Woodside Energy Results and Climate Report

Woodside Energy (WDS), an Australian gas and oil producer, issued their results this morning. I hold some shares in the company as a result of my holding in BHP when WDS acquired their oil interests.

The financial results were very positive helped by “realised prices” for their products increasing by 63%. They are continuing to expand production so as to meet demand.

Alongside their results they issued a 65 page “Climate Report” which explains what they are doing to control carbon emission. This is similar to other reports produced by major oil/gas companies and attempts to justify their actions in the face of those who would like to see all oil/gas production shut down.

This is what their CEO had to say: “As we have seen in the wake of the invasion of Ukraine, significant volumes of gas and other fossil fuels cannot simply be removed from our energy systems without consequence, let alone be switched off altogether overnight.

We need all options on the table if we are to successfully change the way we produce and consume energy and limit global temperature rise.

Energy security and the energy transition therefore should not be seen as alternatives. It is increasingly clear that they both require effective management and substantial investment.

In the Asia Pacific region, major economies such as Japan remain clear that they need Australia to continue as a secure, affordable supplier of energy, including liquefied natural gas (LNG). Investment in new LNG supply can help meet demand at affordable prices. And LNG can help Asia to decarbonise, for example by replacing coal, supporting renewables, and in hard-to-abate uses.

There have been reasons for optimism during 2022. The energy crisis has not deflected the world’s resolve to meet the goals of the Paris Agreement, which were reaffirmed at the Sharm elSheikh climate summit in November. Major economies introduced supportive new policies, such as the United States’ Inflation Reduction Act, and Australia legislated its climate targets.

But this is not uniform. The public discourse on the energy transition can be polarised and ideological, particularly in Australia. We believe this is to the detriment of careful analysis of climate science and delivery of practical solutions. We seek to rebalance this through this report and our broader advocacy”.

Comment: This seems eminently sensible and I will be happy to support the company’s position on this. I am likely to continue holding the shares while many institutions dump them in the face of ESG concerns.

On another subject, the FT has today reported that City of London Minister Andrew Griffith has attacked the impact of the Financial Conduct Authority’s consumer duty measures. He suggests that it could damage the sector and trigger a wave of spurious lawsuits.

I agree and said it was a complete waste of time and would add substantially to the costs of financial services firms which they would pass on to consumers. See my consultation response here: https://www.roliscon.com/Consumer-Duty-Consultation-Response.pdf

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

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Warren Buffett’s Letter to Shareholders

Warren Buffett has published his latest annual letter to shareholders in Berkshire Hathaway. As usual it contains several words of wisdom on investment and I’ll pick out a few interesting points:

He does not believe in efficient stock markets and says: “It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. Efficient markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.

He relates how his capital allocation decisions and stock picking have been “no better than so-so” offset by a few good decisions and good luck. He emphasises this lesson for investors of holding on to your winners but selling your losing investments: “The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well”.

Buffett justifies share buy-backs which Berkshire did in 2022 as did some of their investee holdings. He says: “The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases”.

Comment: Management often have a strong incentive to advocate share repurchases as their incentive schemes are often based on earnings per share. Also they think it might help the share price. I frequently vote against share buy-backs because there are usually better ways for a company to use any surplus cash. Buffett may be one of the few people who can rationally value the benefit of share buy-backs and can be trusted to act in the interest of shareholders.

Charlie Munger, Warren’s partner and aged 98 has some interesting comments on railroads (they own BNSF). He says: “Warren and I hated railroad stocks for decades, but the world changed and finally the country had four huge railroads of vital importance to the American economy. We were slow to recognize the change, but better late than never”. As railroads are a natural monopoly because it’s very difficult to build new ones, one wonders why British railways consistently lose money while BNSF is very profitable. Management is surely the difference.

Warren continues to “bet on America” but the key message is invest in companies that can grow and compound their earnings and then have patience.

Full Newsletter Text: https://www.berkshirehathaway.com/letters/2022ltr.pdf

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

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FCA Sloth on Woodford Funds Compensation

The Financial Conduct Authority (FCA) have published a statement on what is happening on obtaining action and compensation from Link Group over the demise of the Woodford Funds.

They state: “Update on potential enforcement action against Link Fund Solutions. We are in advanced confidential discussions with Link Group and LFS to determine whether the FCA’s proposed enforcement action against LFS can be resolved by agreement. To assist a potential resolution, the FCA has provided time for Link Group to realise assets, including Link Group held assets, to meet the FCA’s concerns”.

