Oil Stocks Downgraded: Climate Change Is Becoming an Issue

The energy sector has been facing a climate-related lash out for several years. It has now substantiated enough to downgrade major oil stocks.

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Oil pipes in an oil field

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The days when oil was considered black gold are long gone. The economies that rely on oil too heavily have started to make drastic changes to their financial models and are building different pillars for their economy. And even though it might take decades and several breakthroughs in energy production, transport technology, and some other areas before we see the true demise of oil, the wind has already started to shift.

What we saw in 2020 was just a glimpse of what was about to come. Right now, electric vehicles make merely 1% of the global car stock. Imagine how the demand for oil would sink when it reaches 40% or 50%. And that’s just one area. And though the fate of natural gas is also tied up with the oil, it might fare better since it’s the cleanest fossil fuel available.

And if the 2020 demand slump wasn’t a blow strong enough, the oil sector across the border might suffer another one.

Oil companies and risk ratings

Standards and Poor’s Global Rating might be on the verge of dealing a significant blow to the American oil industry. It has warned that it might change the risk rating for many of the big players like Royal Dutch Shell and Exxon from intermediate to moderately high. The decision is governed by several factors, all related to climate change one way or the other.

Whether or not the change in U.S. leadership and Joe Biden’s decision to rejoin the Paris climate agreement has anything to do with it is challenging to say. But the S&P backed its decision by citing three challenges that the energy sector is facing: energy transition, price volatility, and weak profitability.

The lower credit ratings would impact the companies in multiple ways. Apart from driving investors (both retail and institutional) away from these businesses, these ratings will also affect these companies’ borrowing capabilities. Lenders would demand a higher fee to fund expensive oil projects, stifling future growth.

Canadian energy sector

The energy sector in Canada is also having trouble gaining any stability. The S&P/TSX Capped Energy Index is still down over 31% from its pre-crash position. But there are still oil stocks worth betting on, and one of them is Enbridge (TSX:ENB)(NYSE:ENB). The energy giant is suffering along the rest of the sector, but it’s still relatively more stable. It has a stable and positive outlook from four global credit rating agencies, including S&P.

It has also proven its mettle as a dividend stock and didn’t slash its dividends in 2020, maintaining its 24-year dividend-growth streak. At its current share price, it’s a bargain from a valuation perspective and for its high yield of 7.5%.

Foolish takeaway

The transition from oil to green energy won’t be sudden, and it won’t be smooth. The US$86 trillion behemothian industry won’t just fade away into obscurity, and governments, especially of oil-dependent countries, will have to make tough decisions to keep the economy stable. They will also need to focus on creating more jobs. In Canada alone, the oil and gas industry employs 175,040 people.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.

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