Exxon Claims Low Carbon Revenue Could Be Bigger Than Oil

Key Takeaways

• Exxon Mobil believes that over the next decade, low carbon investments could be worth more than their traditional oil producing business
• Most energy producers are now putting greater investment into green technology, such as biofuels, hydrogen, wind and solar, though it still makes up a minor part of their revenue
• Oil companies stock has performed very well over the last year with Exxon Mobil stock up 37.21%

Exxon Mobil is predicting that the market for low carbon clean energy is going to be worth trillions over the next decade. That might not come as a massive surprise to clean energy enthusiasts, but the fact that it’s a sentiment that’s come from a senior executive at one of the world’s biggest oil companies is worth noting.

Not only that, but the executive in question, Dan Ammann, believes that clean energy could be worth more to Exxon than their ‘base business’ today.

As part of this long term prediction, Exxon is allocating resources to a larger number of renewable energy products, including hydrogen fuel, biofuels and carbon capture. For investors, this isn’t just goodwill investing, with Exxon only making specific investments into areas where they have signed contracts with customers.

And Exxon investors won’t want the boat to be rocked too much, as they’ve had a lot to smile about in recent times, with returns of over 37% over the past 12 months.

This is the tightrope walk the oil and energy producers are needing to walk right now. They need to continue to generate significant returns for their shareholders now, while also recognising that the world is changing. To stay profitable in the future, they need to be aware of the shifting tides and likely begin to diversify their revenue.

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Oil companies investment in renewables increasing

There are many examples of these types of deals. Just recently, Exxon signed a contract with German chemical company Linde to store and transport carbon from one of their hydrogen plants.

Hydrogen is being increasingly used as an alternative fuel and is able to be used to power vehicles, industrial uses and for heating and cooling. Hydrogen is far more efficient than oil and gas, making it an increasingly viable alternative that leads to fewer emissions.

Both hydrogen and biofuels are a relatively straightforward addition to energy producers portfolio, as the infrastructure required is very similar to that of oil and gas. Along with Exxon Mobil, Chevron is taking a similar approach by investing in these alternative fuels.

Exxon’s have stated a commitment to this area of $15 billion between 2022 and 2027, and Chevron has plans for $8 billion worth of investment through to 2028.

Other energy producers such as BP and Shell are putting greater investments towards alternative energy sources like wind and solar, investing in various projects all across the world.

In one of the most obvious transitions, they’re also looking to capitalize on the increasing popularity of electric cars, rolling out charging stations in both the US and overseas.

While these are all positive steps, it’s worth noting that the investment to date is very small in relation to the total revenue generated by these companies. They are increasing, but investors should see this as a sign that oil companies are moving away from their main, carbon intensive, source of income.

For context, BP allocated $2.2 billion to low-carbon investments in 2021, representing 1.4% of its operating revenue.

What does this mean for investors?

In the short term, not a lot. Investors in energy producers have been one of the few satisfied groups in 2022, as high oil prices and increased demand coming out of the pandemic led to strong growth against a backdrop of tech volatility.

Over the past year, Exxon stock is up 37.21%, BP is up 37.57% and Shell has gained 13.21%.

While there are plenty of positive moves towards greater use of renewable energy, the world economy still relies very heavily on fossil fuels. This isn’t likely to change overnight. While there are many countries around the world which are looking to move to electric cars only, and power grids are gaining additional renewable resources, much of heavy industry will continue to rely on oil and gas in the coming decades.

That means investors don’t need to worry about a major change to the status quo in the short term. In the longer term though, a shift to renewables could actually improve the bottom line for energy companies, if they’re able to make the transition in the right way.

As Dan Ammann stated in his message to investors, “The core oil and gas business, as we all know, sells into primarily a spot-commodity market, and as a result, is highly cyclical.” He also said that a move towards greater emphasis to more low carbon investments could produce more “stable and more-predictable margins and cash flow compared with a commodity market.”

The key, of course, will be the transition. Too little investment now could mean oil companies fall behind their traditional competition and green energy startups in the future. Too much investment and focus would likely mean underperformance in the short and medium term, as oil continues to drive the majority of revenue for energy producers.

Threading that line between is going to be the key challenge for oil company executives in the coming years, and it’s something that investors should watch closely.

The bottom line

The way the world uses energy is changing. Over the past 30 years we’ve seen a massive change in the uptake of green and renewable energy, and this focus is only likely to increase.

Now with electric cars well and truly in the mainstream, green energy has gone from being a niche concern that many weren’t truly aware of, to something that we’re all constantly reminded of on a daily basis.

For oil company investors, this is an area of risk but also an area of potential opportunity. The way each company elects to navigate the changing environment will be key as to how shareholders are rewarded over the long term.

For investors who want to go further than that and invest directly into clean energy assets, Q.ai’s Clean Tech Kit could be right up your street. Every week our AI looks at a wide ranging universe or clean and green securities, including sectors like electric vehicles, smart grid technology, recycling, batteries and ethanol and alternative fuels.

It predicts the performance and volatility for a range of ETFs and individual securities, and then automatically rebalances these Kits based on those predictions. It’s the perfect combination of cutting edge AI technology and green technology, though keep in mind this isn’t a fully ESG investment.

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