The Earth is Heating up, so What Does That Mean For Oil & Gas Stocks?

The
result
can
only
be
tension.
But
there
are
tensions
elsewhere
too.
For
example,
the
“loss
and
damage”
fund
earmarked
for
developing
nations
hit
the
hardest
by
climate
change
is
stalled
by
disagreements.
Former
US
Vice
President
Al
Gore recently
declared that
the
“deck
[is]
stacked
against
COP28.”

Oil
Stocks
Preparing
for
a
Warmer
Future

At
the
same
time,
major
fossil
fuel
company
ExxonMobil
[XOM] recently
announced
that
it
is acquiring
Pioneer.
Likewise,
Chevron
[CVX] is buying
Hess.
These
firms
are
betting
not
only
on
continued
demand
for
oil
but
also
robust
prices –
the
estimated
breakeven
per-barrel
oil
price
to
justify
these
purchases
sits
between
$70
and
$80,
which
exceeds
Morningstar
equity
analysts’
long-term
oil
forecast
of
$60
per
barrel.

Against
that
backdrop,
it’s
no
wonder
there’s
still
debate
whether
the
conference
can
advance
its
net-zero
goal
of
keeping
the
world
on
the
path
to
limiting
global
warming
to
1.5
degrees
Celsius
by
the
end
of
the
century.
If
it
can’t,
what
might
that
portend
for
oil
supply
and
demand?
In
this
piece,
we’ll
explore
potential
alternative
scenarios
to
net
zero
and
which
oil
and
gas
companies
appear
to
be
well-prepared
for
a
warmer
future.

The
World
we
Want
vs.
The
World
as
it
Might
be

I’m
a
big
college
football
fan
and
a
proud
alumnus
of
the
University
of
Notre
Dame.
I
would
absolutely
love
to
see
Notre
Dame
win
the
national
championship.
But
I’m
also
a
realist –
the
odds
of
this
are
long
in
most
years –
so
I’m
certainly
not
willing
to
put
money
on
it.

Investing
is
similar.
After
all,
net
zero
is
a
worthy
goal,
backed
by
science,
sentiment
among
younger
generations,
and
various
stakeholder
groups.
It
offers
a
hopeful
vision
for
the
future,
and
one
that
I
share.
But
as
an
investor,
it
behooves
us
to
prepare
for
multiple
scenarios,
some
of
which
wouldn’t
meet
my
hopes.
Just
as
I
wouldn’t
bet
the
house
on
the
Fighting
Irish
to
win
it
all,
I
try
to
be
clear-eyed
about
the
different
paths
the
climate
future
could
follow
and
the
investing
implications
they
might
have.

Oil
Demand
Could
Decline
by
2050,
But
Not
by
Much

What
paths
are
we
talking
about?
The
International
Energy
Agency’s
(IEA)
World
Energy
Outlook
presents
three
potential
scenarios
for
global
energy:

1.
Net-zero
emissions,
which
predicts
a
massive
fall
in
oil
demand
and
resulting
carbon
output
by
2050;
2.
Governments’
current
stated
energy
policies,
which
predicts
a
smaller
fall
in
oil
demand;
3.
Nations’
announced
pledges,
which
is
a
middle
ground
between
the
first
two.

The
IEA
also
notes
the
Net
Zero
Emissions
pathway
would
limit
global
warming
to
below
1.5
degrees
Celsius
by
2100
but
also
cautions
this
scenario
has
become
less
likely
in
recent
years.
The
Announced
Pledges
scenario
is
estimated
to
lead
to
1.7
degrees
of
warming,
while
the
Stated
Policies
outlook
is
set
to
lift
temperatures
2.4
degrees.

Why
don’t
these
pathways
paint
a
rosier
picture?
In
a
word:
demand.

To
be
sure,
the
IEA’s
most
recent
outlook
estimated
2030
demand
of
77.5
to
101.5
million
barrels
per
day,
which
at
the
midpoint
would
represent
a
roughly
7%
decline
from
last
year’s
level.
But
the
top
end
of
the
range
still
suggests
growth.
And
by
2050,
the
IEA
projects
minimal
declines,
with
demand
of
97.4
million
barrels
per
day
slightly
exceeding
the
96.5
million
barrels
per
day
demanded
in
2022.

