The Environmental, Social and Governance scheme will reshape the industry, as investors are getting more and more interested in the ESG agenda, potentially challenging the ability of oil and gas companies to access capital, financing or sell assets, Fitch Ratings estimated on a report this Monday.
The agency expects the sector to improve in 2021 after many companies announced significant production curtailments, which also helped for the oil prices to modestly recover after its fatal crash in April. But, the financing and liquidity aspects of the sector may rise as new deep issues, as many issuers continue to generate negative free cash flows and with difficulty to sell assets.
An example of this is the impossibility of Shell to sell their Convent refinery, which, as we reported previously, ended up being closed.
“Asset buyers are increasingly selective; due to numerous industry challenges, with a focus on valuation and, in the case of strategic buyers, maintenance of financial resilience during a difficult operating environment. However, ESG in particular could have greater influence on the financing decisions of banks over time, due to social and regulatory pressures,” the agency explains.
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Production cuts help ESG
Also, the production curtailments are pushing the ESG agenda. According to the report, Exploration and Production companies, by cutting their production down after pressures from the demand destruction and global economic resection, are pushing the ESG goals for reduction in emissions. Thus, increasing investors interest.
Indeed, many companies are making strategic and capital decisions to align more closely to the ESG agenda. One of the most recent is Phillips 66. As we’ve reported, they are transitioning to a renewable fuels production in their San Francisco Refinery, and reducing their capital expenditures.
Also, the new Biden administration would boost climate change and environmentally driven policies. Nevertheless, this is yet to be seen, as it depends of his administration’s control of the Senate and the outcome of Georgia’s election.
“Colorado has been ahead of the curve with ESG-focused oil and gas industry regulation. Near-to-medium term operational implications are moderate; but this legislation may have contributed to weakened capital market access and asset valuation for Colorado issuers,” Fitch’s report concludes.
