Why oil’s pain could be renewables’ gain

Declining demand for fossil fuels is already impacting energy company valuations, with consequences for those producing oil, gas, batteries, copper and renewable energy, says CIBC’s Dominique Barker.

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The portfolio manager and senior analyst of equities at CIBC Asset Management has been mandated to lead efforts to include ESG factors in the research process. She’s already changing the way she’s looking at energy companies.

“I’m not going to exclude certain investments in an ESG portfolio just because they’re energy,” she says. “But having said that, I would state that we’re seeing a world of declining demand for gasoline, driven by the electrification of the vehicle fleet.”

This is creating higher demand for natural gas and batteries, which are used for powering electric vehicles. “We’re assuming the electric vehicle fleet will grow and require these basic materials, as well as materials needed to build out the infrastructure for charging stations, so we’ll need more copper for that,” says Barker.

She points out she’s not alone on this. Exxon’s 2018 Outlook for Energy, which forecasts to 2040, talks about the demand for electricity and the future of oil for fuelling cars.

“More electric cars and efficiency improvements in conventional engines will likely lead to a peak in liquid fuels use by the world’s light-duty vehicle fleet by 2030,” the report says.

Barker is also “highly cognizant that a lot of global fund managers are actively divesting from fossil-fuel energy.” In October, 30 financial institutions and pension funds managing assets of roughly $1.2 trillion called on Canadian companies to disclose their exposure to climate-change risks.

The group of Canadian and international institutions—which included the Caisse de dépôt et placement du Québec, Finance Montréal, Desjardins and the British Columbia Investment Management Corporation—issued a joint Declaration of Institutional Investors on Climate-Related Financial Risks. The goal was to help publicly traded companies mitigate their climate-change risks and identify investments in companies with low emissions that promote energy transition.

In November, Norway’s sovereign wealth fund, which was founded from the country’s oil wealth, also recommended divesting from oil and gas stocks.

“If I recognize today that pension funds are going to be divesting or reducing their carbon exposure or fossil-fuel companies, I know that the valuations overall are going to compress,” Barker says.

“On the flip side, I would expect that renewable energy valuations are going to expand, especially those that are related to hydro energy, where I think it will become increasingly difficult to build new hydro projects.”

A number of Canadian companies are well positioned for this, she says, including Brookfield Renewable, Northland Power, Innergex and Boralex. As of March 20, Brookfield Renewable was trading at the highest price (around $39) out of those four. It was followed by Northland Power which, at nearly $23, was the only one to end the day with a gain.

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