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Investing in Oil and Gas? Don't Ignore Companies' Environmental Polices

Published 03/09/2023, 04:14 AM
Updated 07/09/2023, 06:31 AM
  • Environmental policies of oil and gas companies are important to consider when investing in the industry
  • Such investments could potentially pay off in the long run and boost a company's stock value
  • Hence, investors should consider a company's commitment to ESG criteria while ensuring that it doesn't sacrifice its core business
  • Environmentalism has been a major issue for traders and investors to consider related to the oil market for at least two decades. It is back in the headlines these days after the new CEO of Royal Dutch Shell (LON:RDSa) (NYSE:SHEL) said in an interview last week that he is:

    “of a firm view that the world will need oil and gas for a long time to come” and “as such, cutting oil and gas production is not healthy.”

    BP (LON:BP) (NYSE:BP) also made similar statements and even went so far as to say that the company would not be cutting oil production as quickly as planned.

    Amongst oil companies, Shell and BP have been the most eager to align with environmentalists over the past decade. This is partly because they are European companies and have been responding to pressure from European governments to transition away from producing oil and gas and shift to alternative energy production and distribution.

    These companies (unlike Total and the American majors) had previously shown a willingness and even eagerness to decrease their own long-term oil and gas production to assuage environmental concerns.

    However, both Shell and BP have found that alternatives to oil and gas production, like the electricity retail business, aren’t nearly as profitable as oil and gas production. Shell is even planning to suspend planned increases in spending in its renewables unit for the time being.

    When looking at investments, traders and equity investors need to consider the environmental policies of the businesses involved. Here are three important takeaways:

    1. Investment in Exploration and Production

    Oil and gas companies need to invest in the exploration of new fields years down the line. Traders of oil and gas may be less concerned with this, as the contracts they trade are not pushing out a decade or more.

    However, investors in oil and gas equities may want to look more closely at the long-term investments of various oil companies to determine whether the company is investing enough now to position itself for upstream success 5, 10, and 20 years down the road.

    2. Commitment to ESG and Other Environmental Criteria

    It can be important from an investor’s perspective that a company says the right things to accomplish enough ESG approval so that the stock price remains high. However, it is also important to look deeply at what the company is doing to ensure that it isn’t sacrificing its core business—oil and gas—to appease ESG raters.

    3. Alternative Energy Investments

    It is appropriate and wise for oil and gas companies to also invest in alternative energy development. Exxon (NYSE:XOM) was developing useful solar power technologies 50 years ago.

    Oil and gas companies have invested lately in the development of biofuels, carbon capture, and tidal power. These are parallel industries to oil and gas, and it is responsible for oil and gas companies to put their resources behind these possibilities.

    It is possible that none of these alternative energy investments will pay off, but one or more could be a great success. Investors should keep an eye on what these companies are really doing with new technology development, not just what you see in an ESG report or on a commercial.

    It is possible that someday a breakthrough from an oil and gas firm will be treated on Wall Street like the release of a new drug—it could, just maybe, send the stock way up.


    Disclosure: The author does not own any of the securities mentioned.

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