Short Total. Long Equinor (and/or iTraxx ESG)

11 minute read

We believe a market neutral relative value trade combining a credit short on French oil major Total, versus a long on Norwegian oil major Equinor could be attractive.

From the perspective of a world locked into rapid climate change, Equinor’s near monopolistic access to arctic production facilities (and added benefits from the receding ice shelf) trumps Total’s large exposure to hydrocarbon production in areas more likely to succumb to severe physical climate change risks.

We suggest a hypothetical trade that is designed to benefit from potential crystallisation of risks across a number of factors: projected physical climate change exposures, idiosyncratic/M&A reputational risks, central bank policy support and owner support.

We believe the companies are on similar trajectories when it comes to climate transition in terms of potential impact on credit quality. Note that the trade does not provide additional capital to the oil sector. The trade in its basic format is notional neutral, meaning that it is also carbon-neutral under the assumption of similar carbon intensity for Equinor or Total.

We find that at the current juncture it is extremely hard to make a holistic estimate of oil company emissions, especially in terms of intensity terms.