Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 473

Investment opportunities in the global energy crunch

As we look across businesses exposed both negatively and positively to longer-term energy prices, we believe the risk of a prolonged energy shortage is not truly appreciated by markets. And this dislocation offers significant opportunities to investors willing to look at the whole picture.

Traditionally, high energy prices would trigger new investment in the sector creating increased supply that would bring prices back down. This conventional capital cycle in the energy sector typically takes five to 10 years to play out in full.

An extended cycle

Over the past six to eight years, however, there has been a noticeable lack of investment in the sector, as companies have either cut or not increased their capital expenditure.

The current underinvestment is the result of a number of factors.

1. In recent years investors have been more attracted to high growth companies, and as a result are valuing the future promise of cash as highly as having cash in their pocket today. This means they’ve tended to pour investment into startups that burn money to grow quickly, and drained capital from ‘old economy’ businesses – such as traditional oil and gas - that already make money but grow more slowly.

2. Increasingly urgent climate concerns have also been a headwind to traditional energy companies. The growing recognition that a clean energy transition is critical to our survival has clouded the demand outlook for new projects and the capital required to build them has become far less abundant and far more costly.

Together, these factors have created a longer and less efficient capital cycle in the energy sector that not only heightens the possibility of longer-lasting volatility and energy shortages but also presents opportunities to contrarian investors with a truly long-term mindset.

For while the fundamentals of these energy companies look better than they have in years, in our view they remain cheap. At current oil and gas prices, the sector offers an average free cash flow yield of around 20%. The challenge, however, is distinguishing the deservedly cheap from the attractively undervalued. A 20% free cash flow yield doesn’t count for much if a company has no future, and some energy companies probably don’t. But we believe some producers, like Shell, Inpex, and Chesapeake, as well as infrastructure companies like pipeline operator Kinder Morgan, will have a role to play for years to come.

Shell – relic or future leader?

Let’s take Shell as an example.

Most people see it as a fossil fuel company, but we see it more as a diversified energy business that is well-positioned to aid the energy transition. Shell has already committed to net-zero emissions by 2050 - a target that includes not only its own emissions but also the impact of the energy products it sells to customers.

A key part of this is Shell’s exposure to natural gas—a fuel that we see as key to facilitating the energy transition— but also through its renewables, its infrastructure and its petrol stations. In addition, it has a trading arm that matches energy supply and demand around the world, which could be increasingly valuable in a volatile and energy scarce environment.

On top of this, not only is it highly cash generative, but the nature of its business means it offers longer-term inflation protection and resilience against energy shocks.

Given all this, you might expect Shell to trade at a premium, especially in light of the concerns around energy security that are beginning to emerge in all corners of the global economy.

However, the market currently seems to be disregarding these issues. Shell, for example, is one of those with a double-digit free cash flow yield – a measure of how financially stable a company is – which is clearly attractive. This is demonstrated by the fact it is returning money to shareholders through share buybacks and a divided yield of around 4%, as well as earnings growth.

A bumpy ride?

Of course, there are always potential headwinds that we would be foolish not to consider. When investing in energy companies today, we are mindful about the risk of stranded assets. Particularly if the demand for oil declines sharply through recession, or from the world transitioning away from fossil fuels faster than we are expecting.

This would create uncertainty about the future and deliver a bumpy ride for investors.

The environmental, social and governance (ESG) risks associated with energy companies are also something that cannot be overlooked. While we believe Shell is responsibly running down its oil business, harvesting existing assets and investing in its transition and growth groups, which have much longer lives ahead of them, others may disagree and question our approach to responsible investing principles.

For the first time, the world is trying to optimise the global economy not just for efficiency, but also for emissions, and our challenge as responsible stewards of our clients’ capital is to understand how much of this energy transition is priced into current valuations.

Thinking differently

There are no easy answers to these issues, but ultimately, we would prefer to be an engaged shareholder of a company like Shell – holding them to account on their commitments – rather than divesting. If Shell, for example, disappeared tomorrow, demand for its products would remain and would be filled by a different producer. Potentially one that is a private or state-owned entity that is less transparent regarding ESG and climate issues such as emission reporting and targets.

Equally, there are potential economic and political headwinds that could affect some parts of the energy sector. High energy prices have resulted in bumper profits for many energy companies – Shell included – that have caught the eye of governments looking to introduce so-called ‘windfall taxes’.

The impact of these policies is still uncertain, as different jurisdictions have different approaches, but with the cost-of-living crisis unlikely to abate any time soon, this is not an area that should be ignored.

That said, even after considering these potential risks we think certain critical energy infrastructure holdings such as Shell, Sunrun (solar), Vestas Wind Systems (wind), Constellation Energy (nuclear) and Kinder Morgan (gas pipelines), among others, are in a good position - with higher margins, better capital discipline and lower debt. They are also in a cycle of harvesting healthy oil/gas prices while returning capital to investors.

We believe that is a recipe for attractive potential returns, and a good example of how our contrarian bottom-up approach can identify inefficiencies and dislocations in the market to spot interesting opportunities.

 

Shane Woldendorp, Investment Specialist, Orbis Investments, a sponsor of Firstlinks. This report contains general information only and not personal financial or investment advice. It does not take into account the specific investment objectives, financial situation or individual needs of any particular person.

For more articles and papers from Orbis, please click here.

 

RELATED ARTICLES

Searching for value in tech stocks

Why are some companies vulnerable in 2022?

Why Europe is back on the global investor map

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Latest Updates

Investment strategies

Finding income in an income-starved world

With term deposit rates falling, bonds holding up but with risks attached, and stocks yielding comparatively paltry sums, finding decent income is becoming harder. Here’s a guide to the best places to hunt for yield.

Economy

Fearful politicians put finances at risk

A tearful Treasury chief, a backbench rebellion, and crashing bonds. What just happened in the UK and why could Australia’s NDIS be headed for the same brutal fiscal reality?

Shares

Investing at market peaks: The surprising truth

Many investors are hesitant to buy into a market that feels like it’s already climbed too far, too fast. But what does nearly a century of market history suggest about investing at peaks?

Shares

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Investment strategies

Will stablecoins change the way we pay for things?

Stablecoins have been hyped as a gamechanger for the payments industry. But while they could find success in certain niches, a broader upheaval of Visa and Mastercard's payments dominance looks unlikely.

Infrastructure

An investing theme you can bet on for the next 30 years

Investors view infrastructure as a defensive asset class rather than one with compelling growth prospects. These five tailwinds for demand over the coming decades suggest that such a stance could be mistaken.

Investment strategies

A letter to my younger self: investing through today's chaos

We are trading through one of history's most confounding market environments. One day, financial headlines warn of doomsday scenarios. The next, they celebrate a new golden age. How can investors keep a clear head?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.