Energy Insights Back-To-School Virtual Energy Seminar Finale RBC Capital Markets Hosted the Finale of Its Back-To-School Energy Seminar Yesterday
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RBC Global Equity Team Click here for contributing analysts' contact information September 3, 2020 Energy Insights Back-to-School Virtual Energy Seminar Finale RBC Capital Markets hosted the finale of its Back-to-School Energy Seminar yesterday. The event consisted of a number of panel discussions and fireside chats. Discussions were lively and touched on a broad array of topics, the highlights of which are summarized below, with more detail included within this report. The summary from Day 1 can be found here. EQUITY RESEARCH Thematic Highlights Framing the Global Oil Landscape. Renewables would be the clear winner if Joe Biden is elected in November, though natural gas could receive significant under-the-radar support, as its development assists key climate and foreign policy objectives. Perhaps most consequential for near-term balances if Biden is elected would be an American re-entry into the 2015 JCPOA nuclear deal that could bring 1 mb/d+ of Iranian exports back onto the market by 2H 2021. Gulf producers contend that they are well positioned for the looming energy transition, as they have the lowest-cost and greenest barrels. LNG Insights and Perspective. We hosted a conversation with Shell’s Director of Integrated Gas & New Energies, Maarten Wetselaar, which ran through some key takeaways on the current status of the LNG market and longer-term dynamics. We found Shell more bullish on LNG than in our recent conversations, particularly around medium-term gas pricing (2023+). Renewable and Alternative Energy Panel. Algonquin and NextEra emphasized the increasing role of ESG in conversations, from investor dialogue to financing discussions. Given the increased focus on ESG and climate change, panelists expect to see an increased amount of investment into renewables from international oil and gas companies as they work toward sustainability and carbon-intensity targets. Royalty Panel. Panelists expect their capital structure to remain unchanged on the other side of the downturn and are not opposed to the opportunistic use of debt in delivering or accelerating value. PrairieSky and Freehold plan to stick to their current dividend payout strategies, while Brigham still plans to begin holding back some cash in Q3/20 for M&A and to trend to a payout ratio of 75–80% over time. Sustainable Investing Gaining Momentum. There is no longer any doubt that ESG is becoming a core tenet of investing globally and being incorporated into more and more investment processes. Our conversation with OMERS Capital Markets framed how the organization integrates sustainable investing principles into its analysis to understand future risks and opportunities, led by a fulsome ESG assessment. Global Upstream Capital Allocation Decisions. Conoco’s plan remains to return at least 30% of cash to shareholders by prioritizing maintenance production, dividend sustainability, and a strong balance sheet. Management believes the E&P business model is fundamentally maturing and it may investigate variable dividends as a way to effectively return cash to shareholders while managing through volatile commodity cycles. As for evaluating investment, Conoco uses supply cost as its primary determinant of capital allocation and believes its geographic diversification and strong business fundamentals position it ahead of the pack. Priced as of prior trading day's market close, EST (unless otherwise noted). Disseminated: Sep 3, 2020 02:13ET; Produced: Sep 3, 2020 02:13ET All values in CAD unless otherwise noted. For Required Non-U.S. Analyst and Conflicts Disclosures, see page 11. Energy Insights Framing the Global Oil Landscape Participant: Helima Croft – Head of Global Commodity Strategy and MENA Research Moderator: Nick Sellmer – Institutional Equity Energy Sales Renewables would be the clear winner if Joe Biden is elected in November, though natural gas could receive significant under-the-radar support, as its development assists key climate and foreign policy objectives. While oil would be out of favor, it would not face a full frontal assault under a Biden presidency. For example, the former Vice President was very explicit in his campaign speech in Pittsburgh this week that he would not ban fracking. President Trump, on the other hand, will continue to be a cheerleader for the US oil and gas industry if re-elected and American energy dominance would be an important aspect of his second-term foreign policy program. Perhaps most consequential for near-term balances if Biden is elected would be an American re-entry into the 2015 JCPOA nuclear deal that could bring 1 mb/d+ of Iranian exports back onto the market by 2H 2021. Such a scenario could cause significant friction at OPEC, as Iran would undoubtedly insist on being able to bring those barrels back and regain the market share that it was forced to cede