December 20, 2022

Is Big Oil’s Renewable Energy Push Credible—and Good for Investors?

Exxon and its kin were laggard stocks for a long time, but now they enjoy flush revenue and strong share prices. The bet: Their clean fuels may give them better stability.

Reported by Larry Light

Art by James Yang

It’s not easy being green, as that noted savant, Kermit the Frog, once observed. To the environmental minded, Big Oil is the enemy in a fight to bring net-zero carbon emissions to the planet. Yet while the major fossil-fuel companies have a history of fighting climate change advocates, they now profess to be greener—and have launched various renewable energy projects to prove it.

How serious are the oil-and-natural-gas majors? To climate activists, Big Oil’s efforts are minimal and little more than public relations gimmickry. The companies point to enterprising initiatives they’ve launched, from wind to solar power, along with carbon capture, hydrogen and biofuels (via landfills, farm waste and plants). Thanks to their recent swelling revenue and earnings, energy producers can easily afford such ventures.

Among institutional investors, there is a potent faction that seeks to prod Big Oil even deeper into clean energy, with the undergirding philosophy that the industry’s embrace of renewables would be good for both the planet and energy stocks. In contrast with other pension programs that are divesting from fossil fuel providers, this group will stay invested in Big Oil—and work from within to make it greener. That engagement sentiment was behind last year’s successful proxy fight to elect three outside directors, considered sympathetic to sustainable energy, to ExxonMobil’s board.

The contest, led by investment firm Engine No. 1 and backed by the likes of the California State Teachers’ Retirement System, has prompted more of a commitment from Exxon to deepen its involvement in lower-carbon sources than traditional oil and gas. In late 2021, after the board election, it pledged to spend $15 billion on lower greenhouse gas emission initiatives.

“At Exxon, the dynamics of the board are changing, and investors are driving it,” says Marcus McGregor, who heads the commodities team at investment management firm Conning, and is an expert on energy.

CalSTRS professes to be pleased with the company’s approach. “We expect the board members who were added to ExxonMobil’s board last year as a result of the Engine No. 1 campaign will continue to add value in the future,” says Aeisha Mastagni, a portfolio manager for CalSTRS’ sustainable investment and stewardship strategies unit.

For other investors, one large question is whether Big Oil will be a good use of their money, renewables or no. After all, low oil and gas prices have bedeviled energy stocks for a long time. In 2020, the Dow Jones Industrial Average dumped ExxonMobil, with its stock price at a low ebb. In the fall of that year, Exxon shares changed hands for $32.

Then came the price surges of the last two years, driven by climbing demand after the pandemic’s initial shock and then by the Ukraine war, which has stunted Russia’s oil output. Crude today goes for $76 per barrel, up 75% from two years ago. Stocks in oil companies have done even better. The Energy Select Sector SPDR Fund, the biggest oil-and-gas exchange-traded fund, has more than doubled from late 2020. Nowadays, the energy sector leads the S&P 500 by a wide amount, up 56% for the year, when everything else is in the red.

Exxon, the largest non-government-owned oil outfit by revenue, saw its earnings per share triple through this year’s third quarter. Exxon stock now goes for $105, up more than threefold from two years before. Despite all that good news, Big Oil shares are still very affordable. Exxon has a price/earnings ratio of just 9.0. Others’ multiples are similar.

Why Renewables?

But does this new renewable energy effort add to Big Oil’s valuations? Well, for one thing, the industry’s renewables effort is definitely useful as a shield against brickbats from politicians, who can harm the companies with punitive taxes and harsh regulations.

When President Joe Biden last summer criticized Big Oil for reaping windfall profits from high energy prices, the industry’s response was in part that it is a good corporate citizen, creating jobs at home and U.S.-made products to sell worldwide and meet energy and climate objectives. Biden’s plan for a windfall profits tax on oil giants has since stalled and, with a GOP-majority House of Representatives in January, is likely dead.

Chevron CEO Michael Wirth responded in a letter to Biden that his company is “investing $10 billion to reduce greenhouse gas emissions and scale new advanced energy technologies, like carbon capture and hydrogen, along with growing our renewable liquid fuels production capacity to 100,000 barrels per day by 2030,” referring to diesel made from soybeans and animals fats.

Beyond the near-term P.R. benefits, there’s the transition factor. Numerous analysts have argued that getting into renewables is shrewd. While waiting for the age of renewables to fully take effect, Big Oil will be ready to bridge the gap and power the world’s economy with gasoline, heating oil, natural gas and the rest. “Hydrocarbons will be with us for some time,” says Conning’s McGregor. Certainly, oil and natural gas will run out at some juncture. In the meantime, getting in to sustainable energy now sets up Big Oil for the transition, whenever it happens.

Indeed, the International Energy Agency does not forecast a quick demise for the globe’s dependency on fossil fuels. As a portion of world energy supplies, carbon-based fuels stayed steady at around 80% for decades. Over time, the agency contends, this will drop to below 75% by 2030 and to 60% by 2050. Due to the increased use of electric vehicles, the IEA believes, oil demand will top out in the middle of the next decade, then plateau there until about 2050 and from that point descend.

