About Us

The fortunes of the oil and gas sector have long been linked to the ebb and flow of the global economy. After a period of strong performance, fears over slowing economic growth and recession have sent share prices across the sector lower over the past few months. However, we believe there are reasons to look at the energy sector differently today. A combination of structural factors and the strength of companies themselves make it an interesting prospect. In our opinion, the sector is also less sensitive to economic cycles than it was.

Oil and gas companies are generally in robust health with sound balance sheets, strong cashflow and low debt. Profitability has enhanced through capital discipline and consolidation. Companies learned their lessons in the last commodity cycle and have been careful in bringing on new supply. Rather than investing in new sources of oil and gas, they have sought to work their existing assets harder.

The climate agenda has also influenced investment decision making. The CEO of Chevron, Mike Wirth, recently said that the price of oil no longer influenced the group’s capital allocation and investment decisions. He said governments had made it clear they didn’t want fossil fuels, so the group would not invest in new supply. This is being seen in the oil rig count, where investment is coming only from a handful of smaller companies rather than the oil majors.

As the chart below illustrates, listed global energy companies (mainly oil and gas) have seen their free cashflow soar past $1 trillion per annum, against $410 billion when the Paris Climate Agreement came into force in November 2016. Since then, capital expenditure was broadly stable at under $400 billion. As a result, only 37% of free cashflow is now used for capital expenditure, some of which will be spent on the maintenance of existing projects. Higher prices may galvanise companies to make tentative investments in new supply, but there will be no quick fixes.