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Smart ways to invest in the energy transformation

Smart ways to invest in the energy transformation

  •  
By Brett Grant
  •  
5 minute read

The Federal Government has released its first offshore petroleum exploration permits, ensuring growth in the oil and gas sector at a time when it is seeking to boost its climate change credentials. The government’s divergent approach is symptomatic of a dilemma facing investors in the energy market — which way to play the energy crisis. 

On the one hand, Russia’s invasion of Ukraine, along with the global post-COVID-19 economic recovery have sent energy prices — especially for gas and coal — soaring and will likely keep them high for some time. 

This can be expected to ensure bumper profits for Australia’s two main ASX-listed oil and gas companies — Woodside Energy Group (ASX:WDS) and Santos (ASX:STO) — making them an attractive prospect for traders and investors. 

Increased profits in the oil and gas sector are due to the rise in global oil prices, creating windfall profits that could never have been generated by increased operational efficiency.

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On the other hand, as concerns about climate change drive the world toward a lower-carbon future, there are legitimate doubts about the future demand for oil and gas. 

A growing number of investors simply want to avoid the sector altogether to focus on companies helping in the transition to a net zero carbon economy.

One superannuation fund, NGS Super, recently sold its entire holdings in Woodside and Santos for this very reason and expects other super funds will need to do the same to fulfil publicly stated emissions reduction goals. 

Energy investment dilemma

These countervailing trends — increasing energy prices now with the prospect of higher share prices for energy producers and falling prices at some point in the not-too-distant future, and weak demand for energy companies within portfolios on account of the rising profile of ESG factors — create a dilemma for investors. Especially given that there are no programs and timetables, yet, from governments here and overseas on how they expect to manage this transition. 

The nature of the dilemma, the promise of strong returns for income and momentum investors concerned by the risks of shorter-term volatility and the uncertainty around the longer-term energy transition, means that a smarter and transitional approach to energy investing may be needed.

Diversified approaches may help investors walk the line

One way to play the transition is to take advantage of the simple cost-effective array of options in exchange traded funds (ETFs) on the ASX, which can help investors easily and cheaply target the strategy they favour. 

Taking a shorter-term view of the market, with the Ukraine war dragging on and the northern hemisphere winter approaching likely to keep oil and gas prices firm, there is the option to invest in the BetaShares Crude Oil Index ETF-Currency Hedged Synthetic ETF (ASX: OOO) or the BetaShares Global Energy Companies ETF (ASX: FUEL). 

The Crude Oil ETF tracks an index providing exposure to WTI Crude Oil futures, while the FUEL ETF invests in the largest global energy companies outside Australia.

However, if your preference is to focus on the renewables side, then there is the VanEck Global Clean Energy ETF (ASX:CLNE), launched in March 2021 as the first ASX-listed clean energy ETF. CLNE tracks the S&P Global Clean Energy Select Index which measures the performance of 30 of the largest and most liquid companies with businesses related to global clean energy production, technology and equipment, from both developed and emerging markets.

In terms of specific Australian energy shares, Woodside and Santos remain the top two options in terms of trading volume and value.

Woodside has recently expanded its operation with the purchase of BHP’s oil and gas business in June to become a global giant. Woodside shares are up over 50 per cent for the year to date.

Santos has been fully benefiting from the higher oil and gas prices and at the half-year mark; it reported underlying profit up 300 per cent to US$1.27 billion, statutory net profit up 230 per cent to US$1.17 billion, and free cash flow up 199 per cent to US$1.71 billion. Its shares are up nearly 20 per cent by the year ending August 2022, and 30 per cent for the past 12 months. 

On the renewables side, there are some smaller players such as Tilt Renewables (ASX: TLT), Infratil (ASX: IFT), Contact Energy (ASX: CEN) and Genesis Energy (ASX: GNE). However, these are largely in the electricity generation area using renewable energy sources like wind and solar. 

Get a foot in both camps

For those investors looking for individual stocks to play the energy transition story, Macquarie Group (ASX:MQG) could be another option as an example of a more indirect strategy. Although Macquarie Group is a global financial services company, it is also a major player helping industries and companies in reducing carbon emissions, and accessing renewable power, clean fuels and sustainable transport.

Overall, the current global energy crisis may also serve as a catalyst for a bigger energy transition.

Brett Grant, head of product and trading, AUSIEX

Smart ways to invest in the energy transformation

The Federal Government has released its first offshore petroleum exploration permits, ensuring growth in the oil and gas sector at a time when it is seeking to boost its climate change credentials. The government’s divergent approach is symptomatic of a dilemma facing investors in the energy market — which way to play the energy crisis. 

Smart ways to invest in the energy transformation
Smart ways to invest in the energy transformation
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