FLNC - Reality And Exxon Mobil's Fossil Fuel Expansion: Why Investors Need To Pay Attention

Summary

• Energy investment today is a bigger palette than just fossil fuel companies.
• Timing is everything and renewables are receiving huge investment stimuli.
• Fossil fuels are under threat as the need to decarbonize intensifies. Overlooked is the urgency of climate change.
• Energy investors might look more broadly than just at the oil & gas industry.

I've just read Jim Sloan's excellent summary about investment in energy stocks. A great read for energy investors. It set me thinking about my investment strategies in the energy space and I realised a few things that seem worth adding to this SA debate. Here I make some observations about how two areas impact investor considerations in energy investment. Firstly, I consider whether it is relevant to include just fossil fuel companies when considering energy investment, or whether the investment palette needs to be broadened. Secondly, I look at time horizons and the importance of including a much neglected area, climate change and the urgency to reduce emissions, in any investment consideration. I think this second issue is of particular relevance to consideration of investment in Exxon Mobil ( XOM ), because management of this leading energy company is an outlier in essentially disregarding urgent climate considerations as it aggressively seeks to expand its fossil fuel production.

The energy investment scene

I realise that I have a different view about energy stocks, which Jim equated with the fossil fuel industry, and especially the oil and gas industry. I try to look forward in developing my investment portfolio, so for me energy stocks largely equate with renewables and particularly solar PV (eg First Solar ( FSLR ), SunPower ( SPWR ) etc) and wind (eg Vestas Wind Systems ( OTCPK:VWDRY ), Orsted ( OTCPK:DNNGY ) etc) stocks. Because these energy sources are intermittent, inevitably companies involved with managing intermittency (notably stocks involved with stationary battery storage, eg Tesla ( TSLA ), Fluence ( FLNC ), Freyr ( FREY )) need to be included in a forward looking energy investment horizon.

Looking at performance of oil & gas, solar and wind stocks is revealing and the time frames show a changing investment scene which reveals the importance of timing. Of course, there will be arguments about which stocks to include, but I've chosen a few major industry leaders in the solar, wind and oil & gas industries to draw some broad conclusions.

Five year horizon

Taking a 5 year horizon, solar stocks are clearly the winners, with wind stocks slightly ahead of the oil & gas stocks.

Just for fun it is interesting for investors to see what happens when you add a stock that begins to take a commanding position in an emerging industry. Below I show the same 5 year chart as above, but with Enphase ( ENPH ) added. Enphase is a company that is having a major impact in the solar industry and connecting solar PV with energy harvesting and management. You can see why early investors in Enphase are happy.

One year horizon

Perusal of the 1 year chart below, it is clear that the fossil fuel industry won the battle as global economies began to wake-up from the COVID shutdowns. A second conclusion is that while solar stocks have performed reasonably well, wind stocks have suffered a major reversal. I think this reflects a price war as the global wind industry begins to mature and especially begin to scale up and go offshore. There is a crunch happening as the global wind industry needs to be placed in a more viable space. The fact is that wind power is increasingly a major part of the transition from fossil fuels to renewables. Investors might consider this when contemplating where outperformance will come in the future. Pay attention to wind.

Three month horizon

The three month horizon shows that the oil & gas stocks have flatlined, while solar stocks have outperformed. The wind stocks have shown some recovery from the disastrous 1 year performance.

A lot is happening in the investment space today, with turmoil due to the Russian invasion of Ukraine, uncertainty about where COVID is going and the possibility of recession. Overlaid is increasingly grim news about rapidly worsening climate change and urgency to reduce emissions (address fossil fuel use). This has meant big efforts to transition to renewable energy especially for power and transport (electrification of everything). Major investment in renewables is happening everywhere, but notably in Europe (RePowerEU) and the US (" Inflation Reduction Act of 2022" $369 billion spend on energy security and climate change). There is also massive investment in renewables in China (1,200 GW by 2030) and India (450 GW by 2030). I know this might be foreign territory for traditional fossil fuel investors, but it is where major investment dollars are being dedicated.

Timelines on the energy transition from fossil fuels to renewables

Anyone reading comments on my articles concerning Exxon Mobil will be struck by a mixture of climate denying eccentrics and possibly an organised attempt to deny the science that I write about in relation to why fossil fuel exploitation needs to stop. It is clear that we are in a climate emergency, with formerly very rare record breaking fires, floods, wild storms and drought occurring constantly. One aspect of the climate emergency that has had less coverage is melting at the two poles as well as glacier retreats. These all have the result that sea level will rise. Now a study has been published in the prestigious journal Nature Climate Science that puts some firm numbers on this that are confronting. In effect this heralds massive disruption in many of the world's major financial centers which are located at sea level. Also, since nuclear power needs water, most nuclear reactors are located essentially at sea level. While there is some ambiguity about timing, the report indicates extremely damaging sea level rise is now baked in due to emissions now in the atmosphere. This is a new angle that requires urgent attention to prevent further emissions. Meanwhile XOM's management keeps on aggressively making the problem worse. Investors need to have climate on their radar as they review prospects for investment in Exxon Mobil.

Someone has got this wrong

Reading about climate science is an area that a lot of SA readers see as not relevant to their fossil fuel investments. The point is that what is happening with the climate is only political for those wishing to avoid addressing the challenges. Climate is having a major impact everywhere now. This week it has been floods that have one-third of Pakistan under water. The climate science is clear about this. It is controversial only for climate deniers. But it is confronting .

