The oil and gas industry came roaring out of the financial crisis after 2009, returning some 131% from 2008 until the peak in June 2014 as China pulled the world economy out of its historic credit-led recession. Since then, the industry has been hurt by two powerful forces. The first was the advent of US shale gas and rapid strides in globalising natural gas supply chains via LNG. Then came the US shale oil revolution, which saw the US become the world’s largest oil and petroleum liquids producer, dramatically pushing down prices and return on capital.
The second force impacting the investment outlook for the traditional fossil fuel energy sector, particularly in the long term, has been the increasing political and popular capital behind fighting climate change, causing a massive surge in demand for renewable energy. The “Greta Thunberg” movement has recently increased global awareness, to a level where investors are desperately looking for green energy investment opportunities and large sovereign wealth funds are even reducing their oil and gas holdings to defend against the change of sentiment on all CO2-emitting energy sources.
The combined forces of lower prices and investors avoiding the black energy sector has pushed the equity valuation on traditional energy companies to a 23% discount to clean energy companies. In 2020, we see the tables turning for the investment outlook as OPEC extends production cuts, unprofitable US shale outfits slow output growth and demand rises from Asia once again.
And not only will the oil and gas industry be a surprising winner in 2020 — the clean energy industry will simultaneously suffer a wake-up call. Investors must realise that for clean energy companies, the average return on invested capital versus the weight-adjusted cost of that capital is a terrible 0.5, meaning that the industry is actually destroying capital. The VDE (Vanguard Energy ETF) / ICLN (iShares Global Clean Energy ETF) ratio jumps from 7 to 12 in 2020 as clean energy investment doesn’t pay while dirty energy does.
Quarterly Outlook Q3 2022: The Runaway Train
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