Multinational oil companies are trading at some of the highest valuation ever seen due to a climate-change concept coined by former Bank of England governor Mark Carney, the ‘tragedy of the horizon’, said analysts at Barclays.
Carney, the analysts noted, coined the phrase to describe the inherent conflict arising from the mismatch between the horizon for monetary policy of around two-to-three years and the much longer-term horizon for the impact of climate change on financial markets, which results in incentives to address climate change having to be created outside of traditional methods.
“We see this effect playing out now in the share price performance of the European energy sector vs both oil prices and US competitors,” the Barclays energy team said in a note to clients on Tuesday, previewing the sector’s second quarter earnings season.
“In a nutshell, free cash flow that might otherwise have been returned to shareholders or used to reduce debt is instead being invested in low carbon and renewables businesses, the significant impact of which is only likely to be seen in 2030-plus.”
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Meanwhile, investors wanting to participate actively in energy transition feel this is “too far off”.
As a result, the sector is trading on the highest free cash flow yields on record, the analysts said, even after accounting for energy transition capex.
“We see this as the European energy sector’s own ‘Tragedy of the Horizon’, yet an alternative way to see this could be that the Euro oils may offer the best of both worlds, generating strong FCF near term whilst building a sustainable long-term business.”
With coming quarterly results set to provide a reminder of that potential FCF generation, the Barclays team said they expect this ‘valuation discount’ to close over the coming months with attractive investment opportunities across the space.