Oil/renewables: power play | Financial Times


Big Oil received a lump of coal for Christmas to round off its worst year ever. Political turmoil and a pandemic collapsed crude prices and shattered dividend records. One major, ExxonMobil, managed to increase its payout maintaining a 37-year unbroken record. Its reward from the Church of England was chastisement. The CoE’s investment wing joined other shareholders in calling for the US behemoth to act on energy transition. 

Unlike most other oil giants, ExxonMobil is sticking to its roots by making plans to expand oil production. Rivals such as Shell, Total and BP have all belatedly presented pathways for shifting away from fossil fuels to combat the effects of climate change.

ExxonMobil’s stance is out of kilter with growing demand for high-scoring environmental, social and governance investments. The involvement of the church highlights the new orthodoxy that oil has joined dirty coal in the sin bin and deserves to be shunned. 

Clean energy, by contrast, is proving a win-win for investors. The thrill of doing good combines with spectacular returns. In a year when oil and gas investments lost about a quarter of their value, the S&P Clean Energy index has more than doubled.

The resulting valuation gap has grown to startling proportions. ExxonMobil is currently valued at about $175 per barrel of oil equivalent from upstream production over the past nine months. French nuclear generator EDF is valued at $280 per barrel of oil equivalent produced over the same period.

Spain’s Iberdrola, with its high renewables output, trades at $1,200 per barrel of oil equivalent produced. On a per unit of energy produced basis, Iberdrola is seven times pricier than ExxonMobil, and double what it was last year.

A premium for renewables is justified given its growth potential. But the gap between “good” and “bad” energy is excessive. Sinful status has driven big oil and gas stocks below levels justified by their medium-term cash flow expectations. Short term, they look decent value for the impious.

This is one of four Lex notes highlighting New Year investment possibilities.


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