As the global energy industry faces continued disruption, U.S. producers who want to win investors back to the sector must continue delivering returns and remain at the forefront of environmental action.
At the New York Energy Council Capital Assembly in mid-May 2022, decision-makers from private equity funds, E&P companies, and emerging cleantech companies gathered to discuss the evolving energy investment landscape. I had the pleasure of moderating a panel on energy investments with participants from Pickering Energy Partners, Kimmeridge Energy, Houlihan Lokey, EIG Global Energy Partners, and Diamondback Energy.
Trends and challenges in the industry
The global energy industry is currently facing several challenges on both the demand and supply sides of the market. As two years of curtailed demand from the COVID-19 pandemic has started to rebound, the war in Ukraine has now led to new supply challenges. However, years of underinvestment in upstream and downstream projects have left producers with little capacity to quickly increase output. Producers are also facing supply chain issues, cost inflation, and even labor shortages, all of which contribute to a significant and sustained increase in commodity prices.
This comes on the heels of a decade where the industry has generated poor returns and failed to attract the interest of investors. The energy sector as a share of the S&P 500 has fallen from more than 25% in the 1980s to less than 3% today.
Environmental performance and climate issues have also been a looming backdrop for the sector as investors and global regulators raise demands to reduce emissions and implement decarbonization strategies.
A changing focus on energy security
The tide that went against the energy industry for so long is now starting to turn. As the war in Ukraine drives oil to $120 a barrel and natural gas to $8/MMBTU, narratives are moving more from “energy transition” to “energy security.” Rising energy demands, coupled with investors’ growing interest in commodities, are now bringing revenues back into the sector.
The global energy industry now finds itself in a sweet spot where it’s generating attractive financial returns while also giving capital back to shareholders. Oil producers continue to make progress on environmental issues that concern activists, the public, and investors. Despite scrutiny from regulators and environmental groups, it may ultimately be the world’s largest oil companies that save the environment. They are the ones that have the capital, technical expertise, and resources to be at the forefront of carbon capture, hydrogen fuels, and other solutions.
In recent years, the energy sector has slowly moved from an industry that no one wanted to invest in to one that is now generating better investor returns while also improving its environmental reputation. By preserving the discipline to continue the balance, it will attract capital and investors back into the upstream industry.