COP, the biannual UN climate change conference which this year took place in Glasgow, has just ended. I do not wish to comment on the outcome ‒ as usual, it was too little too late, but the best we could hope for. The party was joined by heads of state (some making their presence ominously felt by their absence), government officials and captains of industry, thronged by innumerable NGOs and attention-seeking celebrities.
The only VIPs not invited were the big oil companies. Fossil fuels are, of course, the main cause for our rapidly eroding environment and it might have felt too awkward, like inviting the school bully who never graduated to the prom. But it’s wrong, even hypocritical.
While COP was meeting, the US shuttled to Saudi Arabia to urge the OPEC oil cartel to boost production; the EU asked Russia to please deliver more gas; and conference host Boris Johnson pleaded with Qatar to be the UK’s supplier of last resort. Instead of appreciating the fact that oil and gas is pricing itself out of the energy mix, politicians are highly aware that unaffordable heating bills risk their electability. The Yellow Vests in France were proof that energy transition has to be digestible. The inflationary pressures we suffer from today’s high energy prices are taxing.
The transition to clean energy involves mining, manufacturing, transport and installation processes which are energy-intensive and dependent on traditional energy sources. Clean energy solutions do not build themselves. While we hope for electricity-powered economies exclusively based on renewable energy, we still have to build this saving future with the tools and expertise available today.
Externalities have to be costed. Environmental degradation cannot be free. Emission trading and carbon taxes will help to nudge producers and consumers in the right direction. But these costs should be lightened with support for low income groups, money and technology transfers to emerging market countries. It should involve Big Oil.
However, Environmental, Social and Governance (ESG) investing ‒ the idea to punish companies for their societal and environmental misdeeds by refusing to fund them ‒ has singled out oil companies as a prime target. Institutional investors like pension funds or sovereign funds try to do the right thing by divesting of oil companies. Banks by the same token are pledging to abstain from financing them. This is understandable if one thinks how for years companies like Exxon Mobil have lobbied against climate science.
Yet many oil majors have come around, pressured by shareholders and public opinion, and started to invest in electrical charging networks, solar installations and wind farms. They try to clean up harmful production by curbing methane emissions, turn their back to tar sands and accept that to reach net zero emissions by 2050, existing oil reserves cannot be extracted in full.
Cautioned by the oil price collapse but also motivated by shareholder demands, many big oil companies forwent large-scale investments in new fields, a contributing factor to today’s soaring energy prices. But even if we dismiss their newfound piety, we still buy their fuel, because we have to. We cause their profits, we are their raison d’être. We should bully them to invest their now outsized gains into sustainability rather than share buybacks
To go green is costly. Necessary finance has to come from donors and the cash rich- Andreas Weitzer
The idea of ESG divesting assumes that we sell our shares and nobody will own them anymore – a contradictory proposition. Taken to extremes, a heavily subdued share price will provoke someone to take the enterprise private. It’s a money printer, after all. It will then operate in private, outside public scrutiny. If such ESG strategy ‒ against all likeliness ‒ really succeeded and the oil company went belly up, unsavoury state producers like Russia, Iran or Saudi Arabia will happily step in.
It looks tempting to only invest in companies with superb green credentials, like all those new technology giants that cannot be bothered with the dirt of extracting industries they rely upon for their components and all the green energy they gobble up to the detriment of households and heavy industry.
Turning green has to embrace the whole value chain, with easier gains for the environment to be made with today’s laggards, particularly in developing countries still dependent on coal. To go green is costly. Necessary finance has to come from donors and the cash-rich ‒ perhaps a more honourable investment than flying to Mars or offering joy trips into space.
I thought long and hard about selling all my oil shares. Not only because of a sense of guilt – how dare one profit from the destruction of our planet – but also because all this ESG-morality-investing has resulted in a sluggish performance of my oil stocks for many years, irrespective of the oil price.
Right now, when supply deficits threaten to last and OPEC refuses to open the taps more aggressively, and the oil price therefore rockets, the share price of most oil companies I have invested in ‒ despite their prodigious money-making ability ‒ is still lower than five years ago.
No matter how much oil companies earn, no matter how cheap they are when measured against their cash flow ‒ and they really are, with price/earnings of yesteryear ‒ over the years their shares will wither. This is not because the market anticipates their sell-by date, or discounts their shortened future ‒ but because their story is dirty and not as germ-free as Tesla’s. This is why value investing sucks.
To illustrate: I have just sold a parcel of BP shares. I bought them last year, anticipating that recovering from the pandemic they might earn me some money. At the same time I was sitting on a bunch of BP shares acquired long ago, I don’t even remember when. The new parcel earned a bid of money, admittedly, but the shares I owned already for many years are still under water. Despite a gain of 80 per cent over the last year, a dividend of 4.7 per cent, a P/E of 14 and a price to sales ratio of 0.71, I am still saddled with -20 per cent. You see what I mean?
One can argue that BP has suffered more than its peers from the 2020 lockdowns when the oil price briefly even turned negative. As a consequence, BP is still suffering losses, despite its boastful self-reference as a “cash machine” (CEO Bernard Looney in a recent interview). But other oil companies in my portfolio, like Shell and ENI, have hardly fared better. There are exceptions: Total or Chevron, for instance.
Total, the French oil major (€115 billion market cap), a model among peers, has gained at least a meagre 2.27 per cent over five years. With profit margins of 9.45 per cent, a dividend of 6.08 per cent and a P/E of 12.
Compare this to the EV maker Tesla ($1.2 trillion market cap), which has gained 3,140 per cent over five years at the time of writing. Its share price equals 25 years’ sales and 393 times earnings – almost 400 years’ income. This is not to suggest we should be buying Tesla. It is to show how old and small big oil has become; and how we always tend to tell the wrong story at the wrong time.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com