How much time do companies have? Takeaways from the first meeting of a NeuGroup focused on oil and gas treasury support of energy transition conducted in partnership with Societe Generale.
By Joseph Neu
Last week shook the oil and gas sector. Exxon Mobil saw two board seats go to directors backed by the energy transition activist hedge fund Engine No. 1 (yesterday, the company said a third seat will likely go to the fund), which convinced big asset managers to back its proxy statement. Shell, meanwhile, had a Dutch court rule that it must advance its decarbonization targets.
- These landmark events cast some doubt about how much time US firms in the sector have to rethink their energy transition, ESG and decarbonization strategies in light of rapidly shifting public policy, regulation and market perceptions of risk.
Big picture. There is still hope that the US, which is generally thought to lag Europe by a few years on ESG mandates, will not follow the European path of energy transition favoring renewable energy investment to the detriment of (by taxing) anything else. However, while the US response will almost certainly be more nuanced, there is no guarantee it will be reasonable, based on analytical rigor or science-based, as most everyone in the sector hopes.
- Meanwhile, the pace of change is most certainly accelerating. So it is time for US oil and gas companies to accelerate rethinking of their business strategy on decarbonization, perhaps with more than one nuanced and unnuanced scenario, to tell stakeholders a responsive, responsible and credible story (one that keeps the lights on and meets science-based target initiatives to mitigate climate risk).
- This will allow treasury and finance teams to devise a strategy to secure funding for transition at a reasonable cost. And fortunately, most companies don’t have an urgent need for capital, having prefinanced ahead of the pandemic and pent-up demand bringing pricing up and free cash flow levels closer to normal.
Key takeaways from the meeting:
- The degree to which natural gas and carbon capture/sequestration are accepted as part of the US energy transition will drive strategy. There are many midstream companies that will find it very difficult to pivot in the near- to medium-term from natural gas, which has been responsible for substantial US emissions reduction since 2007. So the finance strategy for energy transition will be dramatically different if these businesses are forced to pivot immediately from natural gas. Almost as significant is the extent to which carbon capture/sequestration will be accepted as part of a decarbonized energy transition strategy—as opposed to a renewables-only one:
- This will vastly impact the finance strategies of those upstream.
- Capital providers’ expectations and who will provide capital to energy transition projects of widely varying risk/return profiles will depend on how this question gets answered in the US over the next months and years.
- Finance strategy cannot be the tail that wags the dog. Treasury and the rest of the finance function supports the business and its strategy. So the business strategy must be set first before a finance strategy to fund it can be made.
- Treasurers cannot advocate to banks looking to pull back from fossil fuel credit commitments that they need to support them through the transition until they have a clear picture of what the transition will look like.
- The same can be said for marketing bonds to fixed-income investors increasingly subject to ESG mandates and rating agencies incorporating carbon assessments and ESG impacts into their credit rating. You need a business strategy and KPIs tied to it before you can start thinking about investor relations (IR) talking points, green bonds or sustainability-linked financing, much less structuring new project financing.
- Be part of the dialogue. While the finance team cannot wag the dog, it should be working with sustainability and ESG teams to understand the thinking going into the revamped strategies, the targets and the why behind them, so that they can better tell the supporting finance story to capital providers and their influencers as soon as it is set.
- The more they can understand what peers are doing and why helps, too. As does collecting market intelligence on what capital providers and their influencers (e.g., policymakers, regulators, raters, market participants) are advocating that will impact access to and cost of capital.
- The external dialogue also goes both ways. As one treasurer noted: “Without education on environmental activities, we allow others to put a target on our backs.”
Joseph’s next post will focus on takeaways from this pilot meeting that zero in on determining what providers of capital really want from players in the energy industry amid this seismic transition where risk is being redefined.