Did inflation, Russia, and the energy crisis just turn ESG investors to run to oil and natural gas investing?
Several months ago, I wrote an article on ESG investing and the damage it has done to the availability of capital for CapEx drilling programs. Last Monday, it was a big honor to sit on a panel for the Maudlin Economics investors conference talking about the future of energy. One of the key issues that was addressed on the panel was the lack of drilling programs, as well as the impact that the “greener” investor movement has had. Both of these are another reason that demand destruction from inflation will not cause a long-term decline in oil prices.
On the surface this does not seem logical, but understanding the new global pricing matrices will help. When Saudi Arabia, Russia and China are collaborating on keeping the prices high, the demand doesn't matter as much. We are seeing some of that play out this month with Russia vetoing production increases in OPEC + meetings.
The NOPEC bill currently going through congress which allows the United States to sue foreign countries that we feel are price fixing or not playing nice in the sandbox will only cause more tension and higher prices. Saudi Arabia and Russia stand to gain from the political games the United States congress are playing. While NOPEC has been around for well over 10 years, it is only brought out of the closet when oil prices are high.
Good News in Today’s News
There were several great articles talking about the change in large investment houses like Blackrock that are coming back to energy. They are looking for those E&P companies that are responsibly supplying oil and gas to the markets. This is a huge step, and while it may ease the availability of capital, the E&P companies will not invest enough capital to keep up with the huge inflation hitting the oilfield service companies on all drilling supplies.
Chevron is the perfect example of only “modestly” increasing drilling programs around the 10% mark. The real winners will be the independent E&P operators, as they are able to give strong returns while staying lean enough to quickly increase their drilling programs and keep up with inflation.
“The difference in tone and receptivity since the Russian invasion has been amazing—it has been a 180-degree change in three months,” says Mr. VanLoh. “Last year, we had to convince people the oil and gas business would be around in five to seven years.”
“For a long time there were crickets in the industry,” Mr. Demicco says. “The uncertainty surrounding energy was mind-numbing and endowments and others stepped back from energy, but there is new interest and investments are coming.”
“The combination of high commodity prices and increased geopolitical relevance is forcing many institutional investors to rethink their aversion to hydrocarbon investments,” says Dan Pickering, founder of Pickering Energy Partners. “The upside is too compelling to ignore, so they are dipping their toes back in the water.”
The Bottom Line
It is not always good to brag, but it is ok to state facts. The fact is: we called it several months ago that investors reaction to high inflation and the looming recession would bring investors back to the highest performing sector in the U.S. investing markets.
Even when money is dumped into oil companies, it takes time for the impact of new drilling to make any relief at the pump. The administration yesterday banned more drilling permits in Alaska so legislation through regulation will also be in play for the next several years.
It is great to be part of the solution by providing low-cost energy sourced using the best-known methods to keep our ESG focus moving forward.
As always check with your CPA if alternative investments are good for your portfolio
Please reach out to our team at any time for answers to your questions.
Jay R. Young, CEO, King Operating
ForbesBooks Author of “The Upside of Investing in Oil and Gas"