Analysts from PwC provided an overview of the current economic environment, as well as insights and advice for the future during a market outlook webinar hosted by PESA September 24.
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During the session, attended by more than 100 individuals from 70 companies, Dr. Alexis Crow, PwC’s Global Head of Geopolitical Investing Practice, compared the impact of COVID-19 to a bomb and suggested the OFS sector needs to prepare itself for the “not so secular shocks” of climate change.
“The top threat for young people and major investors is climate change,” she told attendees. While environmental demands are affecting the energy industry, Crow said she sees a significant future role for oil and gas.
“When we think about the recovery, there’s hope because oil for transportation has not been replaced,” she said.
FUNDING & CASH FLOW
Reid Morrison, PwC’s Global Energy Advisor and US Energy & Chemicals Advisory Leader, echoed Crow’s analysis and said that OFS companies should be focused primarily on free cash flow.
“We need to shift from the constant push for growth to free cash flow and earnings,” Morrison said. “A positive cash flow means the ability to control your own destiny. Value investors won’t invest until they can see if a company can fund itself.”
Large fund investors are largely agnostic about the industry, Morrison said. They screen based on the last three years of earnings. Many companies in the OFS sector thought they could attract capital with a 2% return. But investors want 5%, according to Morrison.
Like Crow, Morrison thinks there’s a significant future for oil and gas companies.
“We want clean energy but the science and engineering at scale are hard to do,” Morrison said. “We’re going to need hydrocarbon energy for the 200-300 years.”
For hydrocarbon producers, there’s a major market opportunity if they take ownership of emissions.
“We can capture 100% of emissions,” he said, “and then use those molecules for other commercial purposes.”
The new standard for oil and gas will be the ability to self-fund investments before seeking strategic capital.
[su_quote cite=”Reid Morrison, PwC”]“Owning emissions may sound like a moonshot. Companies can earn the right to have that discussion with investors by demonstrating the ability to generate a positive free cash flow.”[/su_quote]
Crow and Morrison said issues of climate change, environmental performance and the ability to attract capital in the future are linked to the industry’s ESG performance. The issues themselves are interrelated, Crow said.
Crow said many green projects will be put on hold due to massive reductions in capital expenditures. She predicted continued growth in demand for energy in the coming years.
“Developing countries want as much energy as possible to pull starving mouths out of poverty,” she said.
Her long-term outlook for oil and gas producers is positive due to increased demand and the industry’s history.
[su_quote cite=”Dr. Alexis Crow, PwC”]“The industry will be okay. It has an extraordinary track record of being leaders and first movers when it comes to technology and innovation.” [/su_quote]
With ESG investors taking a more activist stance within the financial community, she predicted an acceleration of demands for carbon capture utilization and storage, energy efficiency and clean energy equipment.
She said there’s a significant opportunity for energy companies to address the social dimension of ESG and cited the example of Saudi Aramco hiring women engineers.
“Investors are interested in how companies are building themselves,” she said.
Without endorsing a candidate, Crow briefly touched on the November election and how it might affect trade and taxes.
“Tariffs have created a deep wounding with allies,” she said. “We need to address how we can improve export markets around the world.”
On taxes, she predicted Biden would seek to implement a carbon tax, but said it was important to keep in mind that the U.S. “always swings to the center.”
On environmental issues, she advised the OFS sector to position itself to lobby a potential President Biden heavily on jobs and technology investment.
For Morrison, the biggest downward pressure for the future of oil and gas companies is poor financial returns. How businesses took on debt was a problem and cannot be repeated because a significant amount of capital did not see expected returns.
[su_quote cite=”Reid Morrison, PwC”]“Companies that point to external factors like markets or even COVID-19 won’t be able to attract capital.” [/su_quote]
He recommended that companies build for the base of the market, not the peak, and look to net income as a key measure of success. Companies are likely to be smaller, but they’ll also be healthier and in better position to attract investors.
Morrison believes diversity is a significant opportunity for investment in the OFS sector.
“The data behind female management and performance shows great upside,” Morrison said. “Blended management teams offering complementary perspectives offer significant performance advantages.”
For more information about PESA’s efforts in energy transition and ESG, contact Vice President Government Affairs Tim Tarpley.