Energy Transition, Part II: A Silver Lining For OFS

The Cowen Insight

Cowen’s Energy & Sustainability teams follow up our October 2020 report on Energy Transition. Energy Transition will be an important driver of OFS terminal values and companies have begun to discuss their exposures. We’ll explore five Transition themes affecting the OFS group and their overall relevance.

The Energy Transition Will Require Investment That May Benefit OFS

Energy transition is an obvious headwind to the traditional business of oilfield service (OFS) companies and investors are increasingly worried about terminal value. However, it’s not all doom and gloom. The energy transition will require trillions of dollars of investment over the next decades. Investment will not only be only in obvious areas like wind and solar, but also on infrastructure such as the electrical grid, charging stations, batteries, geothermal and potentially a hydrogen supply chain. Additionally, investments will be made to mitigate carbon dioxide and methane emissions.

We see OFS capabilities in gas handling, offshore operations, subsurface engineering, and global services deployment presenting opportunities to successfully navigate the transition, but further progress will be needed.

Five Key Energy Transition Categories Where Oil Service Companies Can Participate

Some Oil Service companies already have well defined exposure to areas that will benefit from Energy Transition, while others are still in early stages. Many investors are trying to assess whether any of these energy transition opportunities can offset an eventual decline to the core business of fossil fuel extraction. 

We have identified five key Energy Transition categories where Oil Service companies can participate and discuss how we see these markets developing and how material it can be to revenue.

These five categories are:

1. Natural Gas and LNG
2. Carbon Capture, Utilization and Storage (CCUS)
3. Hydrogen
4. Offshore Wind
5. Geothermal

Overall we see LNG and CCUS offering the nearest term, tangible opportunities. Hydrogen is similarly relevant, but less of a near-term driver. Geothermal for buildings potentially is a unique opportunity, but geothermal drilling for power generation is likely to remain a niche market.

The Energy Transition Presents an Opportunity for Oil Services

Currently, none of the Oil Service companies appear positioned to fully offset a declining fossil fuel business with energy transition related growth. Still, the energy transition is in its early days.

Oil service companies are full of highly trained, highly experienced people that have delivered previously unthinkable productivity growth in fossil fuel extraction and processing in extreme subsurface and above ground environments. Examples include decades of successful operation in politically unstable regions such as the Middle East, delivery of subsea oilfields located thousands of feet below the surface of the sea hundreds of miles from shore, and deployment of gas processing, compression and liquefaction equipment into harsh environments ranging from the arctic to the desert.

We think this technical expertise, coupled with it being early days in many categories of energy transition presents an opportunity for oil service companies to play a role and potentially reinvent their business to thrive in the transition.