'Renewable energy is here to stay': Investors swinging behind 'good energy', report finds

A new investment analysis has revealed a widening gulf opening up between what it calls "good energy stocks", primarily geared towards renewables, gas, and LNG, that have performed well since the onset of the pandemic, and "bad energy stocks" in the oil, tar sands, and petrochemical sectors that are increasingly at risk of becoming stranded assets.

The findings are contained in the latest energy quarterly report from British investment advisory firm finnCap. On one side of the divide, the report highlights extensive "good energy" opportunities available to investors, noting that current annual investments in renewable energy of $350bn will have to be either sustained or stepped up over the next 30 years if the world is to meet its Paris Agreement goals. A surge in renewables investment - with UK-listed clean energy and tech stocks growing by an average of 170 per cent over the past year - demonstrates that investors are rapidly adapting their portfolios to fit a clean energy future, the report states.

In contrast, it also points to a swathe of write-downs in the book value of assets from major oil firms, amounting to $48bn this year alone.

The report highlights contrasts between firms that have reinvented themselves to fit with the low-carbon future, and others that remain entrenched in carbon-intensive industries.

Danish wind developer Ørsted, for example, was previously Dong Energy, a state-owned oil, gas, and coal-fired power generation company with one of the world's worst carbon footprints due to its signifant coal usage. Now, after sweeping changes - including selling its oil and gas business - it has become the global leader in offshore wind power, commanding a 30 per cent of market share in the fast expanding sector. Its latest rating of 18x 2021 EV/EBITDA compares to just 5x for the major international oil companies (IOCs), the report finds.

FinnCap's report argues that there is still a place for the IOCs in the energy transition if they turn their large balance sheets and project management capabilities to backing the net zero revolution and step up the proportion of their capex that is focused on clean energy investments - an approach that has been publicly embraced by the likes of BP and Shell in recent months with the unveiling of ambitious new net strategies.

The report suggests that IOCs should consider splitting themselves between "good" and "bad" energy firms to accelerate their clean energy metamorphosis. Such an approach would give investors more choice, while also removing corporate contradictions and enabling management to focus on core competencies, the report argues.

"Clean, limitless in supply, increasingly competitive on costs, future-proofed, socially desirable and governmentally encouraged, renewable energy is here to stay," said Jonathan Wright, finnCap's director of research, commenting on the report's findings.

"What's more, with institutional investors increasingly focused on sustainability, even SMID cap oil and gas exploration and production companies are going to have to present a convincing ‘E' component to their ESG strategy if they are to attract these investors."

With Shell and BP recently announcing plans for multi-billion pound write-downs of their fossil fuel assets, and US fracking giant Chesapeake Energy filing for bankruptcy, the reshaping of the world's energy markets is well underway. Meanwhile, FinnCap's report provides further evidence that top investors are increasingly on board with the transformation - and that firms still reliant on carbon-intensive assets will need to act soon to avoid being left behind.

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