Fossil fuel profits, popularity in free-fall
At one point, not that long ago, the fossil fuel sector comprised 15% of global economic activity. Today fossil major’s share of the S&P 500 has shrunk to 2.5%. Although fossil’s share of the world market for energy—hanging tough at about 80% for many decades—has been only marginally impacted by the move towards renewables, other factors are impacting the value of the fossil fuel companies. Greatly reduced oil and gas prices and a glut in production have served to suppress profits for most all of the major producers. Yet, the enduring weakness in oil and gas share value over a much longer term cannot be completely explained except in the context of the growing boycott among investors for shares of oil and gas companies.
The Divest/Invest group reports commitments from 58,000 individuals and 1,250 organizations with authority to invest over $14 trillion to divest their fossil investments and invest in sustainable solutions. The UN Principles of Responsible Investing which believes that Climate change is the highest priority ESG issue facing investors and which works to help investors protect portfolios from fossil fuel risks and encourage their shift to a low-carbon investments, now has over 3,000 investor signatories, who collectively manage over $120 trillion. Even assuming some overlap between these two groups, a sizeable number of professional investment organizations have publicly recognized that fossil fuels are not the future and have begun to divest what they can sell and are working to divest the more illiquid aspects of their portfolios—namely the private equity partnerships that have long provided the financial backing for fracking projects.
On top of these downward price pressures, the Climate Action 100+, the largest alliance of institutional investors with exposure to world’s largest corporate greenhouse gas emitters, is demanding that these companies take action to account for their carbon emissions. They are targeting the top 100 fossil fuel companies, called ‘systemically important emitters’, which account for two-thirds of annual global industrial emissions, plus an additional 81 other adjacent businesses with significant opportunity to drive the clean energy transition, are now under great pressure to accurately report their emissions, their efforts to reduce emissions and the risks to their business models and reserves from climate action.
Seeing the writing on the wall and recognizing that their entire economy was exposed to the risks of declining fossil fortunes, Saudi Arabia, at one time the world’s largest oil and gas producer, made the propitious decision in December 2019 to diversify and try to get liquidity by listing 1.5% of the shares of Saudi Aramco, the Gulf kingdom’s state-controlled oil colossus, publicly. This effort was only partially successful because the royal family was not able to get the company listed on either the London stock exchange or the New York stock exchange and had to list it instead on the Riyadh stock exchange. They then had to pressure Saudi citizens to take the patriotic action of buying shares, which, combined with a sufficient number of external buyers lured by a commitment to protect dividends to them, enabled the Crown Prince to claim victory with a $1.9 trillion valuation, making it then the world’s most valuable company.
While a set of extenuating circumstances, starting with the price war between Saudi Arabia and Russia in early 2020, followed by a precipitous collapse in oil demand due to the Covid-19 pandemic, caused a record 73% decline in second-quarter profits, even Saudi Aramco’s enviably low operating costs cannot protect it from declining value with oil prices below $50 a barrel. The company squeaked out some profit in the second quarter but was nonetheless forced to borrow to meet its $75bn dividend pledge to its new investors. In contrast to Royal Dutch Shell and BP lost $18.1 billion and $16.8 billion respectively. These results will like make fewer and fewer investors consider new investments and even those investors not acting because of climate will be bearish due to declining performance. The industry is already playing a a game of musical chairs, declining revenue, declining numbers of investors, and everyone waiting to see who was gullible enough to be left holding the bag when the big losses are booked from sunk oil and gas reserves that cannot profitably be exploited because the costs are too high.
See more at: The Economist: Profits fall sharply at Saudi Aramco, the world’s biggest oil firm, August 13, 2020.