BHP and Woodside Energy Announcements

There were announcements this morning (30/8/2022) from BHP Group (BHP) and Woodside Energy (WDS). Many BHP shareholders will also hold Woodside following the merger of the BHP oil/gas operations into Woodside. I continue to hold both having decided that now was not the time to exit a major gas producer. Institutional investors who wanted out of the sector due to their focus on ESG will surely have been regretting it.

Woodside announced half-year results and their Underlying Net Profit After Tax was up 414% on the prior half year. Obviously there was a positive impact from the merger but the major impact was from higher realised prices for their products which more than doubled to $96.4 per barrel of oil equivalent. If your home heating bills are going up, you can see why! Worldwide gas prices have risen mainly due to the reduction in supplies from Russia after the invasion of Ukraine.

Some 70% of Woodside’s portfolio is in gas production and they continue to invest in new gas developments. But they are also now investing in hydrogen production and carbon capture and storage. You can see a presentation from their CEO on the results here: https://webcast.openbriefing.com/8864/player/?player_id=48929

The announcement from BHP was about three requisitioned resolutions that will be put to the Annual General Meeting. All three are advisory resolutions related to ESG aspects. Resolution 1 simply allows shareholders to express an opinion which is probably harmless.

Resolutions 2 and 3 are more problematic. Resolution 2 requests that the company proactively advocate for Australian policy settings that are consistent with the Paris Agreement objective of limiting global warming to 1.5 degrees C. Resolution 3 ensures reporting against the objective of Resolution 2.

I shall be voting against the latter 2 resolutions because there may be no direct connection between the company’s operations and the Paris Agreement to limit carbon emissions. Australia can limit carbon emissions by law if it considers it necessary to do so and in any case a substantial proportion of Woodside’s operations are outside Australia.

Resolution 2 attempts to impose an obligation on the company to interfere in what are political matters in Australia and hence I consider it as unreasonable. It is also unreasonable because more gas production might offset the use of coal for power generation and hence be beneficial in reducing carbon emissions. In reality these resolutions might be impossible to implement in any sensible way.

In summary these resolutions seem to be more about posturing on environmental commitments than practical objectives that the company could implement. They are attempting to force the management to make decisions on what may be best for the business.  

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Energy Security Bill and the Next Prime Minister

Yesterday the Government introduced the Energy Security Bill into Parliament. It is good to see that the Government continues to function after the recent political upheavals, but would it not be good to get back to some normality as opposed to the recent dramas?

The new Bill aims to:

  • Boost Britain’s energy independence and security.
  • Attract private investment, reindustrialise our economy and create jobs through new clean technologies, as well as protect consumers.
  • Introduce new powers to help prevent disruption to fuel supply because of industrial action, malicious protests and on grounds of national security (comment: surely to be welcomed).

See https://www.gov.uk/government/news/plans-to-bolster-uk-energy-security-set-to-become-law for details.

It includes new powers which will enable the extension of the energy price cap beyond 2023, shielding millions of customers across the country from being charged “unfair” prices as they call it. Or to put it another way – to protect consumers from the real world of market prices and hence making it uneconomic for some companies to operate in this sector. This is surely not a very “conservative” approach!  There are better ways to subsidise household fuel bills.

The clear objective is to reduce reliance on imported oil and gas and encourage offshore wind farms, nuclear power generation and other infrastructure that we need to achieve carbon reductions although the growth of nuclear is still at a snail’s pace. It is certainly worth reading the document on the Bill’s contents and the associated British Energy Security Strategy mentioned in it.

Let us hope that any new Prime Minister does not get the job by promising more tax cuts. It’s clear that Government expenditure is rising by commitments in the Energy Security Bill for example and in many other areas when what is really needed is reducing the amount of our wealth that is spent by the Government. In the last couple of years we have had a quasi-socialist economy with more willingness to interfere in the economy by the Government. But civil servants consistently back the wrong horses.

What the country really needs is a period of stability under a competent leader who everyone can support. That is the way forward for a good business environment which will instil confidence in investors, particularly ones overseas.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Is ESG Mania Out of Hand?

This week the mania for Environmental, Social and Governance (ESG) issues in companies appeared to get totally out of hand. ESG is a ragbag of policies that companies like to support to show how socially aware they are and are in keeping with the times and the mood of the public. Here are a couple of examples of this mania:

A report by Cliff Weight on the Tesco AGM noted this response to a question: “Are you plainly making a token gesture to climate change? Answer. We have >350 people working on these issues. We are very conscious of our responsibilities”. What exactly can these 350 people be working on? It seems a ridiculously high figure even allowing for the fact that Tesco has about 2,700 stores in the UK. The cost of 350 people must be high and these people are simply an unproductive overhead which all good businesses try to minimise. They are not adding to sales or making the business more efficient.