to regional rivals Saudi Arabia and UAE. If Trump wins, expect a continuation of the maximum pressure policy. Gulf producers contend that they are well positioned for the looming energy transition, as they have the lowest-cost and greenest barrels. This in turn could lead to a greater concentration of production in the Middle East, which would enable those petro states to retain their geopolitical influence. Higher-cost sovereign producers such as Nigeria, Angola, and Venezuela could be the biggest losers in the peak demand scenario. For now, the OPEC+ union appears to be on solid footing. Saudi Arabia was able to establish a credible threat of returning to market share in March and none of the other producers seem to want to risk another major move lower in oil prices. Hence the improved compliance performance since the April agreement was inked. That said, we continue to believe that a combination of rising prices, rising US production, and additional US sanctions could again weaken Russian resolve and embolden the powerful critics of the production agreement, principally Rosneft’s CEO, Igor Sechin. September 3, 2020 2 Energy Insights LNG Insights and Perspective Participant: Maarten Wetselaar – Integrated Gas & New Energies Director, Shell Moderator: Biraj Borkhataria – Co-Head European Energy Research We hosted a conversation with Shell’s Director of Integrated Gas & New Energies, Maarten Wetselaar, which ran through some key takeaways on the current status of the LNG market and longer-term dynamics. We found Shell more bullish on LNG than in our recent conversations, particularly around medium-term gas pricing (2023+). A challenging market, although with some green shoots. Seeing spot LNG prices below $2/mmbtu in recent months was clearly challenging for many players in the market; however, most recently we’ve seen a rally in gas prices from the lows. Shell believes this is partly driven by higher demand from China, the country that will be the most significant growth driver of LNG in the next five years, if not longer. Elsewhere, Japan and South Korea have seen demand disappoint this year, partly due to higher output from nuclear facilities. Shell suggested that gas prices are likely to strengthen further going forward, although this is subject to whether we get another warm winter or more “normal” temperatures. Maintaining longer-term positive view. Despite the many challenges of COVID19 and its impact on gas demand, Shell still expects the LNG market to grow on a volumetric basis in 2020, and it continues to see the market tightening over the medium term. Many projects have been deferred, including some potentially large-capacity additions in Mozambique, Papua New Guinea, and the US. While gas demand over time does face some competition from other sources, Shell does not expect these to be material out to 2040, and it sees the most pressing opportunity as faster coal-to-gas switching, particularly in Asia. Update on LNG Canada. COVID19 has clearly had an impact on the project and measures taken resulted in a worksite being only 40% occupied. At the same time, yards in China were closed for a period of time and Shell therefore lost a bit of contingency on its schedule for the project. That said, Chinese yards were back open in April, and in general progress has been satisfactory since then. Shell does not expect to actively market the gas; rather, it is sold into the company’s overall >70mtpa trading portfolio, although Shell did note that Asian buyers were specifically requesting to purchase Canadian LNG cargoes given the strength of inter-government relations. Looking elsewhere at the project funnel. Shell recently exited the Lake Charles project in the US Gulf Coast; this was a project obtained through its BG acquisition. Shell described it as a “good brownfield project” but views US Gulf Coast LNG as commoditized and therefore didn’t see much differentiation from developing the project. Elsewhere, LNG Canada could be expanded from two trains to four, while Shell also has some additional options (Tanzania and Oman were mentioned). Finally, Shell seemed more bullish on a potential entry in the Qatar LNG expansion. This is clearly a source of extremely low-cost gas, but we think the question is whether the entry cost limits international firms from generating decent returns. Hydrogen’s role as competition for oil and gas over time. Shell believes Hydrogen will play a major role by 2050, and investments are ramping up in this area. In the near term, supply is expected to serve heavy transport, particularly trucking, and this is the most obvious way in which heavy trucking can be de-carbonized. Over time, hydrogen is also a solution for carbon-intensive industries to de-carbonize (think steel, cement, etc.), and this is clearly going to be a competing fuel for both oil & gas and coal. Shell does not expect green hydrogen to be sufficient in supply in the medium term and therefore sees blue hydrogen (from gas, with CCS) as also playing a key role over time.