There has been talk of the demise of oil and gas for decades. But you know that things are getting serious when even the boss of oil giant BP, Bernard Looney, warns that demand for oil may peak in the next few years and then decline.
The so-called energy transition from fossil fuels to renewables is gaining momentum.
And Looney’s comments are among a series of indicators in recent days that suggest it could play out sooner than previously thought.
End of an era?: The so-called energy transition from fossil fuels to renewables is gaining momentum
In Britain, Ministers are considering whether to ban sales of new petrol and diesel cars as early as 2030 – ten years ahead of the current schedule.
Meanwhile, in China President Xi Jinping last week announced the country will aim to hit peak emissions by 2030 before becoming fully carbon neutral by 2060.
All this presents a dilemma for investors. Many of us have large chunks of our portfolios invested in the oil and gas sector – often via income funds, which typically hold shares in BP and Shell.
Historically, these stocks have been a great bet. They tend to be very profitable – just two years ago, oil companies generated more than a fifth of FTSE100 profits.
They have also proved a key source of income for investors, paying out some of their vast profits as dividends.
BP and Shell alone accounted for £1 in every £5 of dividends paid by FTSE100 companies in 2018. Their payouts have sustained pension funds for years.
So should investors keep faith in gas and oil companies as they lay out their plans to transition to green energy? Is BP’s pledge to increase renewable spending tenfold by 2030 – and produce net-zero emissions by 2050 – just hot air or a brilliant new strategy?
Or perhaps it’s time to ditch the giants entirely and seek out new income generators – or switch to companies already making money from green energy.
Investment manager Job Curtis says he’s now hunting for income outside the fossil fuel giants. He manages the City of London Investment Trust, which plans to increase its dividend once again for the 54th consecutive year, and is putting his faith in consumer staples firms such as Unilever and Reckitt Benckiser, which owns Dettol.
‘If your household is anything like mine, there are a lot of Dettol bottles and wipes being used at the moment,’ he says.
Insurers and asset management firms ‘also tend to be pretty good from a dividend point of view,’ he adds. His holdings include Prudential and Phoenix.
Royal Dutch Shell was the trust’s largest investment last year. This year it has fallen to sixth place.
Meanwhile, BP has this year fallen out of its top ten holdings altogether. ‘Both intend to grow in renewables, but it is very difficult to judge how profitable they will be,’ says Curtis.
If renewables are the future, there is an argument for skipping ahead now and investing in the companies that already have that focus.
Chris Salih, investment trust analyst at FundCalibre, says: ‘I believe renewables really are the energy of the future – and the good news is they can generate a nice income for investors.’
He tips Greencoat UK Wind, which provides a 5 per cent yield from wind farms, and Foresight Solar Fund, which yields 6.5 per cent and specialises in solar energy investments. However, Salih cautions that many of these investment trusts trade at a ‘premium’. That means they are more expensive to buy than the value of their underlying holdings.
These premiums do fluctuate – sometimes turning into discounts where you get more underlying value from the fund than you paid for – so it pays to keep an eye on them by visiting the Association of Investment Companies website (theaic.co.uk).
Salih adds that investing in electric vehicles is another way to profit from the energy revolution.
However, the best-known electric car maker Tesla has already seen its share price soar dramatically. You could instead look for other companies in the supply chain – for example, investing in firms that make components for the cars, batteries and battery storage.
Zehrid Osmani, manager of Legg Mason IF Martin Currie European Unconstrained Fund, says: ‘In the gold rush it was the people making the pickaxes and shovels that made the real money.’
His fund invests in companies such as Infineon Technologies, which makes parts for electric vehicles, and ASML, an innovation leader in the computer chip industry. The fund has produced a 30 per cent return over three years.
Teodor Dilov, fund analyst at Interactive Investor, suggests VT Gravis Clean Energy Income, which currently yields around 3.1 per cent – meaning it pays about £3.10 in income for every £100 you invest.
‘It invests in a diversified portfolio of global listed securities of companies involved in the operation, funding, construction, generation and supply of clean energy,’ says Dilov.
He says Unicorn UK Ethical Income is a good option for those ‘who want a nod to sustainability’.
‘The smaller company focus means it should be part of a broader, balanced portfolio,’ he adds.
It currently yields 3.76 per cent.
PROFIT SEEKERS SEE OPPORTUNITY IF DEMAND REBOUNDS
Not all investors are convinced that gas and oil companies are in terminal decline.
While some investors may believe now is a good time to support cleaner energy, others focused purely on profit may still find opportunities in oil and gas.
The oil price is currently dampened in part by a 10 per cent drop in demand due to the Covid pandemic. However, should restrictions on global travel and industry lift, demand could bounce back.
Russ Mould, AJ Bell investment director, says if you agree with BP’s forecasts that we’re on a road to a zero-carbon world, it may be hard to justify investing in oil companies – at least until they start to make greater profits from activities away from fossil fuels. However, he adds that if change is not as fast as we think – perhaps owing to lack of political or public action – the picture could be very different.
He says: ‘Demand could recover in a post-pandemic world and do so just as oil majors cut investment, US shale output falls and global oil rig activity is down more than 50 per cent year-on-year. That could make for a surprise comeback from an industry that financial markets seem to be writing off – the FTSE All-Share Oil & Gas Producers index rose 50 per cent in 2016, the year after BP and Shell last made a combined loss, just as they are forecast to do in 2020.’