The rush for renewable energy investments by oil companies is driving up values and risks “overheating” the sector, a report from IHS Markit has warned.
European oil and gas companies, the consultancy said, including Shell, BP and Total are driving this spending. These companies’ drive to shift into renewables has brought a wave of additional cash into renewables M&A.
At the same time, renewable markets are struggling. Power demand is down, power prices and margins are low, government support is reduced and competition is increased.
Initially, the only way for oil and gas companies to boost their involvement in the sector is through M&A, IHS Markit’s Etienne Gabel warned.
Since 2015, risk-adjusted returns have “generally outperformed” oil and gas in terms of profitability, while having less volatility.
“This is a departure from the traditional view that low carbon cannot compete with O&G from a returns perspective,” IHS Markit’s senior director for the Gas, Power, and Energy Futures team said.
Given these returns, and the benefits of portfolio diversification, hydrocarbon companies have accelerated their moves into the energy transition space.
However, these new renewables players “are entering a market with dwindling profitability and fierce competition. The fragmented renewables sector is already consolidating in favour of some well-established power companies.”
As oil and gas companies shift from M&A to developing their own projects, this should help reduce some of the high valuations currently seen in the secondary market, Gabel said. The new players will pick up experience and be able to shift to a more organic growth path.
Thunder Said Energy raised similar concerns in October.
The research house noted that a basket of 10 energy transition stocks has risen 10 times in price since 2015. This basket has risen three times in price this year.