Displaying items by tag: carbon

The world is slowly transitioning to renewable energy. For institutional investors, this transition is likely to bring many investment opportunities. Of course, this will be a slow process that will take place over decades.  

The first step is the displacement of coal by natural gas, which is cleaner in terms of emissions and has already begun in many parts of the world, including the US. Another essential step is investing in various clean energy segments such as batteries, transmission and distribution, utilities, and renewable generation equipment. 

Many countries are recognizing energy security as a national security concern, which is also leading to supportive policies and capital flows. Countries are investing in electrification and local manufacturing in key areas like semiconductors, energy production, and storage. 

As the world moves toward net-zero emissions by 2050, companies in many parts of the economy will have to invest in decarbonization efforts. Morningstar sees opportunities for investors who understand the transition’s impact on the economy and various industries.

Capital expenditure for clean energy is expected to reach between $4 trillion and $5 trillion per year by the end of the decade. However, due to the transition taking place over a multi-decade period, investors should also have sufficient patience, anticipate volatility, and manage risk throughout the cycle. 

Finsum: We are in the early stages of a transition from fossil fuels to renewable energy. There will be plenty of opportunities for investors to earn healthy returns, given the size and scale of the trend.

According to Citi, energy stocks will struggle in 2024 due to rising spare oil capacity. This is essentially the amount of oil production that can be quickly brought online and sustained for up to 3 months. Historically, energy stocks have underperformed in years with 3 million barrels per day of spare capacity. 

Currently, estimates are for an average of 4 million barrels per day of spare capacity. Due to this, the bank is forecasting oil prices to end 2024 in the low $70s. It notes that despite the formation of OPEC+, spare capacity has continued to rise with 80% of the growth coming from the US. 

YTD, oil prices are down by 4%, while energy stocks are lower by 3% despite production cuts by OPEC. Citi sees OPEC continuing to act to support the price of oil, but it will have to sacrifice market share to do so, especially given that current prices continue to support capacity growth. 

In terms of positives for the sector, it notes that many companies in the sector are in a strong financial position which makes them less sensitive to the higher-rate environment. Additionally, there has been a surge of M&A activity in the sector which should also support valuations. 

Finsum: Energy stocks have underperformed in 2023 amid falling oil prices. Citi sees this continuing in 2024 especially with increasing spare capacity. 

In an unexpected twist, crude oil prices declined following the OPEC meeting which ended with an announcement that there would be more production cuts in Q1 of next year. Following the Thursday meeting, oil prices fell by more than $2 and this weakness continued into Monday’s session. Since late September, WTI crude oil has dropped from the low $90s to the low $70s. 

The bearish reaction is likely due to the market already expecting that some sort of cuts would be announced. Further, these cuts are of a voluntary nature. Many are skeptical that there will be enough discipline among members especially given that there has been dissension at recent meetings.

In their statement, OPEC announced voluntary cuts totalling 2 million barrels per day. The committee also signaled concerns over weaker demand in 2024. In terms of specifics, Saudi Arabia will cut 1 million barrels per day and another 300,000 of cuts will come from Russia. However, the lack of details is adding to uncertainty over whether these cuts will actually take place especially given that smaller OPEC members have large reliance on oil revenue and tend to be unreliable, when it comes to production discipline. 

Finsum: Crude oil prices declined following last week’s OPEC meeting. This is despite members agreeing on voluntary production cuts. 

Oil prices were marginally higher headed into this week’s Organization of the Petroleum Exporting Countries (OPEC) meeting, following a decline upon the news that the meeting had been delayed. 

According to reports, this delay was due to divisions among OPEC members when it came to further production cuts and restrictions on output. It’s an indication of clashing interests and incentives. As a collective, OPEC’s best interest is to reduce output to ensure that oil prices stay as high as possible. As individual countries, each country is incentivized to produce as much oil as possible to maximize revenue.

Another factor weighing on oil prices is expectations that demand will be weaker than expected in 2024 due to a slowing global economy particularly in Europe and Asia. Deutsche Bank recently warned that there is a strong possibility that the US falls into a recession next year. China’s economy remains stagnant more than a year after Covid protocols have been relaxed. 

Iranian oil also continues to flood the market despite sanctions on these countries. Iranian production is reportedly at a 5-year high, although there are some who believe that sanctions may be more aggressively enforced due to the conflict in Hamas. 

Finsum: Crude oil prices have dropped $20 over the last few weeks. One factor has been a lack of unity among OPEC member nations around production cuts.

This month has seen two major takeovers in the energy sector as Exxon bought Pioneer Natural Resources for $59.5 billion, while Chevron announced that it would buy Hess for $53 billion. Exxon significantly boosted its North American energy production and reserves with the acquisition, and Chevron added a mix of domestic and international assets. Many are speculating that these moves will trigger more M&A activity in the space.

This follows a slight slowing of M&A among oil E&P companies in Q3 as there were 25 deals worth $14 billion. To compare, there was $24 billion of M&A activity in Q2 of this year and $16 billion in Q3 of last year. 

Of course, these deals are dwarfed by the size of Exxon and Chevron deals. According to a report by Enervus, "As anticipated, the pace of consolidation slowed for private E&Ps as the cream of the crop in terms of scale and quality has largely, but not entirely, been bought out. The next logical step in consolidation is more tie-ups between public producers."

Enervus anticipates more dealmaking among smaller companies in the sector especially in the shale patch. Additionally, larger independents could target smaller and midsized mergers with some candidates including Devon Energy, Marathon Oil, Chesapeake Energy, and Southwestern Energy. 

Finsum: There were two mega-deals in the energy sector this month. Here’s why this could trigger a wave of M&A in the sector.