Fossil fuel energy giants and mining companies are making a capital markets comeback, advisers say, as rallying commodities make investors swerve ESG concerns.

Oil, gas and mining finished April among the top ten industry groups represented within EMEA ECM in 2022, Dealogic data shows.

In a year where ECM issuance is down across the board, mining ECM deal value year-to-date is up 292% from the same period in 2021, while oil & gas deal value has risen by 54%, according to Dealogic data.

Large transactions such as the GBP 789m block trade in Swiss commodity giant Glencore [LON:GLEN] and a GBP 170.58m accelerated sale of natural gas company Energean [LON:ENOG] in March were well supported as investors sought to benefit from surging energy and metals prices since the Russian invasion of Ukraine.

Investors in the February IPO of Norway’s Vaar Energi [OSO:VAR], for example, are sitting on paper profits of almost 40%.

Performance advantage

For many fund managers whose holdings were decimated by equity volatility since the beginning of the year, holding their nose and ignoring potential alpha generating opportunities is no longer an option, said an ECM banker.

There is now a clear economic argument to look at trades in energy and mining companies, an ECM investor agreed, as the buyside approaches these assets differently.

“I think for many years there was a belief that these sectors wouldn’t exist anymore, and now people recognise that this is an area where funding is required,” the investor added. “We are going to need copper, cobalt, and lithium in the global energy transition.”

Sector performance is key. The Stoxx Europe 600 Oil and Gas index is up almost 20% year-to-date and the Stoxx Europe 600 Basic Resources Index is up almost 11%. Both have substantially outperformed the main Stoxx Europe 600 index, which is down 9.4% year-to-date. 

ECM transactions such as blocks tend to be large liquid trades, giving investors a chance to buy a larger slice of stock in one go. This is important as many fund managers have a lot of catching up to do.

The Glencore deal was a play on this changing dynamic on ESG, said a second banker. “Mining and oil are asset classes where investors are generally underweight, but it is hard to maintain that position when these sectors are rallying. To even get to equal weighting investors will have to deploy a lot more capital in the sector,” he added.

Energy and commodities blocks are set to continue, but there will be deals across the ECM spectrum.

Last week, this news service reported that African mining company Allied Gold Corporation is looking to list on the main market of the London Stock Exchange in Q4 this year.

Saipem [BIT:SMP], the Italian manufacturer of drills for the offshore oil and gas industry, is also planning to complete a EUR 2bn rights issue before the end of the year, and sources have previously told this news service that the company’s equity story has been significantly strengthened by the changing investor sentiment on the sector.

Seeking permission

Many portfolio managers, however, must face senior management’s proclamations on green investing and have committed to not deploy cash in companies failing on ESG metrics.

“Taking a hard line against oil and mining does not make sense for many investors as they can experience material underperformance, but some still can’t make big investments in these companies,” said a third banker. “They have to go to their risk managers on a case-by-case basis, many we speak to want to put in larger orders but can’t.”

Companies, on the other hand, are trying to change their image to make themselves more investable.

BP [LON:BP], for example, announced this week a GBP 18bn commitment into the UK’s energy system by 2030, to boost energy security and help the country reach its net-zero pledge.

This includes electric vehicle (EV) charging projects, offshore wind development and the creation of two large-scale hydrogen facilities, sweetening the investment case for many buysiders.

A fourth banker agreed that oil, gas and mining was necessary to fund the global transition to net-zero and said that equity markets were open to these companies if they can adjust their operations to please investors.

“A lot of these companies are trying to re-invent themselves, look at BP for example, almost all the non-sovereign controlled energy majors seem to have a different strategy,” said the ECM investor. “Some are building up huge renewable energy operations and others, like many of the US majors, are deciding to do nothing at all.”

Mining and big oil have started to clean up their act. For many investors, it may be enough to flex their ESG criteria, especially if such a play means better performance.