Oil and gas companies have historically delivered modest returns despite a favorable environment – averaging just 10% over 30 years. Now, rising political volatility, climate litigation, and competition from clean technologies have increased the risks for the sector. Yet, companies are targeting the same returns. Investors must demand more.
At ۶Ƶ Asset Management, we are using our role as an investor to push for better capital discipline, higher hurdle rates, and smarter executive incentives. This would lead to both higher returns and consequently lower Scope 1, 2, and 3 emissions. Companies unable to deliver should return capital to shareholders, helping keep emissions in check.
Key insights
Key insights
- Historical underperformance: Despite periods of high oil prices and favourable investment climates, oil and gas companies have delivered modest returns – averaging around 10% over 30 years – well below those of technology and consumer staples sectors.
- Structural challenges: The sector faces mounting risks from policy volatility, climate litigation, and technological disruption. These risks are no longer confined to frontier markets but are increasingly present in developed economies.
- Capital discipline deficit: Poor capital allocation has plagued the industry, with many companies failing to meet even a 5% return threshold over the past decade. Executive compensation schemes continue to incentivise growth over value creation.
- Energy transition pressures: The rise of renewables, electric vehicles, and clean technologies is reshaping demand. Global investment in clean energy reached USD 2.1 trillion in 2024 – two thirds of the global investment in energy.
- Political and fiscal uncertainty: Elevated global debt and shifting fiscal policies have led to increased taxation and regulatory scrutiny of oil and gas firms, further eroding investor confidence.
Our strategic recommendations
Our strategic recommendations
- Target higher returns: Companies should aim for project-level returns of 18–20% and corporate-level returns of at least 15% to reflect today’s higher risk environment.
- Reform incentives: Compensation structures must prioritise return metrics like return on invested capital (ROIC) and total shareholder return (TSR) over production growth.
- Improve transparency: Firms should disclose return expectations, payback periods, breakeven costs, and commodity price assumptions for new investments.
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Meet the members of the team responsible for ۶Ƶ Asset Management’s strategic direction.
