The sun will come out tomorrow for oil titans. Even as stock markets rallied broadly from pandemic-induced 33% dives in March, share prices for BP, Royal Dutch Shell and others failed to recover. Some artful corporate finance could help in 2021.
Cratering oil demand is one reason Big Oil has struggled. Fund managers are also heeding the call to scrutinise environmental, social and governance factors. Carbon-heavy investments are out; pure-play renewable energy is in.
Take Orsted. In early December, the Danish wind generator was trading at more than 40 times expected 2021 earnings, against BP’s 15 times. The Orsted valuation implies all its 15 gigawatts of projects through 2025 will be delivered without a hitch, with cash flows discounted at a lowball 1% cost of capital, Credit Suisse analysts reckon. The 25-fold increase in wind power generation envisaged by the European Union by 2050 could mean such lofty valuations eventually come good, but for now they reflect exuberance.
That makes it a good time to capitalise. BP and Total expect to own about 20 GW of wind turbines and solar panels by 2025. Spinning off these operations into separately managed entities, and selling one-third stakes, would allow them to maintain operational control while raising cash.
Orsted, including net debt, was worth $75 billion in early December, implying $5 billion per gigawatt for its targeted 2025 capacity. Total’s focus on lower-margin solar power deserves nearer $1 billion per gigawatt, Bank of America analysts estimate. Even then, it suggests a hearty $25 billion valuation, or over a fifth of the French company’s market capitalisation.
In theory, investors should already be factoring this in. Their ESG-era distaste for fossil fuels, however, means they probably aren’t. Spinning off the businesses should therefore bring higher valuations. Total, for one, could use the proceeds to grow renewables capacity and pay special dividends. Separately listed shares also would provide a currency for future consolidation.
There’s even a hedge of sorts. European utility Iberdrola listed its renewables businesses just before the 2008 financial crisis, before buying it back later when values dipped. Depending on how the green investment winds blow, Total and others could follow suit.