Energy Market Dynamics Discourage Reinvestment

Energy Market Dynamics Discourage Reinvestment

Felipe Mejia

Felipe Mejia

Analyst

Over the past few years, energy companies have decreased the rate of reinvestment into their companies. High yield issuance for energy companies has essentially flattened since 2015. Rig counts have doubled since the trough in 2020 but are still about 50% below their 2018 peak and about 75% below the 2015 peak. It’s clear that energy companies have held back from significantly increasing capital expenditures, due to both short- and long-term issues. In the short term, although demand remains high right now and supply is tight, energy companies expect demand to decrease to normal levels next year. We can see this reflected in Wall Street analyst expectations for oil production in 2022, which have been decreasing for the past three months. In the long term, environmental, social and governance (ESG) initiatives are leading energy companies to return more capital to shareholders rather than reinvest. Additionally, management compensation and many bonds have been tied to reducing emissions, creating another deterrent to capital expenditures. If energy companies do not reinvest in themselves, they will not be able to increase supply and keep up with demand. In the short term, this could lead to higher commodity prices and better margins for energy companies; in the long term it could make alternative energy sources more competitive.

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