Big Oil Will Miss the Financial Discipline Imposed by ESG

Fossil-fuel investors may come to mourn their years in the wilderness. It’s true that the rise of environmental; social and governance concerns made oil, gas and coal almost un-investable. But, even truer, it drove valuations to bargain levels and imposed a cost discipline and a focus on shareholder returns that are funding today’s dividends.

For the brave, Big Oil’s time in investment purgatory offered a once-in-a-lifetime buying opportunity. Nathan Rothschild’s advice to “buy when there’s blood in the street” is a favorite of contrarian investors. And, between 2018 and 2022, there was a lot of red spattering the charts, especially in mid-2020 when the pandemic hit, driving prices to ridiculously low levels.

At one point, Exxon Mobil Corp., the world’s largest international oil company, traded below the value of its assets. On a share-price-to-tangible-book-value ratio, it changed hands at 0.65 times in March 2020, down from an average of about three times during the previous 20 years, according to data compiled by Bloomberg. Today, it trades at 1.8 times.

Trading at depressed values, the industry slashed capital investment. Instead of spending money on new projects, companies channeled cash into dividends and share buybacks, as well as paying down debt. Some, including BP Plc and Shell Plc, even went as far as announcing plans to curb production, in effect curtailing future cash flows. The effects of that capital straitjacket would show up, over time, in lower production growth — great news for investors who kept the faith with Big Oil by presaging higher commodity prices on the horizon.