Investors are returning to oil and gas, drawn in by strict capital discipline and improving bottom lines. Fundraising on debt and equity markets is on the rise for the oil industry, at least in the United States. Still, the global chronic underinvestment in new supply is compromising future energy security.
A recent analysis by the Financial Times showed that small oil and gas companies in the U.S. have managed to win back the trust of investors in equity and bond markets. Oil price levels may be part of the reason, but the bigger part, according to consultants and legal advisors, is the new focus on capital discipline, as demonstrated by the industry.
Thanks to that focus, debt and equity investors appear to have been reassured that the days of cash-burning are over for good. The trend includes oilfield service providers, too, for whom the recent years have been especially challenging in the fundraising department.
“Companies are really keeping their focus on shareholder returns,” Pickering Energy Partners managing director Josh Martin told the FT. “They’re very disciplined, they’re making the right decisions by paying out dividends and buying back shares. This is winning the investors back to the sector.”
The trend appears to suggest that ESG investing is not that ubiquitous, too. The suggestion has been reinforced this year by record outflows from investment funds focused on low-carbon energy. The first half of the year saw inflows of $3.4 billion in those funds, but the third quarter alone saw outflows of $1.4 billion amid weaker company performance and external challenges.
What is happening in the investment world, then, is that while investors are dumping the competitors of oil and gas, many are returning to those same oil and gas to enjoy stable and generous dividends in a geopolitical context where oil prices might soon hit $100 per barrel. And oil and gas companies are being smart about it.
Per the FT analysis, oil and gas companies at the receiving end of the new investor bounty are using the cash to refinance old debt or fund modest acquisitions. There is no urge to spend like there is no tomorrow anymore. Discipline appears to have remained the top priority regardless of recent price movements.
“Some are using it to do smart bolt-on acquisitions, trying to shore up their positions in particular geographic areas . . . [but] companies are still fundamentally behaving the same ways in terms of focus on capital discipline and shareholder returns,” Hillary Holmes, capital markets co-chair at legal firm Gibson Dunn, told the FT.
Even with these positive trends in the U.S., the global oil investment situation remains fragile. OPEC has repeatedly warned against continued underinvestment in new oil and gas production, but political winds in the West, where the biggest public oil companies are based, continue blowing due transition. And pressure on the industry is mounting.
The latest warning came from the CEO of the Energy Council—an industry executive network. Speaking to Petroleum Economist, Amy Miller said investment was about to become the Achilles’ heel of the oil and gas industry, and the lack of sufficient funding was about to become worse in the coming years.
OPEC recently said in a report that the global industry needs investments of $14 trillion by 2045 to secure enough supply of liquid hydrocarbons for the world. That, the cartel said, was because oil demand would continue rising in the coming years and decades, reaching 116 million barrels daily by that year.
Returning investment to the U.S. oil patch could go some way to ensuring enough future supply. The country is already the biggest oil producer and a growing exporter. Still, just the U.S. won’t be enough. Investment needs to return to projects in other parts of the world. Indeed, it is returning, only the players are different.
In Africa, Chinese and local lenders are stepping in to replace Western, especially European banks, which are shunning oil and gas developments on the continent. Big Oil is also there, as it is in the Middle East, with the cash to spend on new developments regardless of the political agenda.
The return of creditors and equity investors in U.S. oil is one aspect of a sort of revival for the oil industry amid a flurry of forecasts that it is on its deathbed. Big Oil this year made adjustments to its transition plans, basically delaying said transition due to poor returns on investments in it. The EU failed to agree on a deadline for the phaseout of oil and gas subsidies. And investment funds in the U.S. recently expanded their energy stock holdings to the highest since March.
Oil and gas investments are returning. This is probably the starkest reality check for the transition that has seen wind and solar companies and EV makers struggle this year to turn a profit despite high demand for their products driven by government policies. Just because markets reminded those industries that there is no such thing as constant raw material prices.
Read the latest issue of the OGV Energy magazine HERE
Published: 20-10-2023
