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Are we seeing the beginnings of supply pressure in the energy sector?

Investments, Off the Cuff

Posted by Ashley Misquitta

Jun 2, 2021 2:42:36 PM

Senior Portfolio Manager and Investment Strategist
Empire Life Investments Inc.
Gestionnaire principal de portefeuille et stratège des placements
Placements Empire Vie

Off the cuff with Ashley Misquitta

Ashley Misquitta shares his views on the potential impact that shareholders and courts are beginning to have on a few of the world's largest energy producers. 




Hi, it's Ashley Misquitta, Senior Portfolio Manager, Empire Life Investments. I thought I'd record a quick Off the Cuff video today to provide you with an update on some of the things we're seeing out there. Actually, some major events that were potentially impactful, events that happened last week in the oil and gas space. So the first actually, I guess I would say to start with, all three events would be characterized as winds, if you will, for climate activists.

And all three you would think of is further attempting to accelerate the energy transition away from fossil fuels. So what happened? First there in the Netherlands, there was a court ruling against Royal Dutch Shell. And without getting into the legal weeds of it, essentially what it said was that they have to reduce their carbon emissions at a rate greater than what they were intending to do. So they have to cut emissions faster, essentially. The second event was a shareholder vote at ExxonMobil. What happened was there were two dissident directors who were elected. They were put forth by an activist hedge fund with part of the mandate to help the longer term perspective and opportunity at Exxon as it relates to moving more towards renewables. The final event was a shareholder vote at Chevron, which was kind of along the same lines, but probably a little less impactful. They all happened in the same day, so all three became sort of quite noticeable.

Let's talk about the implications of those three things. First, I think it is quite clear that there remains and continues to be a strong desire to transition away from oil and gas. We're starting to see investors and the courts starting to more directly weigh in, as a way to think about it. These sort of things typically will beget further things along those same lines. So we're likely to see more litigation type activity, we’re likely to see more shareholder votes, at least contested — We'll see to what degree to which they succeed.

The second is a likely dampening effect, even beyond what we see today, a likely dampening effect on capital expenditures directed towards the discovery of new oil and gas fields, the further drilling of wells in oil in the current oil fields that are already discovered. Not that we're going to go to zero, we're not going to stop, but there'll be less on the margin, new dollars dedicated towards that and more dedicated towards renewable. This is important because the intersection of supply and demand is what determines the long run price of oil. There's this concept called the natural decline rate of oil. In reality, actually, not just concept where all things being equal, if I don't spend any new money a year from now, I'm going to have less oil and gas produced from the existing fields.

That happens at a rate of between 3% and 7%. So we need more drilling to stay in the same place. That's the long and the short of it. If we stop drilling production declines and our supply and our supply on the demand-supply side declines. So these are all important things we're watching.

We're going to continue to be paying attention for them and monitoring them, hopefully found this interesting.

Ashley Misquitta, Senior Portfolio Manager, Empire Life Investments. Thank you very much for your time.

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May 31, 2021