U.S.-based Chevron (CVX 2.67%) and ExxonMobil have lagged behind European peers like BP and Shell when it comes to clean energy investment, but there’s more to this story than meets the eye. Here’s why Chevron’s recent acquisition news shows that clean energy fears are probably overblown.
Making what the world needs
One of the lessons from the current round of geopolitical tensions is that the world isn’t ready to jettison carbon fuels. They’re integral to the global economy, and existing clean energy infrastructure isn’t developed enough to replace oil, natural gas, and the products into which they get turned. In fact, demand for carbon fuels is likely to keep growing for at least another decade or two.
There are likely to be some shifts within that demand, with coal and oil continuing to lose share to cleaner-burning natural gas. But overall, increasing demand from developing nations is expected to make carbon fuels a necessity in an “all of the above” strategy to supply the world with the power it needs.
That may not please environmental, social, and (corporate) governance (ESG) investors, but it’s the “on the ground” reality the world faces today unless there’s a more concerted push to go green. In this scenario, Chevron and Exxon have plenty of time to milk cash from their oil and natural gas drilling businesses.
Change can happen slow and fast
The energy sector is highly capital-intensive. Chevron, for example, made $2.8 billion worth of capital investments in the first quarter of 2022 and it’s looking to invest between $15 billion and $17 billion a year over the next few years.
While Chevron needs to spend that kind of cash to maintain its production levels and perhaps grow them, investors need to step back and think about the magnitude of those numbers. There are a lot of companies that don’t have market caps as large as Chevron’s annual investment plans.
One of those companies is Renewable Energy Group (REGI -0.05%), which Chevron has agreed to buy for $3.15 billion. While the stock popped a huge 40% on the news in February, Renewable Energy Group’s market cap was well below $3.15 billion prior to the announcement.
The company produces biodiesel, which is made from renewable materials, so it actually keeps fairly close to the core of what Chevron already does while moving it in a green direction. And the planned acquisition is part of the bigger story that I like.
Eventually, if Chevron wants to remain a viable concern, it will need to shift in a cleaner direction. It could do that incrementally, by building new divisions over time, like its European peers are doing. Or it could make a couple of really big purchases, shifting its capital spending toward transformative acquisitions.
There’s nothing inherently wrong with that approach. Chevron is clearly taking advantage of high oil prices while they exist and demand for carbon fuels still remains strong while it’s also shown it can move to position itself for the future.
The benefit of the doubt
Most investors don’t have the same grasp of the energy industry that a company like Chevron does, with over 100 years of history as an oil driller under its belt.
I trust management and it makes sense to allow them to do their thing without too much armchair quarterbacking. Just keep in mind the long-term implications of its choices.
Renewable Energy Group itself won’t materially alter Chevron’s trajectory, but it does highlight the company’s options for change. And change could, when the time is right, happen more quickly than some investors seem to believe is possible.