- Oil and gas stocks have been shunned by institutional investors for several years.
- Energy stocks have collectively gained some 60 percent this year in the United States alone.
- The ESG narrative has also begun to unravel this year, with ESG funds significantly underperforming traditional funds.
For several years, oil and gas companies have found themselves the target of attacks from investors, the non-governmental sector, and governments for their alleged lead role in climate change.
From shareholder resolutions pushing for greater commitments to reducing greenhouse gas emissions to lawsuits to force oil and gas operators to effectively curb their core business, the barrage has been relentless.
As a result, oil and gas stocks have become the pariah of stock markets in the same way their issuers have become the pariah of the business world. That is, until this year.
This year, a shocking number of countries realized that while cutting emissions may be a noble goal, the immediate priority was to have electricity without blackouts. As a result of this realization, fossil fuel use in climate change avant-garde outpost Europe increased significantly, pulling oil and gas prices with it.
As prices rose, so did the prices of oil and gas stocks. In fact, these rose so impressively, they actually turned into the best performers on the market this year. The reason: huge profits amid the European energy crisis, which, needless to say, have also drawn much hostile attention from climate-conscious governments.
The Financial Times reported this week that as many as 15 of the top performers on the S&P 500 are expected to be from the energy industry, with Occidental Petroleum seen at the top of the list after its stock gained 120 percent this year. What’s more, the energy sector gave a stellar performance in a year when the broader stock market performed a lot more weakly amid the aggressive tightening of monetary policy in both the United States and Europe, and a surge in bond yields that drew investors away from stocks, hurting some of recent past’s best performers.
Bloomberg noted in a recent report that the 21-percent slump in the S&P 500 is about to become the biggest since 2008—the year of the global financial crisis. Only this time, it’s Big Tech that seems to have suffered the most—Meta alone shed 60 percent this year—along with crypto companies, which suffered additional blows from digital currency meltdowns and the collapse of the FTX crypto exchange.
Even Tesla did not survive this year’s stock market jitters unscathed: In just the past weeks, the company shed as much as 70 percent of its value because of growing fears about the demand for electric vehicles. Many called the price drop a long overdue correction and a reality check, but Elon Musk has assured Tesla employees that the company would return to its most-valuable status eventually
Meanwhile, energy stocks have collectively gained some 60 percent this year in the United States alone, the FT notes in its report, and are looking increasingly appetizing to investors previously suspicious of oil and gas because of their emission track record and ESG-dedicated advisors claiming that over the long term the only good investment is ESG investment.
The ESG narrative has also begun to unravel this year, with ESG funds significantly underperforming traditional funds, and evidence piling up that this is not a temporary glitch but rather a trend in ESG investing because it puts political priorities over financial ones. ESG investments have also become the object of attention from Congress and state legislatures dominated by Republicans.
In this context, and with oil and gas demand on the rise—a fact that even the International Energy Agency has not disputed—it was only a matter of time before investors remembered what their number-one priority in investing is: making money.
With profits at a record and with windfall profit taxes threatening future spending on more production, oil and gas companies are more than happy to keep returning cash to investors, both in Europe and the U.S., but especially actively in the U.S. shale patch.
The U.S. shale oil and gas industry became a textbook example of flexibility this year when it defied all expectations about fast production ramp-up, preferring instead to remain on the sidelines of the global oil production growth game and instead return cash to shareholders and leave production growth for later.
But Big Oil is returning cash, too, from its record profits this year that prompted so many governments to call for windfall taxes because, ironically, Big Oil wasn’t using its record profits to produce more oil, which was exactly what those same governments wanted Big Oil to do before they found themselves in a fossil fuel shortage.
Thanks to a strong year in which many were forced to remember that the world runs on oil and gas, and not wind and solar as of yet, the oil industry became bolder in its reactions to hostile governments and non-governmental organizations, too.
TotalEnergies filed a lawsuit against Greenpeace France for spreading “false and misleading information” about the Big Oil major’s emissions after Greenpeace published a report claiming TotalEnergies had understated its emissions.
Exxon targeted none other than the EU itself in a lawsuit just a few days ago in response to plans for a windfall tax on energy companies. According to the plaintiff, the tax would hinder investment. The plaintiff also claimed that the windfall tax is outside the authority of the European Commission.
All in all, 2022 was an unexpectedly good year for the long-demonized oil and gas industry, especially financially, which is what any industry really wants at the end of the day.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.
Published at Sat, 31 Dec 2022 22:00:00 -0800