London-based investment bank Shore Capital said it is expanding its UK oil and gas franchise “at a time when many banks have retrenched from the sector”, concluding that the impact of the energy transition on producers will be “gradual”.
Banks have largely pulled back from oil and gas due to environmental, social and governance concerns, future pricing worries and taxes on fossil fuel profits.
Ex Barclays’ analyst James Hosie, who joined Shore Capital as an equity research analyst for natural resources in May, told Energy Voice that the energy transition and taxes on fossil fuel profits have “undoubtedly” impacted valuations and returns in the oil and gas space.
“The impact of the energy transition on oil and gas producers is material, but very gradual,” Hosie said. “The industry’s role is to continue producing the hydrocarbons required to fulfil the world’s rising demand for low-cost energy, while seeking to minimise the environmental impact of these operations.”
At the height of the energy crisis in 2022, when petrol prices reached record highs as the cost of oil soared following Russia’s invasion of Ukraine, loans to the sector began to shrink.
Data provider Pitchbook observed that while US West Texas Intermediate had risen by 39%, “the market value of loans backing companies in the Oil & Gas sector, by contrast, had lost 1.16%”.
BNP Paribas, Credit Agricole, Barclays, HSBC and Deutsche Bank, have all reduced or stopped financing new oil and gas developments entirely.
HSBC was one of the first banks to say that it would stop financing new oil and gas fields in a bid to drive down emissions in 2022.
In 2023, BNP Paribas said that it will “no longer provide any financing” for the development of new oil and gas fields as it strengthens its energy transition ambitions.
Credit Agricole said in December that it would not provide corporate financing to producers dedicated exclusively to oil and gas exploration or production.
In February 2024, Barclays piled in and ceased providing project and direct finance for upstream oil and gas.
“Shore Capital is supporting the UK’s leading independent energy companies at a time when larger investment banks have reduced or stopped dealing with the E&P sector,” Shore Capital said in a statement, stating that previous energy transitions have “taken time and investment”.
The UK investment bank said it has been a challenging period for the oil and gas sector “due to generational-low oil prices and turbulent gas prices during the Covid period”, but that listed companies have become “lean and efficient”.
Access to capital in the oil and gas sector is also shrinking due to widespread concerns over ESG, and long-hold prices, according to Hosie. On the sell-side and among buy-side equity investors, oil and gas exploration and production companies “no longer get the attention they did previously”, he said.
The price horizon for oil and gas projects was damaged by peak fossil fuel prices, when the price of oil rose to over $100/barrel as a result of the war on Ukraine.
For small oil producers, banks and investors typically take a view of oil prices over four to five years and have taken the view that higher near-term prices would not last, according to Hosie.
Despite predictions that investment in energy would soar, investors were rattled.
European private equity investment in oil and gas fell sharply in 2024 despite some appetite for large-cap buyouts.
UK tightens regulation
Hosie said the so-called windfall tax on fossil fuel profits has had an “impact in valuation, undoubtedly”.
Decisions for oil and gas projects have been “deferred or delayed” since the introduction of the UK windfall tax, according to Hosie, who explained volatility in the UK’s policy regime means a higher return on capital is now being demanded by banks and investors.
The return on capital has generally been viewed as higher in the upstream oil and gas space than in the renewable energy industry, but the risk-return profile on these investments has now shifted.
Most of the clients that Shore Capital services are UK-listed but have operations outside the UK, producing oil in regions such as West Africa, the Far East, South America or the southern US.
At the Autumn Budget in October, Chancellor Rachel Reeves confirmed that the so-called ‘windfall tax’ on oil and gas profits will be extended to March 2030 and the 29% tax relief on new oil and gas exploration would be cut in November.
Given the tax was raised from 35% to 38%, the cash value of the decarbonisation allowance was effectively retained, according to tax advisers at KPMG and CMS. That allowance still represents green tax relief of approximately £63 for every £100 of capital expenditure, they said.
“Capital markets have an opportunity to incentivise the application of the highest environmental standards through their investments in the sector,” said Hosie.
He echoed the words of Shell, under chief executive Wael Sawan, following the company’s recent victory against an emissions-reduction order in the appeal court of the Hague: “Denying the sector access to capital or coverage is not going to make ongoing demand for oil and gas products disappear.”
While other banks have retracted from oil and gas, Shore Capital views continued promotion for the UK-listed oil and gas sector as “supportive of the energy transition”, Hosie said.
According to its half-year results to the end of June 2024, Shore Capital had assets under management of £1.9 billion.
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