(Bloomberg Markets) No one disputes that change is coming to the energy sector. A decade ago, integrated oil and gas companies such as Exxon Mobil Corp. and Chevron Corp. seemed like solid investments. They made up the biggest sub-index in the S&P 500, accounting for 7.8% . And yet, by this July, that same group had dropped to 11th place, with a 2.4% weighting. Over the past five years, the index featuring the once-mighty oil and gas majors has underperformed the S&P Global Clean Energy Index, composed of solar, wind, and other renewable energy stocks. How can investors position themselves for the future? Bloomberg News energy reporters around the world solicited opinions and insights from experts with an array of backgrounds. The responses are diverse, but one common theme emerges: Change means opportunity.
Managing Principal, BP Capital Fund Advisors
“Renewable energy demand will grow dramatically in the context of global decarbonization. While wind power and solar power are more established than other parts of the renewable energy/cleantech theme, we see immense opportunity forthcoming in electric vehicles, fuel cells, and smart-grid technology.
“We believe investors should approach the theme in a balanced fashion, including select parts of the ‘renewable energy/clean technology value chain.’ This approach is embodied in an index that BP Capital [the investment vehicle part-owned by T. Boone Pickens] co-developed with Morningstar—the Morningstar North America Renewable Energy Index. Constituents are either involved in the renewable energy and green transportation fields directly, or they are significant users of clean energy sources.”
Head of Renewable Power in Asia-Pacific, Blackrock Real Assets
“Asia-Pacific represents over half of the global renewables market and will be the leading destination for capital flows into the energy transition, including electricity storage, over the coming years.
“The energy landscape is developing at a pace more akin to a revolution than a transition, led by low-cost renewable energy. More than $1 trillion of capital has already been invested into wind and solar projects globally, and renewable power infrastructure assets continue to represent compelling opportunities for investors seeking both growth and income.”
Founder and Chairman, FGE
“A couple things are clear. The demand side for oil is going to significantly slow down, but the supply is not. There’s more oil coming, so we could be in a world of $20 to $30 oil in 10 years or so. If that’s the case, it’s all going to be in petrochemicals and petrochemical integration.
“A long-term structural decline in oil prices would make petrochemical feedstocks cheaper, while demand for products such as plastics is likely to keep rising to meet needs of growing economies.”
Amy Myers Jaffe
Senior Energy And Environment Fellow, Council on Foreign Relations
“Investors need to balance their portfolios. You need one that’s going to tap profits available now in the oil and natural gas space—maybe in midstream infrastructure—but is also going to allow you to transition into clean energy. Investors are interested in seed funds but cannot commit large sums from their portfolios because of the risk involved in startup ventures coming out of accelerators. That opens the opportunity for investment funds that allow an investor to participate at various stages of a venture through a structure called a stacked vehicle. A stacked vehicle is a venture fund that provides guaranteed optionality to invest larger amounts of money once a venture gets off the ground and starts to grow. Portfolio managers are increasingly turning to co-investment opportunities instead of just tapping the stock market once companies are public. That’s because the most exciting companies are not always coming to public markets.”
Managing Director and Portfolio Manager, Pacific Investment Management Co.
“One of the disruptive forces in the global energy markets has been rising U.S. oil and gas production and exports, which is required to meet growing energy demand in absence of alternative supply growth elsewhere. We see value in the U.S. midstream energy sector, the primary beneficiary of U.S. oil production growth due to the need to process, transport, store, blend, and export. The midstream sector, over the long term, offers the potential for organic growth well above nominal GDP growth, along with attractive yields and attractive valuations. Over the next one to three years, we also see opportunities in the oil market. Due to OPEC+ [Organization of Petroleum Exporting Countries plus other nations including Russia] actions thus far, both voluntary and involuntary, the oil market remains quite backwardated, meaning the spot price of oil is more expensive than the future price. Historically, this has been a strong buy signal.”
Head of Commodity Research, Legal & General Investment Management
“The world’s energy system faces unprecedented disruption over the next three decades if we are to come anywhere close to the objective of limiting the catastrophic impacts of climate change. The transition will create significant risks and uncertainties for many companies. But there are likely to be areas of opportunity as well—for example, in natural resources like copper that we will need in ever increasing quantities.”
President and Chief Investment Officer, Massar Capital Management
“Over 70% of the world’s oil production growth over the past decade was driven by U.S. shale, an industry highly dependent on low interest rates. The shale phenomenon has helped sustain strong U.S. GDP rates, as it accounted for the bulk of the increase in domestic capital expenditure while simultaneously capping inflationary energy prices. The interplay between interest rates, inflation, and the central bank’s reaction function makes monetary policy a far more important component of the energy sector than in the past.
“From a speculator’s perspective, this landscape is unfolding just as risk capital is leaving the sector in droves. The majority of the large banks active in energy markets have either shut down or reduced their commodities divisions, because of regulatory concerns or a shift to more efficient uses of capital. Meanwhile, assets dedicated to energy hedge funds are a sliver of what they used to be. In our view, the lack of available risk capital has had two pronounced consequences:
“One, an increase in the magnitude of price swings and a heightened market sensitivity to the higher frequency of event risks. As a result, investors should shorten the time frame of their outlooks and more actively manage their exposures instead of trying to capture longer-term thematic market moves.
“Two, given the considerable producer hedging flows, taking the other side by warehousing risk and providing liquidity should be well compensated.”
Group Chief Executive Officer, Mainstream Renewable Power
“Renewables have become the best means of simultaneously addressing the emissions gap, delivering cheap power quickly, and, increasingly, the ability to deliver firm power. The fossil fuel industry in all its forms will decline more rapidly than people think as investors take flight fearing a medium- and long-term-returns risk.”
Global Oil & Gas Sector Leader, EY
“The key success factors going forward are going to be flexibility, cost-advantaged assets, and driving margins through integration—all of which are underpinned by technology leadership. Investors will maximize their chance of returns by backing the market participants that credibly have and will continue to grow these characteristics.”
Former Ceo, Vestas Wind Systems A/S
“The energy transition has taken us to a crossroads on where to invest to create long-term value, as renewable energy has gone from being the cheapest source of electricity in 1% of the world five years ago to two-thirds of the world today. We’ve seen large financial institutions divest as a consequence of this, as they seek to ensure a solid return for future generations, but the many undecided investors need to make up their mind fast if they want to avoid stranded assets.”
President, Generate Capital
“Look, utilities don’t want to radically improve their business. They won’t take risks. So, instead, serve the rebels: Sell to the people with a vision. Disruptive technologies don’t make money, that’s for foundations and endowments. Tesla was disruptive from a visionary standpoint, not from technology. It was edgy. Musk eventually added a bunch of disruptive technology. Be patient. Brand-new technologies take 20 years to get to market.”
Global Head of Power, Renewables, and Water, KFW Ipex-Bank
“The energy transition provides ample opportunities. You see banks and financial institutions providing loans, opportunities in replacing existing power facilities. I see also a lot of potential on cross-border investments such as cables, linking countries. In Germany, also I see opportunities for wind offshore, new technologies, and LNG [liquefied natural gas]. Looking forward, I see that hydrogen, electrolysis, and a combination of storage technologies would offer good opportunities. Offshore wind is a success in Europe now, but there are other countries entering that market, too, such as Taiwan, the U.S., and Japan.”