At the same time, clean energy endeavors have shown they can be profitable. Federal legislation passed in August gives more federal money to encourage them, especially solar. Even without government help, solar power seems to be on the way for good things, as the price to generate it is falling. NextEra Energy, a leader in solar and wind energy, has seen its stock rise 52% this year, when the market overall has slid. What’s more, the company is profitable.

While the energy giants do not break out their renewable arms’ performance, odds are they could well be in the black and increasingly so in years ahead. The thinking is that renewables will provide more steadfast revenue than oil and gas, which like other commodities have wild price fluctuations. The developing nations are moving toward greater electrification of their economies, so economic contractions are less likely to send solar- or wind-provided electricity use gyrating. Look at how utility companies perform during recessions—not much change with them.

Grabbing the Green

No doubt the oil majors are making big commitments to renewables, getting in at the outset the way, say, newspapers did not at the dawn of the Internet in the 1990s. That lapse left room for companies like Google to emerge and make inroads on the papers’ advertising revenue.

At least in terms of power transmission, as opposed to transportation and manufacturing, renewables stand to grab ever larger pieces this decade. They likely will account for 60% of electricity output in Western Europe and 35% in the U.S. by 2030, according to S&P Global Commodity Insights.

The majors overall will devote 15% to 30% of their capital expenditures on low-carbon projects by 2030, compared with around 5% now, a Deloitte study found.

A lot of Big Oil’s foray into alternative energy comes via acquisitions and partnerships. BP in October announced the $4.1 billion purchase of Houston-based biofuel company Archaea Energy, which extracts the elements of natural gas, methane and carbon dioxide, from eroding waste in landfills and on farms.

In October, Exxon formed an alliance with Illinois-based CF Industries, which makes ammonia for fertilizer, to collected the carbon dioxide from its manufacturing operations and store it safely. EnLink Midstream, a Dallas-based pipeline company, will transport the gas to Exxon’s underground storage facility. The oil company is looking for ways to strip the greenhouse gas from its oil wells, so the storage capability will come in handy. And the leaked gas removal will render the wells less polluting and vulnerable to criticism, while maintaining Exxon’s traditional carbon fuel output.

The siphoned-off carbon dioxide can be used to enhance production at almost-tapped-out wells, per Climate News. Carbon-capture projects also get favorable tax treatment: In August, as part of a bill to aid the environment, Congress increased tax credits 70% to $85 per ton of carbon dioxide. “It’s a way of protecting their existing operations,” says Eric Fogarty, a portfolio manager for Duff & Phelps Investment Management’s clean energy strategy.

Europe vs. America

There’s a big difference on sustainable energy strategies between U.S. and European oil and gas producers, however. Over the next three to five years, Europe’s BP, Shell and TotalEnergies say they will allocate larger shares of their capex to renewables: 40% for BP, 50% for Shell and 33% for Total. The American majors are less ambitious: Chevron plans for 11% and Exxon 10%.

Certainly, the political situations are different on either side of the Atlantic. European governments are mandating large commitments to sustainable energy. Green parties are a force in their elections. In the U.S., no such government enforcement exists. Some (mainly Republican-run) states and some energy producers are against climate-oriented investing.

Another difference is that the U.S. is the world’s largest oil producer and natural gas provider. So more Americans’ livelihoods depend on fossil fuel usage, which understandably militates against environmentalism at the European tempo.

“The U.S. has big oil and natural gas resources, and Europe has the North Sea,” whose resources are dwindling, observes Benjamin Bielawski, portfolio manager for global clean energy at Duff & Phelps.

In addition, European oil companies, with fewer fossil fuel sources at home, have heavy commitments to wind and solar. “The European companies are much more aggressive, with solar and wind” their big focus, says Simon Wong, senior analyst for energy at Gabelli Funds.

For Exxon and its brethren, carbon capture and turning water into energy-providing hydrogen (still a work in progress) are the main events. Some critics of U.S. majors say carbon capture is merely a way to prolong the use of oil and gas, as the process does nothing to reduce their use.

“The U.S. majors are sticking to their knitting and aren’t apologetic,” as opposed to the European producers, notes Matt Sallee, president of the Tortoise financial firm, where he also runs its energy investment team.

One other feature setting apart the U.S. majors from their European counterparts is that the American companies have higher market valuations. , says Yahoo Finance.

Perhaps this stems from the still-ample U.S. oil and gas reserves. Or maybe the U.S. company leaders have become better financial stewards. “Exxon and Chevron have exercised good financial discipline,” says Ben Cook, a portfolio manager at Hennessy Funds. U.S. oil companies have been burned before by over-expansion, right before petroleum prices dropped. Their executives promise this will not recur.

All that said, Exxon and Chevron have the same goal as the European oil mammoths: They all say that, by 2050, they will be a net zero, meaning the amount of greenhouse gas they add to the earth’s atmosphere will not exceed the volume they subtract. No one knows with certainty if reaching that target will arrest or even minimize the impact of global warming. In the interim, the cold comfort is that oil majors stand to be good for investors.