Chevron: Oil Still Has a Great Future
Integrated
oil giant Chevron Corporation (NYSE:CVX) isn't ignoring the environmental
impact of oil and natural gas -- it realizes that global warming is a very real
issue. But it also has to operate in the world as it exists today. And that
means Chevron still needs to produce these carbon fuels, something it expects
to be doing for many years to come. Here's why.
It's
not that simple
If
you are a die-hard environmentalist or even a steadfast ESG investor, you might
be OK with the oil industry facing hard times. After all, oil companies like
Chevron produce dirty fuels that make global warming worse. But talk to the
CEOs of companies like ExxonMobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.B)
and you get a slightly different story. Recently Chevron's CEO, Michael Wirth,
offered his thoughts on the matter.
In
an interview with CNBC, Wirth was asked specifically about the future of oil,
leading him to explain:
“There's
a long future in a growth environment and there's a long future even in an
environment that begins to plateau for good economic investment to continue to
provide the affordable, reliable, and ever cleaner energy the world will need.”
This
isn't that much different from what Exxon and Shell have been saying. Exxon,
for example, is so confident in the future of oil and natural gas that it has
been doubling down on its exploration efforts. Shell has been hedging its bets
by dipping its toes into the electricity space, but CEO Ben van Beurden
recently explained in a Reuters interview: "Despite what a lot of
activists say, it is entirely legitimate to invest in oil and gas because the
world demands it."
With
the world increasingly concerned about global warming, how can these CEOs still
be so positive? The answer is simpler than you might think.
Seeing
the world realistically
First
off, oil giants aren't ignorant to the issue of global warming. As noted, Shell
is investing in the electricity space. Exxon is experimenting with algae
produced fuel as a way to help the world reduce carbon emissions. And most of
the oil giants are following along with Chevron, which is working on ways to
reduce the emissions it produces while drilling for oil and natural gas. In
fact, it has set environmental goals that target flaring (burning off excess
natural gas), methane emissions, and using renewables to power its drilling
efforts, among other things. To even skeptics, oil majors are making a token
effort to be good environmental stewards.
While
some might think ceasing to produce oil and natural gas altogether would be the
best way to achieve that, it just isn't pragmatic. For example, the
International Energy Agency (IEA) states that, based on existing policy
intentions and targets, oil demand isn't likely to peak until at least 2040. To
be fair, growth won't be robust, with the IEA predicting that between the
mid-2020s and 2040 demand growth "slows to a crawl." But demand will
keep rising even if the world puts in place all of its current environmental
plans.
Only
that's not exactly how things are shaping up, since many countries around the
world are actually falling short of their environmental goals and commitments.
So unless countries get really serious about carbon reduction, the future for
oil is likely to be pretty robust.
The
story is even better for natural gas, which is being used as a transition fuel
in the utility sector because it burns more cleanly than coal. That said, the
IEA's estimates have missed the mark in the past, underestimating renewable
power's growth rates. It is currently offering up another scenario in which oil
and natural gas don't do nearly as well. But that scenario requires exceeding
the environmental goals that exist today. Based on current success rates, this
seems unlikely.
There
are two big problems. The first is that the infrastructure to support oil and
natural gas is in place, pervasive, and huge. You can't just replace oil and
natural gas overnight. It takes time, money, and effort, and it is likely to be
a multi-decade endeavor. At the same time, the world's population continues to
grow (largely driven by emerging markets), meaning there will be more need for
energy. One form of energy is unlikely to be able to support all of the world's
energy needs, meaning that even carbon-based fuels will still have an important
place at the table. While clean energy
will likely displace oil and natural gas over time, the chance of a wholesale
shift in the next couple of decades seems remote given the current set of
circumstances.
But
demand is just half the story. The other side of the equation is supply. Oil
and natural gas are depleting assets. Once a barrel is pulled from the ground,
it is gone forever. If all of the energy companies in the world stopped looking
for new oil and natural gas to replace what they are currently producing,
future production would plummet. This is why a driller's replacement rate is so
important, as it shows how well a company is "replacing" what it
produces (between 2013 and 2017 Chevron's replacement rate was a bit over 100%,
one of the best rates of its closest peers).
The
big takeaway here, however, is that oil and natural gas companies need to keep
drilling in order to produce the energy the world continues to demand. So the
drilling business can't simply end -- companies like Chevron need to keep doing
what they do or the world would fall woefully short of oil and natural gas. So,
at least for now, Chevron's core exploration business is supported by both
supply and demand issues. While there's no way to tell what the future will
bring, Chevron's Wirth appears spot-on when he says there's a "long
future" ahead for oil and natural gas... and the companies that produce
it.
Look
past the headlines
It can be hard for long-term investors to get beyond Wall Street's whims. Today ESG investing is a headline-grabbing investment approach that doesn't look kindly on oil and natural gas companies like Chevron, even though they remain vital cogs in the global economic machine. With a roughly 4% dividend yield, decades of annual dividend increases, and a strong balance sheet, Chevron is a solid option for dividend-focused investors that are willing to take a contrarian view. The core of that view, meanwhile, is something that all of the major energy CEOs are trying to explain -- and it's pretty simple: Carbon fuels aren't dead yet.