Since the Trump administration came on board in January 2017, and pushed for renewed exploration of fossil fuels, crude oil prices have risen to almost $69 a barrel from around $52 a barrel, a 32% jump. Despite that, a new study by the Institute for Energy Economics and Financial Analysis (IEEFA) finds that fossil fuel-based energy and related companies, such as Exxon and Chevron, are investments that have lost their glow.
The non-profit group, IEEFA, whose mission is to ”accelerate the transition to a diverse, sustainable and profitable energy economy,” noted that “a new paradigm is emerging: Cash, revenue, and profits matter, and risks cannot be ignored. Fossil fuel companies are responding in different ways to this shift, some more responsibly than others. But some companies (and their investors) ignore what’s happening, and they do so at their peril.” The report was written by IEEFA Director of Finance Tom Sanzillo and IEEFA financial analyst Kathy Hipple.
An evaluation on how the top companies in the S&P 500 have changed since 1980 bears out the group’s premise. In 1980, seven of the top 10 companies, ranked by market capitalization, in the S&P 500 index were energy companies: Exxon, Standard Oil Indiana, Schlumberger, Shell Oil, Mobil, Standard California and Atlantic Richmond.
In 2018, only ExxonMobil is in the top 10 companies, now led by Apple, Microsoft, Amazon, Facebook, Google, and Berkshire Hathaway.
Granted, many of those energy companies merged, but while ExxonMobil’s market cap today is $340 billion, Apple’s (and now Amazon) market cap is more than $1 trillion.
“The absence of a coherent and honest industrywide value thesis today places fossil fuel investors at a true disadvantage,” the authors state. “The days of powerhouse contributions by such companies to investment fund bottom lines are over. The risk of continuing to invest in coal, oil and gas are formidable and unlikely to abate.”
The analysts argue that the “sector’s decline exposed weaknesses in the old investment rationale, part of which was built on the assumption that a company’s value was determined by the reserves it owned.”