Sell! Sell! Sell!

Norway’s sovereign wealth fund, the Government Pension Fund of Norway, has proposed to divest of oil and gas stocks from its benchmark equity fund.  The move has been cast as an attempt to insulate the fund from a permanent decline in oil prices.    The final decision on the proposal will be made by Norway’s parliament and, if adopted, would take place over a period of several years.

Norway’s pension managers are not the first to call for a sale of oil and gas interests.  There are a number of large funds that have turned a cold shoulder to the sector, including Waltham Forest, the United Kingdom retirement fund valued at BP735, and the District of Columbia Retirement Board.  What makes the Norway fund decision stand out is that at $1 trillion in value its pension is the largest sovereign wealth fund in the world.   Approximately 6% of its holdings or a whopping $37 billion are in oil in gas interests.

Do oil and gas shareholders have something to worry about in the steady drumbeat of divestitures?

There are those who argue that asset managers are better off engaging with oil and gas companies to find long-term solutions to climate change that could preserve value in the conventional oil and gas companies.  This is the approach taken by two other highly visible assets managers, the California state pension fund CalPERS and the University of Cambridge in the UK. 

This seems to be a prudent and responsible policy.  However, it will only work if oil and gas companies are prepared to engage back.  In May 2016, there were proposals in front of shareholders of both ExxonMobile (XOM:  NYSE) and Chevron (CVX:  NYSE) aimed at addressing the business threats of climate change and thereby transforming the two companies into more sustainable operations.  

ExxonMobile management recommended votes against the four climate-related proposals before its shareholders in May 2016.  One would have put a climate expert on the board of directors.  A second would have required a formal policy to limit global warming to two degrees centigrade.  Two other proposals called for formal reports on the impacts of climate change policies and the impacts of hydraulic fracturing. Management reasoned the company was already covering these topics in its annual Outlook for Energy report, despite the fact that this report is primarily focused on the marketing opportunity and demand for oil and gas products. 

All four proposals were voted down.  Interestingly, a great deal more emphasis was placed on executive compensation at the shareholder meeting at least in terms of management’s presentation.  Of course, ExxonMobile management recommended shareholder acceptance of its compensation plans.

Chevron’s shareholder meeting unfolded in a similar fashion.  Proposals before the company’s shareholders included a plan to adopt targets to reduce greenhouse gas emissions and another to require an impact assessment report on climate change.  Chevron’s management recommended against these proposals and neither was adopted. 

Interestingly, the votes on climate change reports were closer than might have been expected.  The ExxonMobile shareholders voted down this idea by a wider margin with 38.1% for it and 61.9% against the idea.  A surprising 40.8% of Chevron shareholders voted in favor of a climate change report compared to 59.2% against.  The votes suggesting there may be a wave of building interest among shareholders to bring their companies out into the open on climate change and how it impacts the bottom line.

While there is this glimmer of a conscious among oil and gas shareholders, entrenched management teams have a firm grip on strategies that maintain the status quo. In addition to the attempts by shareholders to get their companies to address climate change, there were also proposals before both companies to require reports on lobbying.  Naturally, management of both companies recommended against those proposals and both failed.  Such reports would probably bring to light the extent of lobbying efforts, including potentially efforts to suppress scientific information and to deny the role of fossil fuels in climate change.

It is clear that the major oil and gas companies prefer to work their own books.  This is likely the reality that the Norway pension fund managers have accepted.  So they are working their book with a call to Sell! Sell! Sell!   That is indeed a big headache for the investor on the other side of the trade.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.