Introduction
The energy sector is a group of companies that specialise in operations related to oil, gas and drilling. Dominantly, this generally focuses on fossil fuels, but in recent years, there has been a strong demand for renewables and more green energy sources like solar and wind energy. Notable companies in this industry include Saudi Aramco, Exxon Mobil in the international space, and Viva Energy Group, which is based in Australia.
With this rising demand for environmentally friendly operations being highlighted around the world, the energy sector is seeing a drastically shifting landscape that is volatile and uncertain. This report will analyse financial metrics, recent mergers with the changing trends, and looks at the possible consequences. It is notable to keep in mind that the sector is heavily fuelled by the advancement of technology, rapid demand for data centres, and growing scarcity of non-renewable energy sources, all of which play a crucial role in the future outlook of this industry both locally in Australia and overseas.
Industry Overview
Company Financial Metrics (ASX):
*All values displayed are as of 9th August 2024
Recent Deals
After the economic rebound of the COVID-19 pandemic, the sector has seen a lot of activity, particularly with demand for renewable products as well as recent mergers and acquisitions that look to consolidate and increase market power and concentration. Reports state that the energy sector has seen deal values rise more than 40% in 2024, making it one of the most interesting sectors in today’s time.
Among the most notable mergers that happened recently was the Exxon Mobil acquisition of Pioneer Natural Resources. This move comes amidst rising concerns of the adaptability of large energy companies in the changing economic, social and political landscape, solidifying the hold that Exxon has on the United States energy market. As such, the deal, which is expected to close in the first half of 2024, is seen as enhancing the United States’ energy security and delivering significant shareholder value.
The transaction primarily aims to double ExxonMobil’s Permian footprint and increase production to approximately 2 million barrels of oil equivalent per day by 2027. The key statistics are as follows:
Given these promising financials, there are numerous benefits expected to be realised from the synergies of this deal. From Pioneer’s perspective, this accelerates the company’s net-zero ambition from 2050 to 2035 and emphasises environmental benefits, including methane reduction and increased water recycling in operations. On the other hand, this merger makes Exxon the largest producer in the Permian basin. Production volumes are said to more than double to 1.3 million barrels of oil equivalent per day (MOEBD), based on 2023 volumes, and is expected to increase to approximately 2 MOEBD in 2027.
The combined firm has the opportunity to set an example for the rest of the firms in the industry to model. With the combination of Pioneer’s large-scale, contiguous, high-quality undeveloped Midland acreage with ExxonMobil’s advanced technologies, the deal is expected to generate double-digit returns and lead to capital efficiency. The focus on expanding production while integrating practices that will reduce greenhouse gas emissions and increase the use of recycled water in operations plays a crucial role going forward for the global socio-economic conditions and rising environmental concerns.
Changes in the Landscape
As the interest in the sector has been attracting attention, there have been multiple issues brought to light that reveal the unsustainable practices and operations the industry has been relying on thus far. One such concern is the rapid resource draining of fossil fuels, and the lack of focus on the industry being a catalyst for climate change. Consequently, non-renewables have seen a deepening interest from investors, shareholders, and government bodies, prompting a change in priority on the part of energy companies as well.
This shift in interest and research from non-renewables to renewable energy started decades ago, but the pandemic has accelerated its importance, following the highlight of the current climate change epidemic. There are a few key trends in this space, including an increased preference for non-renewable energy investments, consumer consumption of clean energy, and government initiatives to subsidise and write policy on the production of renewable energy sources across the world.
1 - Preference For Non-Renewable Energy:
In 2023, the energy sector has seen a shifting preference for fossil fuels compared to clean energy investments, with the latter seeing an increase of 24%, compared to the former at 15%. Similarly, the total energy investment in 2023 was estimated at USD 2.8 trillion, with over USD 1.7 trillion directed towards clean energy. This is compared with slightly over USD 1 trillion allocated to unabated fossil fuel supply and power. In Australia, consumers are aligning themselves with this trend, with survey results showing that 68% of Australians choose solar energy as 1 of their top 3 energy choices in 2023.
This change can be attributed to a number of different factors. One of them is the economics amid high and volatile fossil fuel prices. As fossil fuel prices fluctuate and often spike, renewable energy sources like solar and wind, which have lower and more stable operating costs, become more financially attractive.This price volatility has driven investors and energy consumers towards more reliable and cost-effective clean energy alternatives.