I also read the Annual Report of Speedy Hire – all 212 pages of it printed on heavy paper to add to our postman’s load. For a company that is in the business of hiring out tools and equipment they found it necessary to spend 2 pages on ESG issues and how they are reducing carbon emissions by converting to electric or hybrid vehicles. Their new “innovation centre” depot in Milton Keynes is powered by 670 solar panels and is also “home to a wellbeing and wildflower garden, an 18-metre living wall and beehives made from repurposed hard hats”.

The Report also says: “Speedy has long been committed to sustainable growth and recognises the increasing stakeholder focus on climate change and the related environmental, social and governance considerations within its business. A new Sustainability Committee of the Board has been established to assist the Board in its oversight of the Company’s ESG strategy and support the Board on all sustainability matters. This will include supporting the Board’s ongoing evaluation of environmental risks and our reporting under the Taskforce for Climate Related Financial Disclosures”. So that’s more unproductive effort to divert the attention of management.

These are typical examples of what every Annual Report of public companies now contain with companies keen to demonstrate that they are in the vanguard of a social revolution. But does it really help to improve the returns to shareholders?

A report in the FT suggests there is some reaction against this mania with an article headlined “Shareholders back away from green petitions in US proxy voting season”. The article suggests shareholder resolutions on ESG issues are being defeated, particularly those that impose prescriptions on management although there is more support for improved reporting.

Perhaps if we are heading into a recession as some people believe, we may see a reduction in this needless expenditure of money and management time on unproductive issues.

Note that I hold no shares in Tesco or Speed Hire at the present time.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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A Great Article from Matt Ridley on Global Warming

Matt Ridley has issued a great blog article on “How Global Warming Can Be Good For Us”. The author of many books on science which are all worth reading, he argues in his latest article that global warming is real, but so far it is mostly beneficial. The biggest benefit from emissions is global greening as forests expand and more rainfall means more land can be cultivated. But there are several other advantages which are ignored by the prophets of doom and popular media who prefer to report only bad news.

For a more balanced view of the problem, read the article here: https://www.rationaloptimist.com/blog/how-global-warming-can-be-good/

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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How the World Really Works – Book Review

It is important for investors, and indeed for everyone, to understand what factors are driving the world’s economies. This is particularly so when there are concerns about global warming and the alleged degradation of the environment as the world’s population continues to increase.

A good primer on this subject is a recently published book by Prof. Vaclav Smil entitled “How the World Really Works”. The author covers wide ranging topics from energy supply to food supply in a very analytic way based on established facts rather than polemics which he criticises as being far too common in the modern world.

His chapter on food production is particularly interesting and he shows how we now manage to feed 8 billion people reasonably well which would have been inconceivable 100 years ago. How do we do it? By using energy supplied mostly from fossil fuels to create fertilizers and by manufacturing farm machinery and road/rail/shipping transport to distribute the products efficiently. The author points out that if we reverted to solely “organic” farming methods we would be lucky to feed half the world’s population.

He covers the supply of key products such as steel, plastics and cement which are essential for our modern standard of living and how they are not only energy intensive in production but that there are few alternatives. He clearly supports the view that the climate is being affected by man’s activities but points out that the changing of energy production, food  production and the production of key products cannot be easily achieved. Certainly it will be difficult to achieve that in the timescales demanded by European politicians when the major carbon emitters of China, India, USA, and Russia are moving so slowly.

Meanwhile any forecasts of the use of oil declining or reserves running out should be treated with scepticism as the price of oil reaches a 7 year high of $95 per barrel. Perhaps investors in oil companies (I hold none) should not be too keen to exit the sector rapidly particularly as the book teaches you that forecasts of economic activity are notoriously difficult.

The author looks at the risks in the future for the world, many of which are uncertain. He mentions the risk of a big “Carrington event” – a geomagnetic storm occurring today would cause widespread electrical disruptions, blackouts, and damage due to extended outages of the electrical grid. If that is not enough to scare you he suggests that another pandemic similar to Covid-19 is very likely as such epidemics have happened about every 20 years in the past and might be more virulent in future. But planning for such events, which were historically well known, was minimal and continues to be so.

