Changing Tides: Institutional Investors Embrace Energy Transition Projects over Dividends and Buybacks

2023-09-12 20:02:26

Major institutional investors in the oil and gas sector would be open to cutting dividends and share buybacks in favor of increased spending on some energy transition projects, consultancy Deloitte said in a study published Tuesday.

Energy companies have sharply increased shareholder returns thanks to high energy prices, after years of excessive spending on production growth. Oil and gas companies were the first to distribute cash to their shareholders in 2022, with a combined 8% return on dividends and share repurchases, according to Deloitte.

Oil majors Exxon Mobil, Chevron, BP, Equinor, Shell and TotalEnergies collectively paid a record $110 billion in dividends and share buybacks to investors last year.

Most producers have also increased their spending on fossil fuels this year.

Environmentalists and some US lawmakers have denounced these practices and urged companies to invest more of their money in the energy transition.

Investors who own $2.3 trillion in stocks in the global oil and gas industry are changing their expectations for growth markets more quickly than executives at energy companies, according to Deloitte.

About 75% of investors surveyed said they would continue to hold stocks to accelerate investment in low-carbon technologies, even if returns fell by as much as 3%.

“There are divergent views,” said Kate Hardin, research director at Deloitte. “Depending on your situation, your dividends and your share buybacks, you might be able to reduce this rate a little.

Deloitte says it used two decades of data from the 25 largest global oil and gas companies by market capitalization to validate potentially counterintuitive investor support for dividend cuts. Institutional investors increased their holdings following a dividend cut in more than 60% of cases.

At the same time, companies underperformed the S&P E&P Index after a dividend cut 54% of the time.

“That suggests there is room for discussion,” Mr. Hardin said.

The study also found a divergence in spending preferences. About 40% of 150 business executives surveyed cited hydrogen and carbon capture and storage technologies as critical to their strategy.

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Investors prefer “more transformational technologies” such as transportation electrification and electric charging stations, Mr. Hardin said. Around 43% of investors surveyed highlighted battery storage as their primary area of ​​investment.

“There is a bit of a difference when it comes to the long-term vision of what the energy transition might ultimately look like,” Mr. Hardin said.

Executives and investors agree that critical minerals are a key area for investment.

According to Deloitte, global upstream oil and gas companies are expected to generate between $2.5 trillion and $4.6 trillion in free cash flow between 2023 and 2030, but less than 2% of total spending is on clean energy.

While a majority of institutional investors expect more action, 60% of executives surveyed indicated they would only invest in low-carbon projects if the internal rate of return exceeded 12% to 15%. compared to an average of 8% in 2022, according to the study.

Deloitte said a full version of the study will be released later this year. (Reporting by Sabrina Valle; Writing by Jamie Freed and Timothy Gardner)

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