Oil and gas companies navigate banking troubles, shareholder focus on climate

The oil and gas industry faced challenges in the financial sector caused by banking troubles and a heightened focus by shareholders on climate change.

Trouble in the banking sector and worries about a possible economic recession helped trigger the selling of US natural gas and oil stocks, and energy futures prices have slipped by double-digit percentage points since the beginning of March.

"Amidst a backdrop of banking 'contagion,' Wednesday's session saw energy 'take it on the chin' — West Texas Intermediate/Brent sank 5.2%/4.0% to $67.61/$74.33 per barrel respectively," Raymond James oil and gas analyst John Freeman said before the March 16 market open.

The market close March 15 was the West Texas Intermediate benchmark's lowest price since December 2021 "as fears over a global slowdown more than outweighed a bullish Department of Energy [petroleum inventory] report," Freeman wrote.

Energy investment bank Tudor Pickering Holt & Co.'s head of research, Matt Portillo, told clients that the drop in oil and gas prices was connected to recession fears that were strengthened by the difficulties of a few banks.

The West Texas Intermediate futures decline "clearly reflects the market's growing concerns that contagion in the banking sector (collapse of [Silvergate Bank], [Silicon Valley Bank] and [Signature Bank] in the U.S. and growing concerns in some European banks) will bleed over into the broader economy," the analyst and his team wrote.

Energy industry financial analysts said the real impact of the recent bank failures will take some time to affect the oil and gas complex, but the uncertainty led some investors to become wary of oil and gas stocks. According to S&P Global Market Intelligence data, a basket of 11 large North American midstream operators has lost almost 5% in value since the end of February.

"The volatility in crude oil prices and the equities roiled energy portfolios last week," Jefferies Group LLC oil and gas analyst Lloyd Byrne told clients March 20. "The consensus on oil's significant decline was the combination of macro positioning, volatility in rates, options expiry, and negative gamma leading to significant unwinds." Gamma is the rate of change in a stock's option price compared to the change in the price of the underlying stock itself. High gamma indicates volatile options pricing.

But years of strong commodity prices and capital discipline have left the midstream sector with low debt levels and strong cash flows, ready for hard times.

"We talked to most of our companies, and we don't see this having any impact on the midstream's ability to access capital," Rob Thummel, managing director at TortoiseEcofin, a family of energy infrastructure funds, said in a March 17 interview.

The midstream sector and the broader energy sector have changed dramatically in the way they access capital, Thummel said. "The energy sector, including midstream, is much less reliant on the capital markets to really operate their businesses — that's the first thing," Thummel said. "And then number two: None of these companies have much exposure to any of these regional banks that are that are experiencing some difficulties."

In a year of financial uncertainty, climate change issues will continue to dominate the hundreds of shareholder resolutions proposed at US companies in 2023, according to the Proxy Preview report released March 22 by advocacy groups As You Sow, Sustainable Investments Institute and Proxy Impact.

Advocacy groups have increasingly used shareholder resolutions to push US companies to publicly disclose their greenhouse gas emissions and their plans for emissions reductions. In many cases, companies will negotiate a compromise to avoid a vote and the resolution will be withdrawn.

Shareholders had filed at least 542 resolutions on environmental, social and governance issues by Feb. 17, on track to match or exceed 2022's record of 627 resolutions, the Proxy Preview report said. Over 450 resolutions were scheduled for a vote, but that number will drop as activist shareholders and companies reach agreements.

Oil and gas companies and electric utilities face 59 different shareholder resolutions so far in 2023, almost all related to the environment and carbon emissions, according to the report's tabulation of SEC filings. Climate change was the topic for 33 of those resolutions, according to the report.

Another sign of the pressure on fossil fuel companies to join in the fight against climate change came from Swiss insurance giant Chubb Ltd. The company said it will stop writing insurance policies for oil and gas extraction projects that do not have "evidence-based" methane reduction plans.

Chubb, the world's largest publicly traded property and casualty insurer with a market capitalization of $77 billion, said it would help clients develop these reduction plans. The plans would require, at a minimum, programs for leak detection and repair, the adoption of proven measures to reduce flaring, and an end to nonemergency venting of wells. Nonemergency venting most often occurs when oil or natural gas prices are so low that it is cheaper to vent gas into the atmosphere than to pay for processing, transportation and storage.

The US companies that will be most affected by the insurer's decision will be upstream independent oil and gas producers, according to Katie Bays, director of sustainable investment at energy transition consulting firm Adamantine Energy. "Third-party insurance access is certainly a material issue for many upstream players," Bays said.

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