Oil's turbulent long-term future
The oil sector is facing risks from all sides.
Why it matters: Risk in the industry is nothing new. But these are especially turbulent and uncertain times. The industry's market clout has waned, the future of demand is kind of a mystery, and future U.S. policy is too, just to name three.
The big picture: "Among the long-term risks facing oil and gas companies today, access to capital and divestment trends will become increasingly important to their credit quality as energy transition reduces long-term demand," according to a new Moody's Investors Service report.
- How companies manage energy transition, a broad term for the variable-rich global trend toward cleaner sources, "will become more important to our view on credit quality."
What they're saying: Here are a couple of takeaways from the wide-ranging report...
1. Watch the banks. So far, big banks' climate policies only mean staying clear of some specific project classes, like new oil sands or Arctic projects.
- "[A] reduction in funding for fracking and shale development would be far more significant, affecting a large swath of the E&P sector," Moody's notes.
2. Look differently at the old metrics, like reserve life. "A long reserve life is desirable today from a credit perspective," they note.
- But let's say the world gets serious about putting emissions on a pathway consistent with the Paris Agreement.
- Then, "a long reserve life could become a credit liability, leaving the company with stranded assets — unless the company could rely on non-stranded, low production-cost assets to pay down debt."
Yes, but: While activist campaigns to pressure big investors to dump oil holdings have been growing in number and success, that's one area where Moody's doesn't see huge problem for the sector — yet.
- "Divestment is not yet a significant factor for oil and gas companies," they write. They note that state, local government and university funds have generally "never represented significant sources of capital."
- "Meanwhile, divestment alone would not halt oil and gas financing, since companies continue to seek out large-scale investors for financing needs."
The intrigue: The report also flags the litigation on climate and other topics as a long-term risk, and one that leads to an interesting conclusion: The industry should want more regulation.
- "We would anticipate a noticeable increase in litigation against the oil and gas industry in coming years, unless a new U.S. administration takes office in 2021 and begins reversing the Trump administration's rollback of rules on greenhouse gas emissions, pollution, fuel efficiency, exploration, and other areas that have benefited the industry."