Here are contrasting views from the climate science and Exxon Mobil management about the relevance and urgency of addressing fossil fuel exploitation.

Antonio Guterras UN Secretary General

The UN Secretary General didn't pull his punches in a recent statement. His comment about addressing greenhouse gas emissions resulting from exploiting fossil fuels is unambiguous about the need for urgent curtailment.

" We have a choice, collective action or collective suicide. It is in our hands….Half of humanity is in the danger zone from floods, droughts, extreme storms and wildfires; no nation is immune." (July 2022) .

XOM is doubling down on increased production everywhere

While the Q2 2022 earnings transcript focused on increased production in the Permian (Darren Woods CEO : "…. grew our year-to-date production in the Permian by about 130,000 oil-equivalent barrels per day versus the first half of 2021… for the full year in the Permian, we expect to achieve 25% production growth for the second consecutive year) and Guyana ( Darren Woods CEO : "In Guyana, our total capacity is now more than 340,000 oil-equivalent barrels per day. We increased throughput by 180,000 barrels per day in the first half of 2022 versus the first half of 2021"), this is just the start of XOM's aggressive plans which include expansion of the Guyana activities, LNG production in Mozambique and PNG, with also partnerships in the Middle East (Qatar) ( Darren Woods CEO : ".. grow Qatar's LNG capacity by 30 million tons per annum by 2026" ) and deepwater exploration in India.

XOM's key takeaways of 2040 energy projections

XOM makes a number of statements about the role of fossil fuels in 2040 that are misleading. The fact that XOM pushes these issues out to 2040 is telling about how management sees this issue.

The XOM statements include :

1. Energy is equated with fossil fuels : There is an assumption that increased energy can only be satisfied by fossil fuels, especially in non-OECD countries where XOM thinks emissions will rise with population increase.

2. Increased electricity needs involve expanded natural gas use : While XOM acknowledges that solar and wind power will contribute to 60% increase in electricity needs, it also sees an expanded role for natural gas.

3. Transport will still be primarily powered by oil : It is argued that while light transport will be electrified, it is argued that oil consumption will increase because of greater commercial activity. The assumption is that commercial transport will remain oil-based.

4. CO2 emissions will not be constrained to limit global temperature rise to 2C : The science says that even 1.5C temperature rise is dangerous (even as we see extreme weather events at ~1.0C temperature rise). XOM focuses on 2C but then states that temperature rise will not be constrained to 2C. The assumption seems to be that this doesn't matter.

5. By 2040 oil and natural gas will still supply more than 50% of global energy : This is used as an argument for increased oil and gas exploration. XOM management assumes that society can survive ignoring the climate imperatives without consequence.

The above summary from XOM is the Antonio Guterras " collective suicide " option.

Is there evidence for an alternative path to continued fossil fuel exploitation?

The evidence for another energy path (renewables) is hiding in plain sight and the shifting investment from fossil fuels to renewable energy heralds the change. The scale of investment in a low carbon future has to have implications for XOM's planned expanded oil and gas production. Every new solar PV (be it residential or large scale) or wind (especially offshore) development means replaced fossil fuel use, with transport and power being the low hanging fruit that is now being addressed.

Europe and the Russian invasion of Ukraine

The singular issue on which most commentary about XOM investment hinges currently is the dramatic effect on gas prices as Europe dramatically frees itself of Russian gas supply. Just about every article on XOM currently acts as if the European situation heralds a return to a fossil fuel past, at a time when the switch to renewables gathers pace. I find it interesting that Europe is coping amazingly well with loss of a huge part of its current energy supply over a period of months. Recent news indicates that Europe is being successful in building its gas reserves for winter and this is grounds for hope that the immediate crisis is being addressed. Of course, a severe winter might reignite the crisis and Russia is trying hard to continue the crisis with now apparent closure of the Nord Stream 1 gas pipeline.

The key point I make is that Europe's response to the Russian situation is to double down on its exit from fossil fuels, not to recognise that fossil fuels are the only solution to humankind's energy supplies. As I indicate above, the science makes clear that we must exit fossil fuels if there is to be a future for humankind. Of course, this is going to take time, but the future is clear and this has to impact XOM's business plan to grow fossil fuel exploitation.

Conclusion

We live in times where some prefer ideology to facts. My take on investment is that facts matter. My take on XOM management is that it prefers not to acknowledge keys facts about the current perilous situation humankind faces and how urgent addressing these issues is. The science is unambiguous and even with the current level of ~1C global temperature rise, the consequences are seen on every continent. With every new report the urgency increases. I've thought for some time that sea level rise is going to be a major issue as most of the world's key financial centers are located at sea level. Change is coming fast.

I don't think XOM management's avoidance of facing reality is going to have currency for much longer. It is clear that the world (especially Europe) is facing an acute energy crisis now, but this is a short-lived issue that will be addressed. Nimble investors have already profited from seeing the current crisis looming. The upside for investors going forward seems much more limited to me and I think the longer term reality being laid out by scientists increasingly means that the world will pay attention to emissions reductions. This means the end of the fossil fuel industry. And the flipside is massive investment in renewables. Why ignore the emerging energy landscape?

I am not a financial advisor but I focus closely on the revolutions happening in energy and transport. I hope that my commentary is useful as you and your financial advisor consider energy investment in general and XOM in particular.

For further details see: