Oil and gas supermajors taking their fledgling renewable energy units public could unlock “high pure-play multiples” of investment, but that is likely to have little positive valence on the parent company share price and could actually work against reaching fast-approaching decarbonisation targets, according to new research from HSBC.
Clean energy spin-offs from European petrogiants Total, BP, Shell and Equinor – a market talking point that has emerged in time with the unveiling of their energy transition strategies – could be valued “at 5-6 times higher outside an oil major than inside”, said the investment bank in a new market report.
Yet this could have “limited impact” on the parent company's share price, with HSBC “not convinced [oil companies] would enjoy much valuation ‘read-across’ from their listed renewables entities”, given their low-carbon divisions are “relatively small” at around 4% of pre-tax profits, by the bank’s calculations.
“IPOs [initial public offerings] would attract high multiples,” said analyst Kim Fustier. “We believe IPOs would successfully attract funds at a lower cost of capital and highlight the value of oil majors' low-carbon assets. Simplistically, the value of a renewables business could be 5-6 times higher outside an oil major than inside, based on multiples for pure-play renewable stocks.”
“Better disclosure for renewables could get oil majors some credit in their valuations without needing to spin them off. And greater visibility for the spun-off entity has to be weighed against the potential loss of operational synergies with its parent company,” she said.
“Still, exposure to renewables compromises the oil companies’ overarching goal of decarbonising their energy mix, and risks making the parent oil company less investable for many shareholders.
“Quite simply, oil companies cannot have their cake, that is, improve financial returns through divestments, and eat it, by decarbonising their businesses.”
HSBC spotlights a partial sell-off of assets – or ‘farm-down’ – to a strategic industrial partner rather than financial investor, as giving oil majors an important opportunity to build “new skills either about a technology or a region”, citing the BP-Equinor alliance forged in the US Atlantic offshore wind market where “Equinor has experience in offshore wind but sees value in its partnership with BP on other levels, such as BP’s knowledge of the US offshore environment and power market”.
“Individual assets farm-downs offer more flexibility to sell projects at different stages in the lifecycle and maximise value creation, as Equinor has shown. Moreover, oil majors can potentially acquire new competences by forming ventures with strategic partners,” said Fustier.
HSBC cautions that ultimately the current focus on the financial outcomes of spin-offs “misses a broader, fundamental point in the context of the energy transition”.
“The big issue in our view is that IPOs or farm-downs reduce oil majors’ exposure to low-carbon electricity, unless proceeds are recycled into other green projects, ” said Fustier. “Lower exposure to renewables compromises the oil companies' overarching goal of decarbonising their energy mix, and risks making the parent oil company less investable for many shareholders.”
For oil majors, she added, growth in renewables is “one of the few avenues available to meaningfully decrease carbon intensity, as other levers, such as shrinking oil & gas volumes, have not been well received by investors, as BP's experience has demonstrated”.
Renewables plant build-out has so far driven oil majors’ carbon footprint reduction, HSBC noted, with Equinor, for instance, seeing half of its more than 50% intensity reduction target by 2050 coming from clean-energy sources.
“This is certainly the case over the next 10 years, but renewables will continue to play an essential role all the way to 2050.”
Spin-offs still mostly speculative for Big Oil
HSBC underlined that discussion about Big Oil majors spinning off their renewables arms remains mostly speculative as even the European oil majors with the most ambitious emissions reductions targets – Shell, BP, Total and Equinor – have each yet to commit to considering an IPO.
“Total has ruled out a spin-off of its low-carbon business for the next five years, arguing that such a move would be ‘very premature’ and that it is focused on building the business for now. As for BP, management did not raise the possibility of a spin-off during the three-day capital markets event in September 2020,” said Fustier.
The report also flagged Big Oil had a great deal of ground to make up to compete in renewables market with utilities, pointing to the far bolder plans at European power giants such as Iberdrola and Enel to expand their clean-energy portfolios.
“We estimate that the six European oil majors’ current net operating renewable capacity adds up to 8-9 gigawatts and could grow to at least 55GW by 2025. These are big numbers but remain small compared to the leading European utilities. For example, Iberdrola aims for 60GW by 2050 from 32GW in 2019, while Enel targets over 80GW of renewables capacity in 2025 up from 45GW currently.”
(This article was first published by Upstream's renewable energy sister publication, Recharge.)