Anti-ESG movement has investment case

Alpha Metallurgical Resources

13/12/2022 05:04

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Robert Cyran
       NEW YORK, Dec 12 (Reuters Breakingviews) - Energy firms
are pumping out extraordinary amounts of cash, perhaps to the
chagrin of those trying to encourage people not to invest in
them. As power crises around the world drive up demand for U.S.
fossil fuels, American companies reap the benefits. Current cash
flows at many firms are large enough to account for big chunks
of their overall value. Even with some draconian assumptions,
they are underpriced. 
    American coal firm Arch Resources  ARCH.N  should generate
about $1 billion of free cash flow this year, nearly half of its
total enterprise value. Rival Alpha Metallurgical Resources
 AMR.N  should produce $1.4 billion, or nearly 70%. Exxon Mobil
 XOM.N , which churned out more profit than Apple  AAPL.O  last
quarter, could bank around a fifth of its $461 billion worth.
Occidental Petroleum’s  OXY.N  free cash flow should be about
17% of its overall valuation, which has inspired Warren
Buffett’s Berkshire Hathaway  BRKa.N  to become its biggest
stakeholder. 
    Investors are wary – and, in some ways, for good reason. The
energy sector notoriously overinvested in past booms, and demand
for coal and oil is expected to peak soon, and then decline.
Exxon Mobil trades at about 8 times trailing earnings, or about
half the S&P 500 Index  .SPX . Natural gas firm Chesapeake
Energy  CHK.O  trades at 6 times, and Arch trades at less than
3. And just last week Exxon and Chevron  CVX.N  raised their
spending estimates for next year.
    Still, those multiples are reflecting a lack of growth, and
if these companies return most of their cash, investors look set
to make a solid return. Though the underlying businesses aren’t
growing, the transition away from coal will take more than two
years, and from oil and gas more than five, as their valuations
imply. For example, over three-quarters of the new cars now sold
in Norway are electric. Oil consumption there only dropped 2%
last year according to BP’s Statistical Review of World Energy. 
    Pressure from ESG investors may be pushing a move away from
polluting fossil fuels over time. Still the anti-ESG brigade
will collect hefty dividends along the way. 
    Follow @rob_cyran on Twitter
    CONTEXT NEWS 
    The S&P 500 Energy Sector Index is up 58% since the start of
the year. 
 (Editing by Lauren Silva Laughlin, Sharon Lam and Amanda Gomez)
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