Another possible reason could be the alignment of climate and energy security goals. Many countries, especially those dependent on energy imports, are aligning their climate goals with energy security strategies.The shift towards renewable energy reduces dependence on imported fossil fuels, which can be subject to geopolitical risks and supply disruptions. By investing in domestic clean energy resources, countries enhance their energy independence and security while also addressing climate change. This translates into commercial pressure for companies to comply with changing regulations and geopolitics.
2 - Consumer Consumption of Clean Energy
With more consumers becoming aware of their carbon footprint and accessibility to clean energy alternatives, there is a positive sentiment towards the consumption of these products. For example, the popularity of electric vehicles (EVs) is surging, driven by technological advancements, increased consumer awareness, and supportive policies. In 2023, electric car sales were expected to increase by over one-third compared to previous years, reflecting a significant shift in consumer preference towards more sustainable transportation options. This growth was fuelled by factors like the improved range and options of vehicles and their performance, cost competitiveness, government incentives and increasing access of infrastructure to support electrical vehicles.
Similarly, the switch of households, office spaces and schools to utilising solar energy sources has also become more common. The World Economic Forum highlights that countries like China, the United States, and Europe have seen record-breaking increases in their renewable energy capacities, with solar PV playing a crucial role. The global push towards decarbonization and the ambitious targets set during international climate talks, such as COP28, are driving this rapid expansion in solar energy consumption. Overall, in 2023, there was a 50% increase in renewable capacity, showing the drastic shifts that consumers are contributing to.
3 - Government Initiatives
Nations are increasingly viewing clean energy as a crucial component of their industrial strategy to compete in the global market. Investments in clean energy technologies and infrastructure are seen as ways to create jobs, stimulate economic growth, and foster innovation. By building strong clean energy industries, countries aim to establish themselves as leaders in the emerging global clean energy economy.
This strategic focus encourages investments in research and development, manufacturing, and deployment of clean energy solutions, positioning countries for long-term economic and technological leadership in the sector. For instance, in the United States, the Inflation Reduction Act has provided significant tax credits and subsidies for renewable energy projects and technologies.Similar initiatives in Europe, Japan, and China have also bolstered investments, such as the European Union's Green Deal, Japan's Green Growth Strategy, and China's extensive renewable energy development plans. These policies not only provide financial incentives but also set regulatory frameworks that encourage private sector investment in clean energy.
Future Outlook
Given the current landscape and changes in the sector, one of the main focuses will be on the scaling and shift to clean energy sources. Reports are currently suggesting that the sector will be drastically different by 2030, only half a decade away, with predictions of 10x more electric cars on the road and the mix of renewables to non-renewables looking to be 50% from the current 30%.
As such, there will need to be a strong emphasis from investors, consumers and policymakers to facilitate and encourage demand for these sources of energy to become more mainstream. The access to finance to organisations in the near future will be a critical input to encourage companies to invest into these assets, which would need to see a shift in the capital concentration from developed to developing countries if this trend needs to be multiplied and adapted globally.
While the majority of the outlook presents a generally achievable set of targets and measures, there are some key risks that need to be accounted for. In Australia, the primary concerns revolve around the integration of renewable energy into the existing grid and the reliability of energy supply. As the country transitions from coal-fired power plants to renewable sources like solar and wind, there are challenges related to energy storage and grid stability. There need to be substantial investments in energy storage solutions to ensure a stable power supply during periods when renewable generation is low. Additionally, extreme weather events, which have been already seen across the country in the past couple of years, pose risks to infrastructure and can lead to disruptions in energy supply.
Globally, the energy sector is grappling with geopolitical tensions, fluctuating fossil fuel prices, and the need for accelerated investments in clean energy. The conflict in Ukraine and unrest in the Middle East have created volatility in oil and gas markets, impacting global energy security and prices. The International Energy Agency has noted that while there is a significant push towards renewable energy, the pace of transition is still insufficient to meet global climate goals. Furthermore, the reliance on critical minerals for renewable technologies, like lithium for batteries, raises concerns about supply chain vulnerabilities and the environmental impact of mining activities.
Ensuring a balanced and sustainable transition to a low-carbon economy will require coordinated global efforts, substantial investments, and innovative solutions to mitigate these risks. Moreover, being able to effectively predict these disruptions and potential solutions is crucial to ensure the country’s infrastructure is prepared to adapt. As such, volatility will be a reality that many companies will have to embrace while utilising both real and financial assets to hedge risks accordingly.
References
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