December 8, 2013 – How do you measure the downside of unburnable carbon assets against the balance sheets of energy companies? Enter the Bloomberg Carbon Risk Valuation Tool (CRVT), from Bloomberg Professional Service at XLTP XCO2.
The CRVT blueprint contains 5 built-in scenarios that can be adjusted to reflect specific energy company data. These 5 cover potential futures that include:
- a 5% annual decrease in oil prices beginning in 2020.
- $50 per barrel of oil beginning in 2020.
- $25 per barrel of oil beginning in 2030.
- an 80% decrease in EBIT (earnings before interest and taxes) beginning in 2020 prompted by decarbonization and peaking in 2035.
- an 80% decrease in EBIT beginning in 2030 prompted by last-ditch decarbonization and peaking in 2035.
The CRVT defines unburnable carbon assets as “stranded.” These are assets that need to be devalued or converted to liabilities. The tool allows the investor to build an income and cash flow for a company and then apply discounted cash flows from the write down of stranded assets.
The above scenarios are based on governments heeding scientists about climate change and applying decarbonization policies. The assumption under such terms is that oil prices will fall as demand decreases. This would impact top-line revenue and bottom-line earnings. At the same time the costs of extraction will remain the same. At some point the cost of extraction would exceed the selling price leading to the end of production.
CRVT also looks at how energy companies expend their capital and determines when it becomes a waste of money because exploring for new finds no longer makes economic sense.
The CRVT also looks at how climate change regulation would impact the price of carbon emissions and how that would negatively impact corporate earnings.
And finally it looks at harder to reach carbon assets like the oil sands and how such carbon-intensive extraction technologies could further impact costs and net earnings after applying regulatory penalties.
The CRVT published study looks at the biggest market cap energy companies and then applies its various scenarios to them. These include:
- ExxonMobil at $393.8 billion (US).
- Petrochina at $232.5 billion.
- Chevron at $231.7 billion.
- Royal Dutch Shell at $215 billion.
- BP at $145.2 billion.
- Total at $144.8 billion.
- Petrobras at $114.9 billion.
- Ecopetrol at $98.1 billion.
- CNOOC at $91.7 billion.
Not surprisingly last-ditch decarbonization has the least impact on the energy companies while the $50 oil price per barrel beginning in 2020 yields to the worst results with shares declining by 58%.
The authors of the CRVT admit to some limitations in their model. For example they use average pricing for determining the cost of extraction which penalizes companies that may have multiple extractive processes in operation, some less expensive and some more. In such cases the company could stop producing at fields that were no longer cost viable. The model also doesn’t consider other avenues that an energy company might explore because of changing regulation around extracting and emitting carbon.