These Oil and Gas Companies Could Benefit From the Push Toward Sustainable Energy

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The bold move by the European Union to phase out its Russian oil and natural-gas use will likely exacerbate the already low levels of inventories, boost oil and gas prices, and accelerate the move to renewable energy. Major energy companies that are already making the transition away from fossil fuels look set to gain.

“I continue to believe that today’s energy companies will be the energy companies of the future,” says Peter Tchir, head of global macro strategy at Academy Securities. “They will be the ones that drive the sustainable-energy products.”

Investors who don’t mind a risk should consider buying top-quality energy companies such as

BP

(ticker: BP) and

Shell

(SHEL.UK). Both are well-run companies that are investing heavily in alternative energy such as wind, solar, and biomass. Over the next year, UBS forecasts double-digit returns of 13.8% and 12.6%, including dividends, for Shell and BP, respectively, according to reports from the bank.

The decision from Europe is startling, as it can’t yet rely solely on renewable energy or go without Russian oil or gas. A staggering 27% of the oil and 41% of the EU’s natural gas comes from Russia, government data show. Europe’s largest economy, Germany, will have decommissioned its remaining nuclear power plants by year end.

“I don’t think turning [Russian energy] off immediately is a viable option,” says Sam Adams, CEO and portfolio manager at Vert Asset Management. About one-third of what Russia provides probably can be replaced in the near future. That portion should grow, with Europe able to ditch two-thirds of the Russian imports by next winter, he says.

In the meantime, energy prices in Europe will likely stay elevated as the EU waits for other countries to ramp up production and inventories remain low. In turn, the higher oil and gas prices will provide major exploration-and-production companies with some hefty profits.

Brent crude, the international standard, climbed 0.9% to $111 a barrel on May 5. West Texas Intermediate, the U.S. benchmark, was up 0.3% to $108.10.

The U.S. has inventories of about 1.7 billion barrels of oil and oil products such as gasoline. That’s down from 2.1 billion in 2020, according to the Energy Information Administration. The lower inventories combined with the effect of phasing out Russian energy should keep prices $10 a barrel higher, experts say. The good news for automobile drivers is that relief is likely on the way.

“Oil prices may already reflect a worst-case scenario,” says Rob Thummel, a senior portfolio manager at investment manager TortoiseEcofin. “It takes a little time for the U.S. to ramp up production, but I think you will see that happen.” In other words, more supply should arrive to help mitigate the loss of Russian imports.

Longer term, the outcome of cutting off Russian imports will likely be an accelerated shift to alternative energy sources and reduced demand, Adams says. And the larger oil conglomerates have the clout and know-how to make that happen. “The most powerful companies in the world are oil and gas companies,” he says.

There are some higher-than-usual risks with this trade. The British government said it’s reviewing whether to institute a windfall tax on energy companies that profited from the surge in oil and gas prices. Shell on Thursday reported a surge in profit for the first quarter. BP on Tuesday reported earnings that beat Wall Street estimates. The tax news came despite Prime Minister Boris Johnson ruling it out earlier. Such a move could hurt profits at U.K.-based energy companies.

Other risks could include falling prices if a global recession follows interest-rate hikes in the U.S. and elsewhere. Still, BP and Shell are likely good bets to make, on balance.