He does not propose solutions to global warming other than that we do have many tools to enable us to adapt and cope with the issue. For example, farming could be made more efficient and wasted food reduced. Electrification of vehicles might help in a minor way and he is particularly critical of the increase in the use of SUVs in the last 20 years which has been particularly damaging (I cannot but agree with him on that point). But this is not a book containing simple remedies to the world’s problems. It is more one that gives you an understanding of how we got to where we are now and where we might be going.

For example, the use of coal in energy generation can be much reduced, and oil/gas also to some extent. Nuclear fission is a good source of clean energy and fission is a possibility even if he was not aware of the latest announcements on the latter. But it is inconceivable that there will be short-term revolutions in energy supply.

Altogether the book is worth reading just to get an understanding of how the world currently works – as the book’s title suggests.

Incidentally some of the events covered in How the World Really Works are also discussed in my own recently published book entitled “A Journal of the Coronavirus Year” which covers not just the recent pandemic but the changes that have happened in the last 75 years of my lifetime. It’s now available from Amazon – see https://www.amazon.co.uk/Journal-Coronavirus-Year-2020-2021-Biographical/dp/0954539648/ for more information.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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The Death of Coal Mining and the Nuclear Alternative

Boris Johnson has said that the Glasgow climate deal is a “game-changing agreement” which sounds “the death knell for coal power”. Let us hope so. My father worked down a pit in Nottinghamshire in his early life and was all for replacing coal power stations by nuclear power. Coal mining is not just a great creator of pollution but is also positively dangerous for the miners.

China is one of the largest consumers and producers of coal and in 2019 there were 316 deaths of coal miners in that country. That was an improvement on previous years but it is still a horrific number.

Nuclear power is considered to be dangerous by some people but in reality it is remarkably safe. For example the Fukushima event in Japan in 2018 only directly caused the death of one person. For a very good analysis of the safety of various energy sources go here: https://ourworldindata.org/safest-sources-of-energy

One problem with nuclear power is that it tends to be produced in plants that have very high capital costs and take many years to build. They are also vulnerable to faults when in operation. This often results in very expensive costs in comparison with coal or gas. But that might be solved by the development of small modular reactors (SMRs) where Rolls-Royce (RR.) has a potential technology lead from their experience in building nuclear reactors to power submarines.

They have recently obtained more funding from the Government and from partners to develop this business – see the Rolls-Royce press release here:  https://www.rolls-royce.com/media/press-releases/2021/08-11-2021-rr-announces-funding-secured-for-small-modular-reactors.aspx

Will that enable Rolls-Royce to recover from the dire impacts of the Covid epidemic on its aero engine business? Perhaps but not for some years in the future I would estimate. Developing new technology and new production methods is always vulnerable to hitches of various kinds which tends to mean that it takes longer than expected.

There are of course alternatives to nuclear power such as wind power, hydroelectricity and solar. But wind power is intermittent thus requiring investment in big batteries to smooth the load and in the last year there was less wind that normally expected in the UK. This has impacted the results of companies such as The Renewables Infrastructure Group (TRIG) and Greencoat UK Wind (UKW).

Which technology will be the winner in solving the clean energy problem is not at all clear but I would bet that coal is definitely on the way out for electricity production although it might survive for use in steel manufacturing. UK coal fired power stations are scheduled to be closed down by 2024 and already the UK can go for many weeks without them being in operation.

Whether you accept the Government is right to aim for net zero carbon emissions by 2050 or not, we must surely all welcome the replacement of coal power generation by other sources.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Crown Place VCT AGM Report and AIC Survey of ESG Interest

I attended the Crown Place VCT (CRWN) Annual General Meeting today via the Hopin platform. This worked well with no technical hitches.

I have held the shares in this company for a very long time. It was one of those VCTs with a difficult history originally when it was formed from three Murray VCTs. After Albion took over management it has had a good track record. Total return in the last 5 years has been 14.0%, 14.6%, 11.2%, -0.6% and 15.9% last year.

Emil Gigov, representing the manager, gave a useful presentation. Like some other VCTs I hold, it has been focussing on late on software, fintech and digital health companies which now comprise 77% of the portfolio (excluding cash) and has been selling off its asset-based investments such as care homes. It is holding a large amount of cash in the portfolio (35% of assets) and this raised a question from the audience. Why so much cash? Answer was primarily because they need to keep that to exploit future opportunities, particularly follow-on investments to existing holdings.

I asked a question which I submitted in writing during the meeting which was: “What do you think of the Chancellors announcement that all listed companies will have to state how they expect to achieve net zero, enforced by regulation?”. But I did not get an answer.

All resolutions were passed with over 90% of support. In summary there seemed to be no contentious issues at this VCT and charges are reasonable (although raised to 2.6% of assets last year due to a big performance fee).

