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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Is Wall Street Cutting Its Fossil Fuels Losses?

The global energy sector is at a major bifurcation point, with the energy revolution having grown into an unstoppable force now. The value of fossil fuel investments has been cut in half in the year-to-date, while renewable energy remains on the ascendancy and the only energy sector that’s still growing.  For oil and gas investors who have been left holding the bag, here’s some advice: Just cut your losses and move on because a reprieve won’t be coming to the sector in a long time.

That’s the verdict by Wall Street pundit Craig Johnson who says it’s hard to see any significant trend changers on the horizon that might change the oil trajectory.

Yet another wave of COVID-19 has oil demand threatening the industry further, and prices are already looking a lot like the March culling, CNBC cited Johnson, Piper Sandler senior technical research analyst, as saying. 

And, so far, it’s not looking good at all for Big Oil.

The heavyweights of the sector, Exxon Mobil (NYSE:XOM) and Chevron Corp. (NYSE:CVX), have just returned dismal quarterly results that have given us a glimpse into the sorry state of the sector.

The two companies represent nearly 46% of the Energy Select Sector SPDR Fund (XLE) in terms of weighting.

Damning results

Exxon and Chevron are the two biggest members of the U.S. energy sector, representing 22.86%  and 22.77% of the sector’s benchmark favorite, Energy Select Sector SPDR Fund (XLE).

Exxon has reported Q3 revenue of $46.2B (-29.0% Y/Y), $2.16B below the Wall Street consensus, with production of 3.67 Mboe/d was marginally lower than estimates of 3.72 Mboe/d. Still, Q3 Non-GAAP EPS of -$0.18 was $0.16 better than estimates while GAAP EPS of -$0.15 beat by $0.11.

Chevron did not fare much better. Third-quarter revenue of $24.45B (-32.3% Y/Y) missed by $1.89B; Non-GAAP EPS of $0.11 beat by $0.38 while GAAP EPS of -$0.12 beat by $0.25. The company’s net oil-equivalent production of 2,834 Mboe/day clocked in a bit lower than the 2,872 Mboe/day estimate.

Related: Four OPEC+ Members Favor Extended Cuts

It’s been yet another year to forget for the American energy sector with the XLE ETF down 51% YTD--and Wall Street just cannot see any positives in this industry.

“From my perspective, [energy is] 2% of the overall market at this point in time, and I think the energy space probably just should be set aside until we get clear indications of a trend change,” Johnson has declared.

Danielle Shay, director of options at Simpler Trading, has concurred:

“The pandemic is really what’s just kicked this to the curb. If I was in this energy space, I would look at it and say, ‘How much pain am I willing to take?’

And the dagger:

“We still have an ongoing pandemic. You’re probably going to see lower prices for another six to nine months,” she has said. “For me personally, if I was in this space, I would cut the losses, take the tax loss and move on with my life and put my money elsewhere.”

It’s not a very good sign that the oil and gas sector has declined sharply at a time when the broader market has remained relatively calm.

Source: CNN Money

At the same time, Big Oil’s biggest nemesis--renewable energy--has continued to soar:

Source: CNN Money

Coupled with the fact that a win for the polls’ favorite-- Joe Biden--is decidedly bearish for U.S. oil, we might be inclined to agree with the pundits this time around.

But regardless of who ends up in the White House, the renewable energy and ESG megatrends have gained far too much momentum to be quashed now. 

ESG-focused money is continuing to pile into clean energy investments because the risk of not doing so is becoming far too great. 

It’s far from being a moral or ethical standpoint. Big money wants profit, and the word on the street is increasingly tainted with fear that oil and gas are far riskier--unless they start diversifying far more heavily into renewables. And for the smaller companies, it will be all about size, scale and ability to be a part of the transition that’s already underway, as Scott Scheffield, CEO of Pioneer Natural Resources, which recently acquired Parsley Energy, told the Wall Street Journal.

It’s not a sudden death by any means. But watch the money, not the polls. 

Look no further than Pioneer Natural Resources’ recent purchase of Parsley Energy. As Scott Sheffield, chief executive of Pioneer, told The Wall Street Journal, size and scale will be important for an oil company to survive as the world moves away from fossil fuels.

By Alex Kimani for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on November 04 2020 said:
    It is up to you to delude yourself but please don’t try to delude your readers. Just look at the facts.

    The percentage of fossil fuels in the world’s energy mix—coal, oil and natural gas—is still lingering well above 80%, a figure that has changed little in 30 years. In fact hydrocarbons accounted for 85% of global primary energy consumption in 2019. That remains so despite being challenged by serious environmental policies and despite a global expenditure of $ 3.0 trillion on renewable energy during the last decade. This is a hefty price to pay just to gain only a percentage point of market share from coal.

    Moreover, investments in renewables by major oil companies pale when compared to those in oil and gas. For instance, Shell’s investment of $2 bn in green energy amounts to just 8% of its total annual investment.

    Moreover, the notions of an imminent global energy transition from oil and gas to renewables and zero emissions are illusions. Oil and gas will continue to be the core business of the oil industry and the fulcrum of the global economy throughout the 21st century and far beyond.

    The Wall Street Journal’s word is not gospel and I dare say it is plain wrong.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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