In
other
words,
despite
many
stakeholders’
pledges
to
reduce
carbon
emissions
and
oil
usage,
limited
political
willpower –
alongside
resistance
from
oil
and
gas
producers –
make
it
unlikely
that
net
zero
will
be
achieved.

Consequently,
investors
should
be
willing
to
reconsider
companies
in
the
oil
value
chain
that
were
previously
thought
to
be
unprepared
for
a
future
in
which
oil
demand
would
decline
substantially
to
meet
net
zero.

Which
Oil
&
Gas
Stocks
Are
Prepared
for
Climate
Risk?

One
way
to
examine
oil
companies’
preparations
for
various
scenarios
is
through
their
commitments
to
reduce
carbon
output.
Here,
we
can
use
Morningstar
Sustainalytics’ Low
Carbon
Transition
Rating,
or
LCTR,
which
measures
companies’
carbon
reduction
commitments
and
assigns
an
implied
temperature
rise
based
on
their
magnitude.

Per
the
LCTR,
no
companies
followed
by
Morningstar
equity
analysts
are
found
to
have
an
implied
temperature
rise
of
less
than
1.5
degrees,
meaning
none
is
fully
prepared
to
transition
to
a
net-zero
economy.

But
perfection
might
be
the
enemy
of
progress.
About
37%
of
covered
companies –
including
a
third
of
covered
energy
companies –
have
made
carbon-reduction
commitments
that
put
them
on
a
path
to
less
than
2.4
degrees
of
warming,
in
line
with
a
future
as
outlined
by
the
IEA’s
Stated
Policies
scenario.

What
does
this
mean
for
investors?
If
net
zero
is
truly
unachievable
and
the
world
recenters
on
a
higher
temperature
goal,
these
companies’
transition
plans
to
a
below
2.4-degree
future
are
less
out
of
step,
and
arguably
present
less
risk,
than
other
covered
companies
whose
plans
imply
higher
temperature
rises.

To
be
sure,
it’s
not
like
these
firms
that
are
prepared
to
meet
an
envisioned
2.4-degree
scenario
are
out
of
the
woods.
Should
the
future
unfold
that
way,
we
should
probably
expect
more
climate
hazards
like
forest
fires,
floods,
or
hurricanes.
Those
events
can
result
in
significant
physical
damage
to
infrastructure
and
productivity
losses
for
companies,
which
Sustainalytics
assesses
on
a
five-point
scale:
Significantly
Below
Average,
Below
Average,
Average,
Above
Average,
and
Significantly
Above
Average.

By
taking
those
physical-risk
assessments
into
consideration,
we
can
zero
in
on
firms
that
are
not
only
prepared
for
the
2.4-degree
scenario
but
also
are
not
expected
to
incur
heavy
damage
to
their
physical
assets
or
infrastructure.

The
Case
for
TC
Energy,
Diamondback,
and
Tenaris

Ultimately,
I
found
three
oil
and
gas
companies
prepared
for
a
2.4-degree
warming
scenario
that
trade
at
attractive
valuations
and
are
unlikely
to
face
heavy
physical
asset
damage
risk:

• Canadian
natural
gas
pipeline
firm
TC
Energy
[TRP];
• Oil
equipment
manufacturer
Tenaris
[TEN];
• Permian
Basin
producer
Diamondback
Energy
[FANG].

Each
firm
has
made
carbon-reduction
commitments
that
Sustainalytics
analysts
estimate
are
aligned
with
a
temperature
rise
of
less
than
2.4
degrees,
physical
asset
risk
rated
Average
or
Below
Average
in
most
categories,
and
a
share
price/fair
value
estimate
ratio
less
than
1.0.

Final
Thoughts

Despite
governments,
regulators,
investors,
and
other
stakeholders
pushing
for
ongoing
carbon
emission
reductions,
there
remains
continued
debate
about
the
ability
for
the
world
to
hit
net
zero
and
ultimately
limit
global
warming
to
1.5
degrees
Celsius
by
2100.

If
this
goal
becomes
untenable
because
of
a
continued
high
level
of
oil
demand,
investors
should
consider
companies’
own
commitments
and
the
physical
damage
of
potential
climate
hazards.
Seeking
out
stocks
that
are
prepared
for
a
scenario
in
which
oil
demand
falls
by
only
a
minimal
amount
in
the
coming
decades,
and
combining
with
attractive
valuations,
allows
investors
to
consider
environmental
risks
while
still
seeking
reasonable
returns.

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