Historically, the energy sector has been a big bet for investors and generically, it has been an expanding sector globally since the industrial revolution.
With coal overcoming the initial energy inertia and putting fossil fuel on the map, we have seen energy sources gradually take a shift towards more sustainable and climate friendly alternatives.
We are a long way from Watts steam powered engines and currently, the bulk of industrialization and transportation is still powered by diesel, gasoline and gas.
However, solar and electric powered vehicles and automobiles are gradually becoming staples and experts are predicting a decline in gasoline demand in 2025. The million dollar question is how will this affect investors who are heavily exposed to the energy sector?
According to Vitol global gasoline demand is poised to decline as China, a leading gasoline consumer would see its demand peak in 2025. Vitol’s group head, Russell Hardy told Bloomberg that China’s gradual shift toward electric vehicles will bring about domestic gasoline demand peaking either this year or next.
One key thing to note here is that the Nigerian and African economy in general play catch up to global trends and a key indicator of what our economies would go in say a decade or half a decade is what the global trends are saying now. For example, after the dot-com bubble in the late 90s, it took almost half a decade before tech startups like Andela, Jumia, Konga, Nairabet took off. Basically, the African market typically lags the global epicentres and eventually catches up. This is indeed the case currently as [find percentage of Nigerian vehicles powered by gasoline]
It is not surprising then that Oando, a fossil fuel based energy company is one of the top performing companies in the Nigerian Stock market this year. Oando’s market capitalization hit N1t in Q3 of 2024 having had a very impressive 748% YTD stock performance. Seplat energy is the most expensive stock in the Nigerian Stock market by face value only. The energy sector in the Nigerian market is definitely thriving.
As cleaner energy solutions get more efficient and gradually receive consumer acceptance, we expect a decline in the market share of traditional energy companies. This is already evident in projections predicting steady decline in gasoline demand. The Nigerian energy sector still heavily dominated by fossil fuel solutions may be a sector poised for steady decline in the coming decades. Therefore it is inherently risky investing in a declining sector but here’s how investors can mitigate these risks.
Invest in established energy players: In a declining sector, the odds favour established players who have the experience, financial wherewithal and technical know-how to weather dire conditions. For example, during the dot-com bubble, even though 75% of internet companies crashed, Ebay, Amazon, Microsoft and a handful of other already established companies at the time survived. In other words your investments should target the Seplats and Oandos of the Nigerian energy sector.
Look to diversify into other sectors: Agriculture, Banking and Finance, Manufacturing, Telecommunications and ICT are other booming sectors in the Nigerian economy and they are not expected to slow down in coming years. An astute investor should have a diversified portfolio and look to reduce too much exposure to one sector. If for example, your equity exposure in the Nigerian Stock market is 100% in energy stocks, you may look to diversify and invest at least 25% in Agriculture and Manufacturing sectors.
Understand your investment horizon: With gradual declines and lesser profit targets expected, investors must properly understand the landscape. Investing in non-renewable energy in this day is probably a medium to short term investment as more sustainable energy solutions are fast gaining traction. Having a 50 years outlook or investing in fossils as your retirement plan may not be the best financial decision to make. As per DNV, an energy consulting firm, demand for fossil fuel is expected to shrink to just 50% of available energy sources by 2050.
Diversify into green energy companies: EV makers, Solar solution providers, wind energy and other sustainable energy solution providers may be prime companies for investing into at the moment. We have seen an explosion in these sectors in more developed economies as companies like Elon Musk’s Solar City and Tesla, Mercedes Benz’s electric vehicles have all grown exponentially in the last half a decade.
Not as gloomy as it seems
Up until now, the article has suggested that investing in fossil energy might be an unprofitable venture but those Oando investors who have seen their stock swell by nearly eight folds this year alone may find this stance laughable at best and bereft of knowledge at worst.
Well, the truth of the matter is the world cannot just achieve zero reliance on fossil fuels in a decade or two. A lot of energy infrastructure in both developed and developing countries alike are heavily reliant on fossil and this cannot change overnight. The smart investor though would need to factor in these realities into his investment decisions.