The Great Balancing Act: The Future of the Energy Sector

RBC analysts discuss the importance of balancing growth and resilience for energy companies navigating today’s market volatility.

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By Robert Kwan, Shelby Tucker, Elvira Scotto & Luke Davis
Published September 27, 2023 | 2 min read

Key Points

  • In light of recent market instability and volatile commodity pricing, for companies in the US energy sector, successfully balancing a focus on growth with financial resilience and capital deployment could prove crucial to success.
  • Balancing innovation focused on sustainability with consumer affordability is another key consideration for the industry.
  • Capital allocation policies are more important than ever, as traditional forms of financing become less available.
  • Overall, RBC analysts are seeing a sector embracing financial discipline – as companies ensure they strike a balance between growth and resilience.

How important is consumer affordability in today’s energy pricing conversations? 

Robert Kwan: While one of the biggest macro drivers in the industry is the drive to decarbonize, on the other side is affordability. As we are seeing, decarbonization is costly – it drives up energy prices; however, on the flip side, energy affordability is extremely important from a political perspective. We've seen a number of instances where governments have stepped in to try to reduce energy prices, and typically that runs contrary to decarbonization initiatives. 

So that tension that's out there is something that is very important. It's something that companies need to try to navigate. How do you invest in lower carbon intensity, yet still make it affordable to customers?

Shelby Tucker: There are a number of strategies being pursued right now. One being to redeploy technology to help mitigate bills to consumers. The other thing we're seeing are ways of driving rates for customers based on the economic status of the customer. So, customers that are lower income are able to get some degree of subsidies, versus others that don't. And you can do that on the regulatory construct because with a regulator, they can determine what rates can apply to which customer base

How are companies approaching challenges around balancing and raising and deploying capital today?

Elvira Scotto: I would say, within midstream energy, there's been a real shift in capital allocation policies. These companies have become a lot more disciplined with respect to the deployment of capital.

Over the past few years, these companies have really worked hard to right-size and shore up their balance sheets, and they remain focused on maintaining these strong balance sheets. So, when they look at the deployment of capital, they're really targeting high return, highly accretive growth projects. And given their free cash flow generation and strong balance sheets, they can largely self-fund these growth opportunities.

I think for midstream companies, having disciplined capital allocation policies and a strong balance sheet has become key. This type of strategy can allow midstream to weather any potential storm, such as recessions or commodity price volatility. The strategy could also allow them to take advantage of various growth opportunities, or potential M&A opportunities, as they arise

Could investors benefit from a balanced approach to growth and resilience within the sector?

Luke Davis: Investors are really appreciating the shift in financial discipline, and the overall resilience of the industry. There is greater resilience in every part of the cycle, and that has opened the door to a material return of capital programs. This will continue to differentiate the industry and bring in new investment over time. 

I think there’s been a widespread recognition that companies can't rely on traditional forms of financing from banks, and potentially equity, as they otherwise historically would have. And so again, going back to the point of resilience, I think companies have really taken that to heart and continue to operate in a sustainable way that'll make them more resilient through the cycles.

Our Experts

Robert Kwan
Robert Kwan
CFA - Equity Analyst, Energy, Utilities, RBC Dominion Securities Inc.
Shelby Tucker
Shelby Tucker
CFA - Equity Analyst, Utilities, RBC Capital Markets, LLC
Elvira Scotto
Elvira Scotto
Energy Infrastructure Analyst, RBC Capital Markets
Luke Davis
Luke Davis
Analyst, Energy Research

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