A new report by two analysts at Robeco discusses sustainability trends in energy credits, especially in the era of Covid 19. The analysts acknowledge the demand collapse that is keeping crude oil, and accordingly alternatives fuels, at very low values. Their focus is on what lies ahead for energy credits.
Frances Pang and Guido Moret make the point that it is not merely Covid-19 that has shocked the energy markets in recent months. They also give space to the failure of OPEC to reach an accord with Russia in March. Relations within “OPEC+” continue to be tricky. Recent reports have OPEC and Russia together demanding that producers that exceeded quotas in April and May compensate by extra cuts through the third quarter.
The geopolitical disarray that produced that demand lends emphasis to the plain financial/economic fact that the world is awash in crude. Robeco’s analysts warn that oil-weighted producers “with large near-term debt maturities could be at risk of declaring bankruptcy.”
The natural gas market is less chancy. Gas prices have remained stable and, especially for the midstream companies, the future is hopeful.
Robeco and SDG
Pang and Moret say with some satisfaction early in the report that Robeco’s position within the energy sector was underweight in the oil part of SDG credit space (defined by the United Nation’s Sustainable Development Goals) going into 2020. Robeco had exposure to “higher quality, diversified energy companies and midstream energy companies” that were in a good position to withstand a sudden drop in crude oil prices. Accordingly, its portfolio was resilient in the sell-off and benefitted from the rebound in April and May.
Robeco screens the pertinent corporate debt with the SDG principles in mind and scores the bonds. It excludes from its investment universe those issued by companies with negative scores. See a further explanation here.
The energy sector, the authors emphasize, has “a negative starting point within the SDG framework” because the SDGs explicitly call for both clean and affordable energy and action on global warming. Specific companies, even with carbon-based products, can work their way out of this initial negative. For example, since liquified natural gas is a lower emission energy source than oil or coal, they may help economies in the process of transitioning into renewable sources.
Some Points to Consider
Robeco is not simply telling us about its own book. It is advising parties on how to construct their own books. In that connection, the report suggests a look at the following points:
- The trend of increased allocation of the capital budgets of energy companies toward renewables involves some activities that aren’t necessarily obvious: recycling of the water used in drilling, for example. These are activities that improve value.
- The most efficient companies are those working on their cost structure, their asset-quality diversification, and decarbonization.
- The energy industry is in a state of flux and has been for a lot of years. Recent market shocks are likely to force further volatility. Energy companies will have to look at their business models, reconsidering whether they are and will remain viable.
The report concludes with some reflections about what is not now clear, some Socratic professions of ignorance. Prediction is particularly difficult, both short- and medium-term. There are too many unknowns that will affect the value of SDG credits including how long the price of crude oil will remain at its present low level, and how quickly the market for electric cars, and their batteries, will expand.
Expecting a Recovery in the Price of Crude and …
The authors expect that over time global economic demand will recover from present Covid-19-induced lows, and that demand for oil will increase along with demands for everything else. Unless oil supply increases at the same place, one can expect that the recovery of demand will bring about an increase in oil’s price, and this will revive the viability of alternatives, stimulating long-term infrastructural investments in the alternatives.
Given this reasoning, the two Robeco analysts remain positive, despite the unknowns, about energy companies that are working to diversify away from fossil fuels, and about investment in SDG credits.
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