Investment Opportunities

Is It Too Late for Big Oil’s Green Transformation?

Last week, I showed you how the Canadian oil sands are finally winding down. But what about the oil majors, known collectively as Big Oil?

Until recently, the biggest names in the oil business were just dipping their corporate toes into renewable energy.

These investments were small and amounted to little more than window dressing. However, that’s all beginning to change.

BP Upsets Oil’s Applecart

The biggest change comes from one of the largest oil and gas majors on the planet: BP (NYSE: BP).

On August 4, BP reported that its loss for the second quarter of 2020 was $16.8 billion. It also announced that it was slashing its dividend by 50%.

That was the company’s first cut since the disastrous Deepwater Horizon well blowout 10 years ago.

But none of that was what grabbed the attention of analysts and investors. The brand-new business plan BP was beginning to operate under was what investors were really interested in.

Let me explain.

BP’s CEO, Bernard Looney, announced the new makeover plan for the London-based business. Today, the company invests about $500 million annually in renewable energy projects involving wind, solar and green hydrogen.

By 2030, Looney wants BP to be investing $5 billion per year in renewables. He’s clearly focused on transforming the company into a massive, diversified supplier of green energy.

After that announcement, BP’s shares jumped more than 7%.

Looney has some other big goals. He wants to cut BP’s oil and gas production by 40% in the same time frame. BP also has no plans to enter new countries for oil exploration and intends to reduce its refining capacity by one-third.

But talk is cheap. I’m more interested in actual expenditures on renewable projects.

Rystad Energy analyzed the renewable spending plans of oil majors. It found that between now and 2025, Big Oil plans to spend about $18 billion. That total includes only capital that can be linked with specific renewable energy projects.

Nearly all of that $18 billion will come from just 10 oil majors.

It may seem like a big number, but it’s small potatoes compared with the $166 billion attached to oil and gas projects over the same time frame.

And Rystad found that while BP plans to spend a lot on renewables, it has almost no projects in its pipeline when compared with some of its competitors.

For instance, the large Norwegian energy major Equinor ASA (NYSE: EQNR) is planning to spend $10 billion of the aforementioned $18 billion.

Competition in the Energy Space

BP is going to have other serious competitors in the green energy space. And one of them is the second-largest oil explorer by market value, Royal Dutch Shell (NYSE: RDS-A).

Shell realizes that, like oil, renewable energy infrastructure needs big capital to happen, the kind that Big Oil companies generate. So Shell is gradually deploying more of its capital on renewables.

Shell currently spends $1 billion to $2 billion annually on renewable energy projects. That’s about 10% of its $25 billion in annual capital expenditures, or capex.

In the U.K., the company created Shell Energy Retail. It supplies all of its British retail customers with 100% renewable power. It also offers discounts on electric vehicle chargers for the home. And customers who sign a three-year, fixed-price supply contract receive a free Google Nest smart thermostat.

Shell wants to see how a leading oil major can be perceived as a clean power provider. It has future plans to become a leading, regional electric utility here in the U.S.

The Switch to Renewables

Do we need Big Oil to make the transition to clean energy? The straight answer is no.

But the switch to renewables will happen far faster if Big Oil is involved. However, some Big Oil companies are wary.

As they move into investing in renewables, these companies want to avoid cannibalizing their profits as much as possible.

From an investor’s standpoint, Big Oil will still have to partner with knowledgeable players in the renewable energy sector. And those are the companies I want to invest in.

Even though Big Oil is heading in the right direction, many questions remain. That makes the oil and gas sectors just too risky for me to recommend.

Renewable energy… technology… biotech… online learning… that’s where my colleague Matthew Carr and I are investing instead. And you should too.

Good investing,

Dave


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