The U.S. oil and gas industry finds itself in a kind of existential traffic jam; whether a light flashes red or green, they find themselves stuck.
On the one hand, executives are haunted by “the red problem” —think ledgers blotted crimson by losses. On the other is “the green problem” —pressure and advocacy from environmental groups, panelists said during “The Future of Energy Investment: The Next Five Years” during Houston’s IMAGE conference in August.
Bryant Fulk, principal at Aventurine Partners, said energy has moved from the worst-performing sector in the 2010s to the best-performing sector.
Avoiding the red problem means finding a way to maintain the industry’s performance streak.
“Until 2021, we really lost our way,” said Bob Fryklund, chief upstream strategist at S&P Global Commodity Insights.
Many oil companies turned their focus to growth at the expense of investors, he said, but now the industry has shifted its business models to focus on free cash flow and EBITDA.
“For the investors, they're getting, particularly here in the U.S. but also places overseas, the free cash flow, 75% of that cash,” he said. That includes dividends and stock buybacks.
“The investors are happy.”
In short, he said, the industry’s paradigm has shifted. Some investors still haven’t returned to the sector after getting burned in a series of booms and bust cycles. But E&Ps are also suffering their own form of post-traumatic syndrome.
“The question is, going forward, are we going to mess it up again? We're really good at that,” Fryklund said.
He said during the 1980s downturn, he saw a bumper sticker in Oklahoma that said, “Please, God, give us another chance. We won’t screw it up.”
“But we did screw it up. So that's the question going forward is, ‘Are we going to do that again?’”
Double whammy: red and green
Rob Lee, head of corporate advisory and energy for MUFG Bank Ltd., said he believes the “red problem has exacerbated the green problem.”
He said family offices and institutional investors require a narrative around ESG to consider pursuing the opportunity. However, if the returns aren’t there, potential investors will also lose interest.
“Why would I make a fight to go against our ESG policy to invest in something that has very low historical returns?” he said.
The industry’s discipline and focus on cash flow shifted things from “an investment sector to a cash distribution sector,” Lee said. “That's got to be the new narrative … the sector is delivering free cash flow to investors at a risk-adjusted return better than what they can get in the market and higher interest rate environment.”
One of the chief challenges of overcoming the green problem, Fryklund said, is how many people devote themselves to the green cause.
When proposed bills or regulations are up for consideration, he said, “they go to social media 20-to-one times more than what the traditional energy group does. …They just flood the market.”
EnergyFunders CEO Laura Pommer said the industry needs to overcome its reputation.
“Oil and gas isn't a bad word, and I think that there's a big PR [public relations] problem we've had for a very, very long time that needs to be overcome, and that goes in tandem with people also understanding where the alternatives come from,” she said.
Lee said the world is not going to stop using hydrocarbons for fuel.
“We need to stop calling it transition energy. It's not transition. It's addition. When you look at the predominant fuel 300 years ago, it was wood. I'm going to guess that we burned more wood today,” he said. “We're not going to stop using hydrocarbons, and I think it's getting everyone to understand that there's no silver bullet. We need everything. And just because you are directing investment dollars towards green solutions doesn't mean that we don't need the hydrocarbon solutions as well.”
Kevin Covey, managing partner at GrayStreet Partners, said it’s important to educate the world on the role of hydrocarbons and the potential ramifications of a supply shortage.
“I think that the world needs us to keep getting oil gas out of the ground or the prices—the amount of money the average person allocates to energy—is going to shoot through the roof in a couple of decades,” he said.
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