Amidst Escalating Costs, The Value Of Energy Assets Is Underestimated

In the current economic climate, the book values of energy and infrastructure assets are significantly underestimated. Several factors—soaring costs of raw materials, strained supply chains, labor shortages, and increasing prices for new equipment—have converged, creating a scenario where industrial assets cannot be realistically replaced or replicated without substantially higher costs.

This creates two unique dynamics. The first is that existing asset footprints are likely worth far more than investors currently estimate, and the costs associated with duplicating or competing with these asset footprints likely reduce competitive pressures from new entrants. The second is that the future capital needs of these companies, particularly those with older assets, are likely underestimated.

The costs for critical raw materials, such as steel and aluminum, continue to rise. Since these materials are foundational to the construction and maintenance of oil and gas and infrastructure assets, their escalating costs directly inflate the value required to replicate existing infrastructure. Steel prices, for example, surged dramatically due to constrained global supply chains, heightened tariffs, and geopolitical tensions. Aluminum prices have similarly risen, driven by higher energy costs and supply chain disruptions. These heightened material costs have yet to be fully reflected in current asset valuations, implying a gap between existing book values and the realistic replacement costs of these industrial assets.

Secondly, labor costs have increased in recent years. Historically, labor-intensive sectors, such as construction, infrastructure development, and industrial asset maintenance, benefited from the availability of low-cost labor. Now, with stricter immigration enforcement, combined with demographic shifts and skilled workforce shortages, labor costs across North America and Europe are on the rise. This ongoing labor market transformation means existing assets hold greater intrinsic value, as reproducing these assets today would entail considerably greater expenses. This is especially true for the energy and infrastructure companies that deliver most of their value through physical assets, such as pipeline companies or oil sands companies, which require additional upfront infrastructure investment.

Thirdly, post-COVID-19 economic dynamics have led to significant increases in new equipment pricing, driven by persistent supply chain disruptions, inflationary pressures, and sustained tariffs imposed on Chinese manufacturers. Supply chain bottlenecks and shortages of critical components—such as semiconductors and specialized machinery—have further driven up prices, highlighting the substantial gap between current book values and genuine replacement or reproduction costs.

All of this is before the climbing costs of permitting that are incurred for new projects. “On one of our current projects, the permitting costs alone are twice as much as what we’re spending on the pipe itself. And that’s if everything goes well—if there are no legal battles or delays. The risk of spending hundreds of millions of dollars on a project that could be halted due to regulatory challenges raises the cost of capital and, ultimately, costs for consumers,” said Williams CEO Alan Armstrong. With the rapid growth in infrastructure project regulations over the past decade, the resulting extended timelines compound these climbing costs. Companies now find themselves buying more expensive equipment, with a higher cost of capital due to perceived project execution risk, and then having the project take longer which extends the impact of these carry costs.

Given these combined pressures—material inflation, heightened labor costs, and escalating equipment expenses—the industrial asset sector faces a significant recalibration of asset values. Standard accounting practices based on historical cost and depreciation schedules currently understate the actual replacement cost of legacy investments. This is likely an underestimated tailwind for asset-heavy companies and will be a barrier for high growth entrants. The result is likely to be growing returns to incumbents and a desire among incumbent operators to extend asset lives. Oil and gas historically returned its cost of capital since new entrants were able to enter quickly. Returns are now starting to climb and are expected to continue doing so, now that many assets can no longer be reproduced cost-effectively.