Energy opportunities: Power up your portfolio by monetizing energy investments

Traditional energy was 2021’s best-performing sector in the Standard & Poor’s 500 Index, rising by 48% after years of underperformance on concerns about climate change and a pandemic-induced demand shock in 2020.

Russia’s invasion of Ukraine extended the rally into this year, making the sector a bright spot within a broader market that has been ravaged by high inflation, rising interest rates and fears of an impending recession.

Where oil prices go from here, however, is not entirely clear.

On the one hand, weaker economic activity could cool demand. On the other, prices could trend up if Russian oil exports continue to contract and demand picks up when China begins easing lockdowns and the peak summer driving season in the U.S. ramps up.

Oil companies will also face pressure on their bottom lines as several European governments have begun imposing windfall taxes on their profits, with pressure building to do the same in the U.S.[1]

And although some countries are responding to energy security concerns in the wake of the Russia-Ukraine war by investing more heavily on fossil fuel supplies, especially coal,[2] many others are pursuing self-sufficiency by redoubling their focus on renewables.[3]

A reversal of fortunes

As fossil fuel stocks rose last year, shares in renewable energy firms headed in the opposite direction.

Clean energy valuations had peaked in February 2021, cresting on optimism about the sector’s prospects under President’s Biden’s “Build Back Better” agenda. As the new administration’s plans met political resistance, though, the “Biden bump” gradually faded and clean energy shares began to decline, significantly underperforming the S&P 500 in 2021.[4]

The drop accelerated in early 2022 with investors’ broader rotation out of high-growth technology companies. Rising interest rates are a particular concern for the renewables sector because clean energy firms tend to have much higher leverage than fossil fuel producers.[5]

Nevertheless, demand for and investment in wind, solar, energy storage, fuel cells and electrification continues to grow strongly in the U.S. and around the world. That suggests equity investors could soon return to the clean energy sector. Indeed, the investors with the longest-term horizons had never left in 2021: venture capital investment in clean energy start-ups as well as clean-tech more generally reached a record last year, according to BloombergNEF and Pitchbook.[6]

In 2022, investment in developing renewables capacity – mainly in advanced economies and China – is expected to be the main driver of an 8% increase in global energy investment to $2.4 trillion, according to the International Energy Agency.[7] It’s worth noting, however, that almost half of the overall expected increase is a result of tight supply chains and rising costs of labor, services and materials such as cement, steel and critical materials.

The segments due for the biggest increases in investment include technologies such as batteries, low emissions hydrogen, and carbon capture and storage. The IEA expects investment in battery energy storage alone is expected to more than double in 2022, reaching almost $20 billion.

Many traditional energy firms are also growing bullish on green hydrogen. Spain is striving to become a European hub[8] for the zero-carbon fuel, while British oil and gas giant BP is moving to acquire a sizeable stake in an Australian project that could become one of the biggest renewables and green hydrogen production centers in the world.

Different routes to clean tech exposure

BP’s green hydrogen push highlights the fact that investors don’t have to stick with pure-play renewables companies to gain exposure to the clean energy transition: they can also buy into cash-rich utilities and legacy fossil fuel companies investing in renewable energy.[9]

Right now, clean energy investments account for around 5% of oil and gas companies’ capital expenditure worldwide, which is up significantly from just 1% in 2019. With soaring oil prices swelling their coffers, oil and gas firms can afford to be even more aggressive in their transition efforts.

The IEA calculates that the combined income of the global oil and gas sector is set to jump to $4 trillion in 2022 – double the five-year average. These windfall gains present a once-in-a-generation opportunity to accelerate their diversification into sustainable sources ahead of the phasing out of fossil fuels.

Investors in traditional energy companies can also explore how the boost in oil and gas prices can help them prepare their portfolios for the inevitable shift towards a carbon-neutral future. Monetizing their existing positions through securities-backed financing could help with this process.

Just as there’s more than one road to net zero, there’s more than one investment approach to getting there. Securities-backed financing offers investors the flexibility to follow the pathway that makes the most sense for their portfolio.











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