Note that an interesting aspect on the question I posed was revealed in a survey that the AIC has published of private investors. This is what it said: “When asked what was important to them in choosing an investment, respondents ranked ESG as the least important of five factors. Among all respondents, the most important consideration was an investment’s performance record, followed by fees and charges, the fund manager’s reputation, and the asset management company’s reputation.

But one female respondent aged 59 said: ‘In my personal life I do give consideration to these things, I drive an electric car, I have a plant-based diet, I definitely have quite strong feelings about that – but hand on heart when it has come to my investments, the first thing I would look at is returns.’

ESG is more important to women than men, and more important to investors under 45 than those over 45”.

The AIC don’t give the actual numbers who responded so as investors tend to be male and over 45 perhaps this affected the outcome. Such investors are less likely to adopt extreme life styles I suggest.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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COP26, Regulatory Arbitrage and Greenwashing

COP26 finished last week and many readers may have lost interest in the issues it discussed long before it closed. There is just so much one can take from the scaremongers of global warming when most of us have more immediate concerns about health and wealth. But there was one announcement by Chancellor Rishi Sunak that could be seriously damaging to your wealth in the next few years.

This was his announcement that the UK will be the world’s first net zero financial centre. This will not just be political gestures but he is proposing the following to quote from his Treasury statement: “Under the proposals, there will be new requirements for UK financial institutions and listed companies to publish net zero transition plans that detail how they will adapt and decarbonise as the UK moves towards to a net zero economy by 2050”.

“To guard against greenwashing, a science-based ‘gold standard’ for transition plans will be drawn up by a new Transition Plan Taskforce, composed of industry and academic leaders, regulators, and civil society groups”.

In other words, this will not be another “greenwashing” exercise but impose specific obligations on companies. The fact that meeting net zero carbon is an impossible task for many companies in any realistic timescale it seems is likely to be ignored. Even attempting to meet that target will impose enormous costs on companies even those who are not big generators of carbon emissions. If you extend it to Scope 3 emissions (those include all indirect emissions that occur in a company’s value chain) then the reach will affect all sectors of the economy.

This will certainly put the UK in the lead in the attempt to restrict global warming whether you believe it is practical or not. But if such regulations are introduced in the UK one can imagine exactly what will happen as it seems unlikely that other major economies will follow that lead. China, the USA, Russia and India are very unlikely to impose such draconian measures. As many UK listed companies have an international focus they have no great need to be listed in the UK. They could just as easily be listed in the USA or other countries with more friendly or easy-going regulatory frameworks.

You might think this is just an attack on oil/gas and mining companies but it will have a much wider impact in reality. For example, one of the big consumers of oil are ships transporting goods around the world so anyone importing products for sale, such as retailers, would need to persuade the shipping companies to avoid using oil.

One thing is certain. Companies such as BP and Shell may simply consider that it is easier to move their listing to another jurisdiction or accept a bid from a private equity player who does not have concerns about their environmental credentials.

This is what Jeremy Warner had to say in the Daily Telegraph: “However much we might wish it otherwise, oil and gas will long remain our primary source of life enhancing energy. And yet the industry is being driven underground by politicians and regulators too cowed to stand up to the hysteria of the climate change activists. The enemy within is almost as bad as the holier than thou pressures from without; oil company boards, together with those of their bankers, are these days stacked with well meaning do-gooders more focused on bowing to the campaigners than the demands of shareholder value”. If you are a shareholder in BP or Shell (I am not) you may sympathise with such comments.

Such moves of listing may already be evident from the decision of BHP to move to a single listing in Australia rather than the dual listing at present.

Unfortunately with such companies being the bedrock of the dividend paying FTSE-100 companies there are few alternatives for some investors such as big pension funds to choose.

Personally I have been investing in alternative energy generating companies and battery companies because the latest announcements from the Government tell me that the hysteria over achieving net zero is now so widespread that it will have a big impact on the financial world. In addition the Government plans to spend many billions of pounds in financing green initiatives and not just in the UK. We have already contributed £2.5 billion as the biggest donor to Climate Investment Funds. Such funding imposes a heavy burden of taxation which will add to the above woes of companies domiciled in the UK.

The irrationality of the general public over climate change in the UK has no bounds. For the last 30 years the young have been taught in schools an extreme agenda which has also been promoted by the national media, particularly the BBC, and politicians are now pandering to the mood of the public. This scenario is going to make the UK a poor location for investment funds in comparison with other countries. Private investors should surely rebalance their portfolios to have less emphasis on the UK. At least that is the case while the mania continues.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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