Is power to the people an opportunity for the investor?
No sector is more central to the global economy than energy. But is the future in fossil fuels or renewables? Do the established oil and gas giants hold the advantage or will new challengers shake up the status quo? We investigate where the balance of power lies.
The urgent need to reduce the planet’s carbon emissions is set to transform the energy industry and climate change is now the dominant issue of our times. The energy market faces the biggest shake up in its history.
Yet at first glance this sector appears to be one of the most stable in the global economy – the superstar firms of fifty years ago are still the big players today. Most people could name the world’s biggest energy companies. Exxon, Shell, Total, Chevron, BP – all are household names and have been for decades.
Perhaps that’s not surprising. In spite of its bad press, fossil fuels still make the world go round. The demand for oil, gas and coal is rising, especially from emerging economies that require more and more energy to power their growth. With our desire for more machines, gadgets and tech comes a corresponding thirst for more electricity to power them. Hydrocarbons – we know they’re bad for us but we haven’t kicked the habit yet!
And as these precious fossil fuels get harder to find and more expensive to extract, only the established superstars have the size, resources and investment power to fund the exploration needed. Indeed, with the planet’s oil and gas reserves finite, there is little incentive for new players to join the race and challenge the superstars.
But a close look at the market reveals that the status quo is changing and the established giants face huge challenges. Can they adapt and stay in power?
The changing energy landscape
Beneath the ground, seismic shifts in the energy market are underway. As climate change and the environment claim first place on the global agenda, the search for more sustainable ways to power our planet grows ever more urgent. Increasingly, our energy must come, not from the desert oilfields, oil sands and deep sea rigs, but from wind turbines on our hillsides, solar panels on our roofs and swaying fields of biomass. Energy production is set to become less global and more local.
Our research shows that valuations in financial markets move quickly to reflect shifts in trends within the energy sector as it transitions. Incumbents may well feel the pressure from alternative energy suppliers as changing demands are fully met.
Of course, this doesn’t mean the end of the oil and gas giants. They are all planning for the future and investing heavily in renewables, whether it’s solar, wind, biofuels or hydrogen fuel cells. But for the first time in decades, the way is open for other contenders to emerge and smaller, more nimble and innovative companies are snapping at the heals of the ‘carbon based’ superstars. In some respects, the energy sector resembles the technology sector of forty years ago. Who will be the energy Apple to Exxon’s IBM? It also has a massive impact on manufacturing, and transport sectors whose own success is aligned to shifting energy supply and evolving technologies.
The contenders emerge
Instead of the corporations listed in the first paragraph, substitute companies such as Berkshire Hathaway, Siemens Gamesa or Cypress Creek. Not such household names and so far, these companies, and others like them, are familiar only to the business and investment communities. Yet each is achieving size, reputation and most importantly, a growing customer base in the renewable energy market. Any of them could become the superstars of tomorrow.
Coming up behind them there are companies around the globe that may be regarded as niche and experimental today but could well become mainstream tomorrow. And who’s to say that the winners will only come from the energy sector? For example, companies such as Tesla are investing heavily in battery technology that could have far wider applications than simply powering vehicles.
And let’s not forget ESG driven Millennials, who are pro-actively championing a societal change in greener policies and supply, could also have a significant influence on how quickly and widely change happens in this sector and who the energy superstars of tomorrow might be.
Knowledge is power
If the superstars have changed little in the last fifty years, the same cannot be said for the next fifty. This could be the market that goes through the most fundamental change as the search is on for greener solutions to power our planet. Innovation has never been so important or so valued and the future will belong to those businesses that embrace change.
BNP Paribas Asset Management monitors the energy market closely, investigating the sustainability of both the established superstars and the challenger companies. Our objective is to make a substantive contribution to the low-carbon energy transition. That means aligning our portfolios with the goals of the Paris agreement by 2025.
The approach we take is research-based, designed to identify the next generation of superstar companies in the energy sector who will offer long-term, sustainable returns for our clients.
Earlier we touched on the companies and current technologies such as wind and solar that are leading the way today, but change can happen quickly in this sector and these may not be the same ones who will drive the energy industry for the next generation and beyond. Behind the headlines, our investment team is investing a lot of their own energy to identify the best and most sustainable opportunities.