Are Energy Companies Investment Fossils?

The shale-boom "encouraged" this metric, however; when fracking came in, it "undermined" the reserve-based investment methodology in two ways, the authors state. "First, it rendered old estimates of total global reserves meaningless, as supplies of oil and gas were now viewed as abundant and no longer in short supply (at least not on a time frame that mattered to Wall Street)."

Second, the authors state, a price collapse caused by the oversupply "destroyed the economic value of many reserves. Accounting rules define proven reserves in both geologic and economic terms: a reserve represents the amount of oil and gas that could be profitably extracted as expected future prices. But as expectations for future prices fell, many 'reserves' were seen as suddenly unprofitable, forcing the industry to write off many of them as worthless."

Therefore, oil and gas became subject to the same short-term variables as other investments. "Cash is king now. And risk can no longer be ignored," the authors wrote. The paper also found that the sector is "ill-prepared for a low-carbon future," especially as the global economy moves toward less energy-intensive models of growth.

With the demise of the "old investment rationale," the authors state that investment in these industries "requires deep expertise, strong judgment, a hefty appetite for risk and a robust understanding of how individual companies are positioned with respect to their competitors, both inside and outside the industry."

With that, the authors state, "Blue-chip stocks with stable returns are far more appealing, and — simply put — coal, oil and gas equities are no longer worth the risk." The nonprofit institute is funded by grants, including from the Rockefeller Family Fund, Energy Foundation and Rockefeller Brothers Fund.

Ginger Szala is executive managing editor of Investment Advisor. She can be reached at [email protected].