The future of the energy sector – disruption or reorientation?

In addition to the catastrophic humanitarian consequences, the invasion of Ukraine by Russia has an enormous impact on the energy industry. This impressively demonstrated to the world their dependence on fossil fuels such as oil and gas. The West responded with a firm declaration that it would become independent of Russian energy, including fossil fuels in general. This will accelerate the expansion of renewable energies. At the same time, oil and gas supplies should not be jeopardized.

Continuing rising and rising energy costs puts great pressure on the economy

In extreme cases, a sudden shortage of energy resources can push the global economy into recession. It is not only about the energy costs themselves, but also the inflationary pressure on the cost side that higher energy prices bring. Because, as it turns out more and more, oil and gas prices, which have been rising for more than a year, are moving slowly but surely across all production chains – from energy-intensive manufacturing of goods to increasingly costly transportation in a global networked world. An economy based on renewable energies would significantly reduce the risks arising from huge fluctuations in oil and gas prices. However, there is still a long way to go until then.

The demand for oil and gas will continue to rise for the time being

Perhaps the global economy will have to get used to volatile and rising energy prices over the next few years. Because the expansion of renewable energy sources lags far behind the expected demand for energy.

A growing world population combined with a growing middle class in emerging countries will inevitably drive the thirst for energy upwards. It is currently still difficult to imagine moving away from fossil fuels, especially in emerging countries. Accordingly, the demand for oil and gas will remain realistic for some time and even continue to increase for a few years, even as green energy transitions to its momentum. At the same time, very little has been invested in recent years to be able to adequately and affordably meet this growing demand in the future.

Conventional energy companies have an important role in the energy transition

Currently, high oil and gas prices are benefiting traditional energy companies: margins are expanding and cash flow is increasing. The recent positive development in the stock prices of these companies clearly reflects the situation. However, at the same time, almost unnoticed, these companies are also investing in renewable projects to prepare for the post-oil future – a trend that is likely to increase further in the coming years. So it’s very likely that energy companies like Shell and BP will be very different in 20 years than they are today.

Energy infrastructure companies that operate pipelines and oil and gas plants will also be sorely needed for the foreseeable future. Natural gas (including LNG), in particular, which emits half as much carbon dioxide as coal power, will play an important role as a transitional source of energy for many years to come. In addition, energy infrastructure companies are pre-selected to allow green hydrogen to flow through their pipelines and store it at their plants in the future. In this way, they can also open up new areas of growth in the future.

Given the massive capitalization of the traditional energy companies listed above, as well as decades of experience in large projects, it seems unlikely that they will disappear after the energy transition. They are likely to play an important role in the transformation of the energy industry.

Green Energy Companies Long Before Above Average Growth

However, the greatest growth potential is clearly found in companies that focus on green forms of energy, such as solar, wind or hydrogen, or that manufacture important components for these regions. Companies that enable a more energy-efficient economy are also promising. The fact that the current investment trend is far from sufficient to achieve the goals set in the Paris Climate Agreement suggests that there is a positive potential for surprises for the growth of these companies. Especially when you consider that the above-average growth phase is likely to be of a long-term nature. This fact theoretically justifies a higher share valuation of these companies.

High growth does not justify every evaluation

However, there are also limits here: every growth has its fair value. Many investors have felt such pain in recent months that this is limited. For example, prices for green energy companies have collapsed, in some cases very dramatically. And this is despite the fact that the transmission of energy is really just an increase in velocity. On the one hand, the decline in prices can be explained by the sometimes perfect valuations of some titles, and on the other hand, many investors seem to have realized that there is competition in this area and not everyone can count on the big winners. As exciting and promising as the big green energy trends may be, a calm approach and strong stock selection that doesn’t neglect company valuations is critical here.”

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