Buy VDE, FENY, IYE ETFs as COP28 vows to end fossil fuels
The COP28 Summit concluded on Wednesday with a historic deal to transition the world from fossil fuels. The deal will see more countries ramp up investments in clean energy solutions like wind and solar.
Transition’s impact on oil and gas companiesCopy link to section
In theory, such a deal should be a bad thing for the prices of oil and gas and their respective stocks. However, in reality, the deal, if implemented, will lead to more revenue and profits for companies in the oil and gas industry.
The first implication is that companies will focus more on profitability than growth. Indeed, this trend has been going on for a long time as governments started implementing clean energy plans.
Most companies, including giant firms like ExxonMobil, Chevron, and Occidental are not investing in growth as they did before. Instead, they are focusing on acquisitions and rewarding their shareholders with dividends and buybacks.
Exxon plans to buy back shares worth over $20 billion in 2024 while Chevron is acquiring over $17.5 billion worth of stocks. Other companies like Total, Shell, and Marathon are also implementing record buybacks, which is a good thing for shareholders.
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The other reason why oil and gas stocks will thrive in the new COP28 era is that the transition is not working as expected. In the UK, the government has adjusted its net zero plans, with the Prime Minister conceding that its goals were over-ambitious.
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Countries and states that have implemented strong transition goals are having challenges. In California, gasoline is costing $4.71 while the average in the US is $3.25. California’s government is also facing a $68 billion budget shortfall.
The reality is that these climate ambitions will not work in the long-term. The IEA has estimated that peak oil demand will be 102 million barrels per day in 2030s, up from the current 97 million barrels. I believe that these predictions are wrong.
Another sign that the transition is not working is that demand for electric vehicles is plateauing. In the United States, dealers are reporting that EVs in their inventories are not selling as fast.
The case for FENY, VDE, IYECopy link to section
Therefore, I believe that oil ETFs will thrive in this era of COP28. Some of the funds to consider are Vanguard Energy Index Fund (VDE), Fidelity MSCI Energy Index Fund (FENY), and iShares US Energy ETF (IYE).
FENY vs VDE vs IYE
While these funds are different, they track the same oil and gas companies, including giant ones like Exxon, Chevron, Marathon, and EOG Resources. As a result, as shown above, these funds tend to move in sync, meaning buying one is enough.
These ETFs have retreated recently because of the falling oil prices. Brent has crashed to $73 while the West Texas Intermediate (WTI) has moved to $68. Natural gas price has also plunged recently.
In the long term, however, oil and gas prices will likely continue rising as countries adopt to these COP28 targets. Companies will also likely grow their exploration investments at a slower pace than in the past. This means that they will have higher margins by slashing their capital expenditure
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