We all know that if someone divests from a company, all they do is sell the shares to another investor who may care less about the environmental or social record of a company.
Great analysis... all feels so circular to me at the moment. But what's the end game? For me it's the inevitable exponential decline in demand of oil and gas which will drive an exponential decline in these companies revenues. Their market caps will consequently shrink to a coal miner like status and the bag holders will take the hit. So divestment isn't just about casting a vote and hoping that hurts the company, it is.. imo.. also about avoiding badly managed, capital intensive businesses that face inevitable structural decline.
Well, I think we will always need oil and gas. It's just that we stop putting it on fire for no reason.
This means that yes, growth rates are on a secular decline, but oil & gas is not going away. They are just becoming a smaller part of the market.
If you are an oil&gas major there are two ways to be successful in this environment:
1. Be a cost leader and produce stuff cheaper than anybody else. That is what Enron, Chevron, etc., are trying to do, but in my view it is going to be a losing battle because government owned oil companies like Aramco can produce enough oil cheaper than anybody else. But there is no arguing with Americans about cutting costs in a declining industry. It never works as their steel, car and airline industry (incl. Boeing) proves, yet they try it again and again.
2. You move up the value chain which means you invest in carbon capture and storage, renewables technology, and refining rather than oil exploration. This is what many European oil majors are trying to do and it ends in a racer to quality with obvious costs in the near- to medium-term. Many companies will not be able to compete in the period where there are tons of investments that have to be made. This is when weak players will drop out or go back to their old business model in which case there is a slow death ahead of them (e.g. BP). Meanwhile, the ones who are willing to take the pain will be winners in the long run (e.g. Equinor).
I agree that the cost leaders with survive the longest and assuming that the middle east can hold together in a functional state, I suspect Saudi will be the last one producing.
But I view the future differently in that even if oil & gas demand stays relatively high, it will remain relatively expensive and volatile (as it has for 140 years) whilst clean tech will keep getting cheaper. and if demand does fall (which it should if clean tech prices keep falling), the marginal use cases for oil (petrochems, jet fuel etc.) will become more expensive per unit of production due to falling scale and increasingly underabsorbed fixed costs. So the end game for me is a nasty operating deleveraging sprial for these companies, with the low cost producers being the last ones standing.
I'm very skeptical that they can manage a cleantech pivot because a) it's a different business model which petrochem leaders are pre-disposed to view as inferior and avoid b) they don't have a competitive advantage (other than access to capital which they like spending on oil projects) c) investing in cleantech infrastructure is much more suited to a Utilities business model and aligned with their incentives which is why they are leading the investment race in building out cleantech and d) it's a smaller market for them (i.e. once they build a wind turbine they don't capture the same flow of revenue that they do from pumping millions of barrells of oil per day.
Will be interesting to see how it all plays out though... 'Big oil' may yet surprise me and turn into 'big solar' :)
The bots have indeed taken over - we humans are just grist to their mill
Mind you, we only have ourselves to blame.
Great analysis... all feels so circular to me at the moment. But what's the end game? For me it's the inevitable exponential decline in demand of oil and gas which will drive an exponential decline in these companies revenues. Their market caps will consequently shrink to a coal miner like status and the bag holders will take the hit. So divestment isn't just about casting a vote and hoping that hurts the company, it is.. imo.. also about avoiding badly managed, capital intensive businesses that face inevitable structural decline.
Well, I think we will always need oil and gas. It's just that we stop putting it on fire for no reason.
This means that yes, growth rates are on a secular decline, but oil & gas is not going away. They are just becoming a smaller part of the market.
If you are an oil&gas major there are two ways to be successful in this environment:
1. Be a cost leader and produce stuff cheaper than anybody else. That is what Enron, Chevron, etc., are trying to do, but in my view it is going to be a losing battle because government owned oil companies like Aramco can produce enough oil cheaper than anybody else. But there is no arguing with Americans about cutting costs in a declining industry. It never works as their steel, car and airline industry (incl. Boeing) proves, yet they try it again and again.
2. You move up the value chain which means you invest in carbon capture and storage, renewables technology, and refining rather than oil exploration. This is what many European oil majors are trying to do and it ends in a racer to quality with obvious costs in the near- to medium-term. Many companies will not be able to compete in the period where there are tons of investments that have to be made. This is when weak players will drop out or go back to their old business model in which case there is a slow death ahead of them (e.g. BP). Meanwhile, the ones who are willing to take the pain will be winners in the long run (e.g. Equinor).
I agree that the cost leaders with survive the longest and assuming that the middle east can hold together in a functional state, I suspect Saudi will be the last one producing.
But I view the future differently in that even if oil & gas demand stays relatively high, it will remain relatively expensive and volatile (as it has for 140 years) whilst clean tech will keep getting cheaper. and if demand does fall (which it should if clean tech prices keep falling), the marginal use cases for oil (petrochems, jet fuel etc.) will become more expensive per unit of production due to falling scale and increasingly underabsorbed fixed costs. So the end game for me is a nasty operating deleveraging sprial for these companies, with the low cost producers being the last ones standing.
I'm very skeptical that they can manage a cleantech pivot because a) it's a different business model which petrochem leaders are pre-disposed to view as inferior and avoid b) they don't have a competitive advantage (other than access to capital which they like spending on oil projects) c) investing in cleantech infrastructure is much more suited to a Utilities business model and aligned with their incentives which is why they are leading the investment race in building out cleantech and d) it's a smaller market for them (i.e. once they build a wind turbine they don't capture the same flow of revenue that they do from pumping millions of barrells of oil per day.
Will be interesting to see how it all plays out though... 'Big oil' may yet surprise me and turn into 'big solar' :)