The clean energy transition offers many long-term investment opportunities but oil companies will continue to be huge players in the market for a long time yet, according to Will Argent, manager of the Gravis Clean Energy Income fund.
While many sectors have struggled under high inflation and economic tightening in recent months, the IA Commodity and Natural Resources group has thrived, increasing 13% since start of the year.
Meanwhile, the MSCI World has trailed 21.3 percentage points behind, making an 8.3% loss so far this year.
Total return of sector and index since the start of the year
Source: FE Analytics
While most companies have been hit by rising prices, oil producers have benefitted from tightening supply as Western counties pledged to cut off all imports from Russia as part of its war with Ukraine, as well as increased demand as countries open up post-pandemic.
As a result, companies such as Shell and BP have become an appealing investment in today’s volatile market with share prices up 67% and 36.5% over the past year.
Shell reported its highest ever quarterly profits this year, making $9.1bn (£7.3bn) in the first three months of the year, compared to $3.2bn the year before.
Share price of Shell and BP over the past year
Source: Google Finance
Although these bumper results may level out as the inflation and oil supply crises become calmer, Argent said: “They will be a big part of the market for me for the foreseeable future. I don't mean just the next few years – oil is going be a part of the energy supply mix.”
Even with 192 counties vowing to reach net zero carbon emissions by 2050 in the Paris Agreement, the world is still massively reliant on oil.
The UK set an additional goal of slashing 78% of emissions by 2035, but the need for fossil fuel is still on the rise, with oil demand increasing 12% at the end of 2021, according to a study by the Department for Business, Energy & Industrial Strategy.
Argent said: “Oil is still going to be massively used and it's going to take a long time to edge that out.” However, the need for clean energy is still likely to outperform on the long term, he added.
Since it launched in 2017, his fund has beaten the IA Infrastructure sector by 46 percentage points by investing in renewable energy assets around the world. A key reason for this is due to governments backing the transition to clean energy.
Total return of fund vs sector since launch
Source: FE Analytics
The UK government introduced a Contracts for Difference (CfD) scheme to support the development of offshore wind farms. It offers developers high upfront costs for energy and protects them from volatile price changes in the long-term, offering them stability across the site’s lifespan.
Likewise, the US gave tax cuts to companies building wind and solar farms as an incentive for companies to move towards sustainability.
Argent said that oil companies are beginning to recognise the profitability of the energy transition, with many building wind, solar and hydrogen plants to generate power sustainably.
He added: “They're trying to invest more in renewables, some of it will be to clean up their credentials on the PR side of things but some of it is because they see that it is the future and that there a good prospect for them to invest.
“Their oil and refining businesses will still form the majority of their revenues and earnings so we’re not going to see the end of those companies for quite some time.”
Laura Hoy, equity analyst at Hargreaves Lansdown agreed that many of the industry’s key players were beginning to see potential in renewables, although they will only make up a small part of their portfolios for now.
She said: “While renewables are just a drop in Shell’s $19bn bucket, they are likely to become a much larger slice of the pie as the energy transition ramps up.
“If the group’s able to build out this part of the business to become a reliable profit driver while oil prices are still high, it would make the transition all the smoother.”