Dagelijkse update over de markten vanuit Quintet Private Bank (Europe) S.A. (alleen in het Engels beschikbaar)

InsingerGilissen, 13 FEB 2020

BP has dropped a bombshell on the energy sector. The company has vowed to have net-zero emissions by 2050. For a company that is drilling for gas and oil on a global scale, such a bold statement makes you wonder. But it is surely throwing down the gauntlet for the others.

It makes you wonder because the net-zero emissions include the BP fuels burnt by its customers. And it also means that if it wants to be net zero, BP will have to offset its fossil fuel production by taking an equivalent amount of carbon emissions out of the atmosphere through several technologies, whether carbon capture and storage. Or will it simply commit to planting trees? In brief, a lot of detail is still unknown. It also implies that the ongoing shift towards renewables will need to intensify. It also makes more sense today, knowing that the cost of solar or on-shore wind has fallen below the cost of fossil fuel production in several places.

However, it will be quite a challenge for all oil majors. First, switching towards renewables and decreasing fossil fuel production entails these companies facing large amounts of stranded assets. What will all the reserves they have been building be worth, if there is a brutal switch towards renewables? And by writing them off, how will that impact the bottom line and the savvy dividends these  ompanies pay? And will BP’s promise mean that the company has a specific timeline to stop drilling?

For sure, BP is recognizing the reality of countries and consumers switching to renewables and looking to boost sustainable energy. Norway, yes oil-producing Norway, for instance, already exceeds 70% in its share of energy linked to renewable sources. The other Nordic countries are all heading the same way. The UK, the US and Japan, however, are all closeto just 10%. The EU is climbing towards 20%. But, carbon-free energy for all is still some way off. As a result, the world for now still needs fossil fuel production, even if in the long run that might decrease to almost zero. And while we’re currently witnessing the risk of oversupply due to the coronavirus and China’s falling import needs, the US Energy Information Administration (EIA) is predicting a substantial supply deficit in the second half of 2020.

In brief, while the long-term view for the oil majors and the energy sector looks bleak, in the short term you’d better not write it off completely. Big challenges exist, but looking to current valuations, lots of pessimism is priced in. That can be seen when comparing the energy sector’s relative return with the evolution of the oil price. The gap is simply too big. But as we have written and asked before, is it still worth investing in the energy sector?

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