow, they need to go for much bigger projects. That could be nuclear energy of course when the market is ready. The investment of ENI and Equinor in nuclear fusion (Commonwealth Fusion Systems now raising more cash from financial investors) is more in tune with what Big Oils can do. Thinking big is really where the value of Big Oils should be. 

Oils valuation essentials

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Posted in ESG