Fantasy League Matchmaking Between Oil Majors and Transition Upstarts

Fantasy footballers deploy their own optimal mix of real-life players from different teams, and compete with other fans for team scoring totals and bragging rights.

In a similar spirit, it’s possible to fantasize about optimal corporate match-ups on the energy field, pairing up the financial heft and business savvy of established giants with the entrepreneurial zeal of start ups and speciality players.

While no trophies will be awarded in this power sector showdown, the accelerating consolidation trend across the energy landscape means plenty of real-life company hook-ups are likely anyway, and so it can be instructive to dream up potential pairings.

$200 BILLION SEASON

The West’s largest oil and gas producers raked in nearly $200 billion in profits in 2022, a testament to the enduring profitability of the oil and gas sector even as global efforts to phase out fossil fuel extraction and sale stepped up a gear.

The record profit haul – which came on top of massive dividends and share buybacks that delighted shareholders – lured praise from investors.

But the eye-catching headline numbers also drew scrutiny from climate trackers and policymakers anxious to see fossil fuel majors show leadership in the renewable energy field.

Some of so-called Big 5 majors, especially Europe-based firms BP (BP.L), Shell (SHEL.L) and TotalEnergies (TTEF.PA), already boast major business segments tied to renewable energy.

But the most profitable of the big western firms were U.S. giants Exxon Mobil (XOM.N) and Chevron (CVX.N) which raked in roughly $92.5 billion in profits between them in 2022, or 47% of the Big 5’s total haul.

Big exposure to U.S.-based production assets, along with lucrative export streams of oil, gas and fuel were key drivers behind the outsized earnings of U.S. firms.

But Exxon and Chevron were also aided by relatively smaller investments in renewable energy businesses compared to their European peers, which allowed the U.S. firms to devote most of their efforts to maximising returns from traditional fossil fuel businesses.

That has brought the firms into conflict with the U.S. government, which has laid out bold ambitions tied to the energy transition away from fossil fuels, and has been critical of energy companies “padding the pockets of executives and shareholders.”

Even so, the profit pile earned by Exxon and its rivals clearly presents each firm with expansion opportunities in all areas of the energy sector, including the clean and green space.

POTENTIAL MATCH UPS

While the oil and gas majors were busy making bank, niche firms specialising in accelerating the energy transition – from upgrading transmission networks to developing smart grids – have faced mounting pressure to scale up operations and product lines to meet surging demand.

On paper, the two sets of companies seem primed for a bout of matchmaking, with the hefty war chests of the majors seemingly ideal for funding the capital-intensive expansions planned by the firms engaged in energy transition efforts.

But both also face margin pressure from rising operating and financing costs, as well as significant investment needs to scale up and refine product offerings.

The market capitalizations of both U.S.-headquartered firms are miniscule compared to Exxon and Chevron, with Exxon’s market cap at the end of 2022 nearly 200 times larger than Itron’s and 22 times larger than Quanta’s.

Other relatively small firms deployed in the renewable space include NV5 Global (NVEE.O), a technical engineering and consulting firm, and Stem Inc , a digital smart network and energy storage system provider.

Both firms operate at the front edge of the energy transition in different sectors, and present potentially appealing entry points for majors seeking access to fast-growing specialist areas.

Beyond possible David and Goliath set-ups, there are also some larger firms that may be on the radar for oil majors looking to quickly beef up their presence in the green energy and electrification spaces.

Enphase Energy Inc (ENPH.O), a supplier of microinverters to the solar and battery storage industries, had a market cap of more than $30 billion at the end of 2022, so is already an established entity.

But the firm also derives a majority of its revenues from the United States, and so may need a helping hand from a larger firm to extend its global reach.

Chicago-based Exelon Corporation (EXC.O) may be another intriguing addition to a potential fantasy energy team.

As the largest utility company in the United States, the firm is already in the starting line-up for any energy sector discussion.

But along with hefty annual revenues comes substantial grid investment needs that may strain the company’s coffers in the years ahead.

In real life, the utility sector is so heavily regulated that a pair-up with an oil major is unlikely.

But for a fantasy league exercise, the partnering of an established utility needing to upgrade electric grids with a cash-rich oil and gas giant could make a tough team to beat.

The opinions expressed here are those of the author, a columnist for Reuters.