The International Energy Agency believes oil demand is finally nearing its peak. The global energy advisory expects oil demand to stop rising by 2030 as China's growth slows and more people switch to electric vehicles.
On one hand, that means oil will remain vital for the next several years. However, energy companies can see the writing on the wall, leading many to transition to lower-carbon energy. Enbridge (ENB -1.21%), TotalEnergies (TTE 1.10%), and BP (BP -0.38%) stand out to a few Fool.com contributors for their energy transition plans. Here's why they believe it makes these energy stocks compelling long-term investments.
Slowly transitioning with the rest of the world
Matt DiLallo (Enbridge): Enbridge has been preparing for a lower carbon world. The Canadian oil pipeline giant (Enbridge transports 30% of all the oil produced in North America) has slowly shifted its business mix toward cleaner energy. It has grown its natural gas transmission and distribution businesses and built a renewable energy platform.
Today, liquids pipelines supply 57% of the company's earnings, with lower carbon natural gas and renewables making up the balance. However, the company recently agreed to buy three natural gas utilities from Dominion Energy in a $14 billion deal that will further shift its business mix to lower carbon energy:
Image source: Enbridge.
Enbridge also agreed to a couple of smaller bolt-on deals to bolster its energy transition businesses. It's paying $1.2 billion to acquire seven operating landfill-to-renewable natural gas assets in the U.S. In addition, Enbridge is nearly doubling its interest in two German offshore windfarms in a 625 million Euro ($670.5 million) deal.
Meanwhile, nearly all of the company's 24 billion Canadian dollars ($17.6 billion) secured capital project backlog is lower carbon energy projects. It's building new natural gas pipelines, investing in a liquified natural gas (LNG) export facility, expanding its gas utilities, and building several new offshore wind farms in Europe. The company also has an extensive pipeline of development projects. In addition to more gas and renewable energy projects, Enbridge is also working on emerging clean energy technologies like hydrogen and carbon capture and storage.
These investments will further shift its business mix away from oil. That positions the company to keep growing in the future as it continues to pivot from oil to more sustainable energy.
TotalEnergies is shifting with the times
Reuben Gregg Brewer (TotalEnergies): There's no question that the future is going to include more renewable power. But this transition isn't going to be like flipping a light switch. It's going to be slow and drawn out. That means decades of profit ahead from selling oil and natural gas. France's TotalEnergies is ready to keep supplying the world with these carbon fuels.
That said, the company is shifting in a cleaner direction. On the oil and gas side, that means homing in on its best oil investments and getting rid of ones that are dirtier or less profitable. At the same time, it's focusing on growing its natural gas business, as this fuel is cleaner burning than oil and coal. And, importantly, natural gas is viewed as a transition fuel in the world's move toward renewable power. The giant integrated energy company is basically focusing on producing the most long-term profit from its legacy assets.
Those profits are going into two broad buckets. First is the dividend, with the stock offering a yield of 4.6%. (Note that U.S. investors have to pay foreign taxes on that income, though the taxes can be claimed back come tax time.) The second use of the company's carbon profits is investing in... clean energy. In fact, the company's integrated power division, where it places clean energy and electricity assets, now makes up nearly 7.5% of segment operating income. That's over twice the size it was just one year ago, so this is not a commitment the company takes lightly. Basically, you get the best of both with TotalEnergies, continued participation in oil and gas and an expanding footprint in clean energy.
Focused on the future of energy
Neha Chamaria (BP): Oil and gas supermajor BP recently hit the headlines for its $100 million order for Tesla's ultrafast chargers. BP's deal with the electric vehicle (EV) giant is part of its plans to invest up to $1 billion in EV charging infrastructure in the U.S. by 2030, including $500 million over the next two to three years.
EV charging, however, is just one of the five areas beyond oil where BP is transitioning, and that's precisely why this energy stock could benefit as peak oil nears. BP knows it must adapt to the changing dynamics of the energy sector, which is why it is transforming itself from an oil company into an "integrated energy company" and therefore, investing aggressively in what it calls its five "transition growth engines." They include EV charging, bioenergy, convenience, hydrogen, and renewables and power.
To put some numbers to that, consider that BP spent almost 19% of its total capital expenditure on these five areas in 2021. That will shoot up to 30% next year, and BP expects it to hit 50% by 2030. In other words, BP aims to invest as much in these new growth engines as oil and gas by the end of this decade as it strives to become a net zero company by 2050.
BP expects its transition growth engines to become a larger contributor to its earnings before interest, tax, depreciation, and amortization (EBITDA) over time. So while the company expects oil and gas to generate nearly the same EBITDA of around $30 billion to $32 billion in 2030 as in 2025, it expects EBITDA from its five growth engines to triple to $10 billion-$12 billion between 2025 and 2030. BP is clearly preparing for the future of energy to remain relevant even as the world transitions from fossil fuels to alternative energy.
