Mid-Year Outlook: Investing in the Future of Energy

Climate change, energy security and geopolitics converged in 2022 to create a storm for investors. 2023 brings about a different set of challenges - and opportunities. Citi believes the next decade will determine who ends up as winners and losers in a growing, consolidating energy industry which investors may want to consider as part of their portfolio.

The players leading the charge include major traditional energy companies and energy producing nations that see the green transition as inevitable and profitable. Capital scarcity favors leading firms with strong capital positions.

Energy Security is an Unstoppable Trend

Renewable energy is becoming more economically attractive as the price continues to decline and demand increases. Even in the relatively energy-rich US, electric heat pump installations are growing rapidly, and electric passenger vehicle sales grew by 65%, compared with a 14% decline for those with internal combustion engines.

We see conditions for a round of consolidation in the renewable energy sector, much like we’ve seen with railroads and oil at the beginning of the 20th century and again in the tech sector at the beginning of the 2000s. We view this sort of creative destruction as a feature, not a negative, that is likely to help accelerate the green energy transition.

Between geopolitical tensions affecting energy supplies and the rise of renewable energy, the energy industry is going through a sea change. Companies are jockeying to maintain dominance in the shifting landscape. They are also mindful of the need to be capital efficient and invest more prudently.

Source: Bloomberg New Energy Finance, May 2023.

The Middle East is Changing Too

Growing geopolitical tensions and changing market dynamics have prompted some Middle Eastern countries, particularly Saudi Arabia and the United Arab Emirates (UAE), to invest heavily in renewable energy sources to prepare for an eventual shift in the global energy landscape.

These investments have taken various forms, including the development of large-scale solar and green hydrogen projects and the construction of refineries focused on producing petrochemicals instead of traditional transportation fuels.

The United Arab Emirates and Saudi Arabia’s ambitious renewable energy targets, such as the former’s aim to achieve 30% renewable energy by 2030 and the latter’s goal of 50% by the same year, signal a growing awareness of the need for change. By investing in renewable energy projects and infrastructure, these countries are securing their own energy futures and contributing to the global push toward a cleaner, more sustainable energy mix.

As the world continues to grapple with the challenges posed by climate change and the need for a more sustainable energy future, the actions of OPEC+ and major oil-producing nations will play a crucial role in shaping the trajectory of the global energy market.

What Do Investors Do Now?

Our view is that investors should be selective and consider entities with capital and execution capabilities. Investors may want to consider leading energy firms whose cash flow, efficiency and focused strategic execution will allow them to seek distressed opportunities and attract more capital for sustained growth. Government support worldwide is also shifting from research to consumption stimulus – another consideration in their decision-making process.

Citi’s focus is on well-capitalized battery, metals, oil & gas companies already preparing for the clean technology, or cleantech, revolution. For investors, selectivity is likely to be key. Businesses with a valuable product or intellectual property asset but no good way of executing on it may be absorbed by entities with access to capital and strong execution capabilities. It’s likely the clean technology (cleantech) sector will end up bigger, though with fewer firms.