1 of 9/ Super vol vs super cycle, a subtle but important mindset difference
Post my ROCE Deep Dive and ESG 2.0 & Energy Transition series, this week I turn to how Oil & Gas cos should look to navigate a “super vol” energy transition environment.
arjunmurti.substack.com/p/super-vol-vs…
Post my ROCE Deep Dive and ESG 2.0 & Energy Transition series, this week I turn to how Oil & Gas cos should look to navigate a “super vol” energy transition environment.
arjunmurti.substack.com/p/super-vol-vs…
2/ I prefer “super vol” over “super cycle” as the world is not short resource and ill-advised climate policies and ESG virtue signaling extremism can shift suddenly. We are likely to see sharp moves in both directions, not just upward.
3/ Suggestions on how cos might navigate a super vol transition era:
(1) Recognize high commod vol will persist for many years and prices can move sharply both ways; it's about navigating the extreme ends of the cycle, not thanking God a bull market is back.
(1) Recognize high commod vol will persist for many years and prices can move sharply both ways; it's about navigating the extreme ends of the cycle, not thanking God a bull market is back.
4/ (2) Use high prices to prioritize balance sheet improvement as the main S-T objective. No such thing as “too strong” a B/S, + for defense and offense.
(3) As L-T capital market access is not a given, investors will place a premium on cos with a fortress B/S + superior ROCE.
(3) As L-T capital market access is not a given, investors will place a premium on cos with a fortress B/S + superior ROCE.
5/ (4) Stop waiting for investors to give the green light to grow again. Thriving in a L-T transition is about sustainable biz models, not the historic ramp-up/-down that happens, slightly lagged to the commodity cycle (worst way to do it).
6/ (5) Figure out how to get both your co. and broader industry to Net Zero Scopes 1 and 2 along with (near) “zero” methane. A credible NZO plan with a fortress balance sheet and superior ROCE is the code to crack for a premium valuation and sustained outperformance.
7/ RED FLAGS 🚩 your O&G co. might not be on-track to successfully navigate the energy transition include (partial list):
(1) Mgmt is waiting for investors to give the (dreaded) growth trigger.
(2) Net debt is not falling (ex. acq) during high price periods.
(1) Mgmt is waiting for investors to give the (dreaded) growth trigger.
(2) Net debt is not falling (ex. acq) during high price periods.
8/ 🚩 (cont.)
(3) ROCE improvements lag the sector or the change in commodity prices (its not 1:1 but nor is it 0:1).
(4) Acq. are made in new areas from non-distressed buyers, w/o clear strategic or compelling logic, especially during high price periods.
(3) ROCE improvements lag the sector or the change in commodity prices (its not 1:1 but nor is it 0:1).
(4) Acq. are made in new areas from non-distressed buyers, w/o clear strategic or compelling logic, especially during high price periods.
9 END/ 🚩 (5) Cos. talk up a good net zero and methane reduction game, but don’t follow through with concrete, verifiable actions. Delay and pretend IMO will fail as an approach (deny is not the right term). Getting to true NZ0 will be a challenge for all cos in all sectors.
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