“Ethical Markets agrees with this call for big oil to stop wasting money in mis-investments increasing fossilized reserves rather than shift to renewable’s as we document on our Green Transition Scoreboard® “Deepening Green Finance” tracking $8.1 trillion of private investments in 2017. We propose that if asset allocators cannot fix their algos fast enough to re-price their fossil risks, they might be able to change these assumptions with a stroke of a pen, justifying keeping these assets in the ground rather than burning them!
~Hazel Henderson, Editor”
Strong oil and gas results should result in capital returns and renewable transition not new production growth
New research by investment experts suggests major shareholders should be requesting greater cash returns from outperforming oil and gas companies, instead of seeing it invested into economically unsound growth projects.
In consultation with over 20 fund managers and oil and gas analysts, ShareAction’s research concludes that with improving profitability and cash flows in the oil sector following strong fourth quarter results, investors’ interests would be better served with extra capital returned to them.
However, as prospects improve, companies like BP and Shell are starting to invest that capital in new projects and growing production. ShareAction and investors seriously question the economic assumptions of these new capital projects targeting oil production growth.
The economic life of these projects will stretch over the next 20 years and beyond, during a period where technological innovation such as new engine technology, regulatory change triggered by the Paris Climate Agreement and slowing energy demand growth in emerging markets will likely see declining growth in oil consumption.
ShareAction’s conclusion echoes Legal & General Investment Management’s warning last month that investors in the oil and gas sector risk “sleepwalking into a period of momentous change” and that the implications of previous energy transitions were often underestimated at the time.
In the light of these changes, investors have a short window of opportunity to challenge oil companies’ current capital investment plans in new production growth and failure to do so may result in destruction of significant shareholder value.
The report, entitled ‘Strategy, Free Cash Flow, and Climate Uncertainty: Where Now for the Integrated Oil Sector?’ has other key actionable recommendations for investors:
• Vote against the reinstatement of scrip dividends in 2018 AGMs. Voting against the scrip dividend would be a strong message that cash, not further shares, should be returned to investors.
• Demand that remuneration committees develop key measures that reward management teams for capital returns and profitability over hydrocarbon production growth.
ShareAction’s call for capital returns does not rule out the possibility of oil companies transitioning to lower-carbon alternatives. However this report does question whether this is in investors’ best interests across the sector. So far, big oil’s attempts at transitioning have been unconvincing and fossil fuel production growth remains at the core of most capital plans. ShareAction believes management teams need to demonstrate which transition pathway is most suitable for their business – capital returns or renewable transition.
The final recommendation suggests supporting the forthcoming climate resolution at Shell’s 2018 AGM (filed by a coalition of Dutch investors and coordinated by Follow This). By supporting the resolution investors can send a strong message to Shell and management teams across the sector that the time for business as usual is drawing to an end and the economic assumptions underpinning growing production into the future have to be challenged. ShareAction’s research into voting patterns by institutional investors on US climate resolutions – notably Exxon and Occidental – shows investors are increasingly willing to vote in defiance of management of climate related issues.
Toby Belsom, Head of Research at ShareAction and co-author of the report, says: “BP and Shell are in a much better position now since the oil price crash in 2014. On the doorstep of AGM season and with strong full-year results just in, there’s no better time for shareholders to ask the board to prioritise greater returns over unsustainable growth based on further exploration for fossil fuels. We fully expect investors to take this request to their meetings with the companies in the coming months and will be monitoring their engagements closely.”
Andrew Howard, Head of Sustainable Research at Schroders, says: “Encouraging capital into climate solutions on the necessary scale has attracted a lot of attention from policymakers and environmental groups and, while plans are typically ambitious, tangible action remains more elusive. If oil companies are not capable of instigating real substantive investment in areas that will create value in a carbon-constrained world, then shareholders might be better served if that capital is returned to investors. While climate change presents obvious challenges to fossil fuel producers, capital discipline in the face of shrinking demand could yet create value for shareholders”
Peter Michaelis, Head of Sustainable Investing at Liontrust, says: “For decades the oil industry has been defined by its cyclical nature – underpinned by growing global demand. Now we can see that a structural decline in demand is much more likely in the coming decades, this will drastically alter the return on capital investments made today. The burden of proof has to fall to the integrated oil companies to demonstrate that in a carbon-constrained world with rapid growth of substitute technologies (renewables and electric vehicles) they can continue to generate strong returns on investments made today. This paper clearly articulates the proof that shareholders should be demanding.”
Dr. Matthew Kiernan, Chief Executive, Inflection Point Capital Management, says: “This is a balanced, well-reasoned, and timely clarion call for investors to ask some tough strategic questions of the executives and boards of hydrocarbon companies being considered for investment. The tectonic changes in the global energy value chain and the imperatives of fiduciary responsibility demand nothing less.”