Investing in stranded assets

Oil companies are desperate to stick to business as usual and tend to fight decisive climate action as much as they can. This makes sense if one understands that the valuation of their shares is calculated off the amount of proven reserves an energy company owns. And despite the push for climate action, most fossil fuel producers show no intention of cutting back on their exploration and development of new fields. According to Rystad UCube, capital expenditures (Capex) of oil and gas producers are expected to rise by 85% over the coming decade and will eventually reach more than $1tn per year. Much of the exploration and development will take place in areas that have not been developed so far, such as Guyana.

The problem is that the production from the existing oil fields is already likely to push global CO2 levels beyond the levels that will warm the climate by more than 1.5⁰C. In other words, if we are successful in stopping climate change, the existing reserves of oil and gas companies will become partly stranded and have to remain in the ground forever, causing a decline in the valuation of these companies. Now look at the chart below from Global Witness , based on Rystad data. Over the coming decade, Exxon alone is scheduled to invest $167bn in oil and gas exploration and development. That is half the market cap of the company. If the world manages to achieve the climate goals set in Paris in 2015, these investments would all become worthless. Thus, Exxon faces a share price decline in excess of 50% if the fight against climate change is successful. No wonder they are so adamant that climate change is not a problem…

Capex projections 2020 - 2029

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 Source: Global Witness, Bloombeerg, Fidante Capital.