Before Buying Oil Stocks, Read This

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Hydrocarbons have been a mainstay of economic growth over the past century. And you can argue that the pace of globalization could not have happened without oil and gas. Love it or hate it, oil is a lifeline for International exchange. In turn, it has provided incredible economic growth and investment opportunities around the world. Although I am pro-decarbonization, I am not suggesting that we immediately eliminate all oil and gas production.

  • The world is not ready for a 100% oil and gas free world.

One day, yes. But not today and not so soon. Oil and gas producers are under the fire of change, especially the largest integrated oil and gas companies. Apparently every week there is a new title on Hull (SHEL), Exxon (XOM), Chevron (CVX), or one of the others coming under renewed scrutiny or fire from another ESG group. (And they’re paying big bucks to decarbonize by buying and investing in decarbonization projects). This week, we put that to the test. So, if you own oil and gas stocks, you will need to be very careful. We are in the first round. And this report is just the tip of the iceberg.

Back to Basics: Emissions Intensity for Oil, Gas and Refining Operations

Here is a graph that shows the amount of greenhouse gases produced per barrel of oil equivalent produced or refined. You can see that the production of natural gas emits the greatest amount of greenhouse gases; methane is one of the main reasons.

O&G emissions intensity


Let’s dig deeper now…

Integrated oil company analysis

The largest emitters in the oil and gas world are the integrated producers. These companies extract oil and gas from reservoirs, refine them into everyday products such as gasoline and petrochemicals. Then they sell these refined products further downstream or to end users.

You will recognize many names in the charts as they are among the largest oil companies in the world.

Emissions from integrated oil and gas producers

Edgar, Corporate Documents, Bloomberg

We mainly focus on Scope 1 and 2 emissions because these are the most quantifiable today. But, if you note (now in red) the huge Scope 3 emission levels of Chevron, Exxonand Shell you see the full emissions picture – and how massive it is…

Scope 3 O&G Emissions

Corporate deposits, sales of Exxon products

Intuitively, that makes sense. These companies supply huge amounts of oil and refined products that are burned in gasoline, used in petrochemicals, and burned for electricity generation. All of these are applicable to scope 3 emissions. So how does a net zero world affect the bottom line of these companies? Glad you asked…

Let’s apply our Carbon Tax on these Scope 1 and Scope 2 emissions…

If you want to report something here, take this:

  • You will see that the annual carbon tax liability is in the BILLIONS for most of these oil companies.

Many of these companies use internal carbon prices of $25 to $50 per tonne, which helps with long-term capital planning decisions. For consistency, I used the same.

Cost of the O&G Scope 1 and 2 carbon tax

Company deposits

No doubt, these are big bills. To put that into perspective, let’s compare this tax hit to income. We can use the annual carbon tax paid against EBITDA (Earnings before interest, taxes, depreciation and amortization). Because it is easily measurable in all businesses. Below is a graph that shows a carbon tax liability of $50 as a percentage of projected 2022 EBITDA for the integrated group.

O&G Integrated Producers $50 Carbon Tax

Company Filings, Consensus EBITDA Estimates

  • With the exception of Equine (EQNR) (which has been well ahead of the curve in emissions reductions), a $50 carbon tax would deal a massive blow to corporate profits.

Suncor (US) is the big loser of the group and will be the most impacted by a carbon tax. Canada’s carbon tax is already $50 a tonne and rising, which is bad news for Suncor.

Key points to remember

I don’t know if we’ll see a global carbon price (we think that would speed up the process) but I think national carbon taxes will become the norm. Due to rising carbon prices (we follow the price action here) and carbon taxes, expect many companies to revise their cash flow forecasts and asset values.

  • Be smart about allocating to countries that don’t yet have a carbon tax.

This can lead to unpleasant surprises for those who have not modeled a carbon cost. We have thoroughly analyzed many major commodities and companies, including what their carbon liabilities will be. Many will find this difficult. Few are positioned to thrive. As an investor, if it’s not on your radar, it has to be fast.

Sincerely, Marin Katusa

Steve R. Hansen