See full announcement here: https://www.fca.org.uk/news/statements/update-potential-enforcement-action-against-link-fund-solutions

Comment: The Woodford Equity Income Fund was suspended in 2019 when it became apparent that the fund’s holdings were way too illiquid and could not meet likely redemption requests. It has taken over three years for the FCA to enforce any action against Link who were allegedly responsible for failing to regulate the fund managers.

The wording of the announcement hardly suggests a vigorous action to force Link to pay compensation to investors and soon. The FCA is too slow and ineffective as usual. Why should they be seeking “agreement”? They should be laying down the law to force compensation. It could be another few years before this is resolved while many elderly investors might actually die in the meantime.

Note: I have never held an interest in any Woodford funds. I would advise those who did to register with the ShareSoc campaign for legal action. See: https://www.sharesoc.org/campaigns/woodford-campaign/ . Relying on the FCA is pointless.

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

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Digital IDs – Do We Need Them?

The Government is consulting on the creation of a centralised digital ID gateway to online public services. The idea is that people will only have to provide the details needed to, for example, renew their passport, once. From then on all the public authorities they deal with will know who they are because the data initially submitted will be visible to all of them.

But there is a very long list of public bodies who will be able to share the data. The long list of public bodies that will have access to personal information can be found at the end of the consultation documents under Annex 4. It includes HM Revenue and Customs, the Land Registry, the Disclosure and Barring Service, the Home Office, departments for Work and Pensions, Justice, Education, Levelling Up, all Councils and the major regional authorities.

Potentially enormous numbers of people will have access to the information which is surely a potential security risk.

This consultation closes on the 1st March so you need to respond quickly if you have an interest in this matter. Click on the link below for more information and to respond.

Government consultation: https://tinyurl.com/mrtrefzk

Comment: The creation of digital IDs for all UK citizens has many advantages and if properly done might actually improve security. But the proposed legislation appears to enable data sharing much too widely and without adequate protections.

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

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FCA on Getting to the Gamers

On Friday the Financial Conduct Authority (FCA) published a fascinating article on the views of people on the risks of investment offers under the title “Getting to the Gamers”. It included these comments:

“Consumers can now easily invest in high-risk investments. Some of these promotions use popular ‘gamification’ techniques to encourage people to participate. Gamification uses elements of game playing, like score-keeping, competition and league tables, to encourage people to take part. High-risk investments can be a valid part of well diversified portfolios, but we are concerned that many investors don’t recognise all the risks involved”; and:

“First, we had to find out more about these investors, what attracts them to these offers and where they see them. Our research found they tend to be aged 18-40 and are often driven by emotional and social factors. They enjoy the ‘thrill’ and feeling of ‘being an investor’. 78% said they relied on their gut instincts to tell them when to buy and sell. 

But nearly half of them – 45% – didn’t realise that losing money was a potential risk of investing, and over 60% relied on social media when researching investments. They were also disproportionately attracted to offers and platforms that used gamification”.

See FCA article here: https://www.fca.org.uk/about/getting-gamers

Comment: it is certainly plain to see that in the last few years a lot of new investors have been attracted into stock market investment. They have never been through a bear market and their perceptions of risk are therefore inadequate.

What can the FCA or anyone else do about this? Encouraging investors to get some experience before making big bets on shares is one thing to do and more education before they even start to invest are surely the things to look at. Some education should be a pre-requisite before being allowed to invest in the stock market.

Warnings about reading or listening to social media posts on investment topics would also not go amiss and tougher regulation in general of investment web sites would help.

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

Segro Results, BP Acquisition and Boltholes in Portugal

Segro (SGRO), a property company with large warehouses, issued their final results this morning. Adjusted profit was up 8.4% but IFRS earnings per share were down substantially. This curate’s egg of results arose because the assets were revalued down by 11% to reflect the general fall in commercial property valuations particularly in the second half of the year, while rental income was up by 18.9%.  Rental income rose due to strong like-for-like rental growth (a 23% average uplift on rent reviews and renewals) and development completions. The full year dividend is increased by 8.2%.

Comment: These results would look really good if the fall in the value of their properties was ignored. They have no control over the latter of course which are affected by macroeconomic conditions, the cyclical nature of property investments and investors’ general view of commercial property which is very negative as other assets such as offices and retail have declined while interest rates have risen. The market has responded positively to these results after an initial hiccup. For the longer-term it’s starting to look very positive.

Energy company BP (BP.) yesterday announced they were acquiring TravelCenters of America for $1.3 billion. TravelCenters operate a network of EV charging points in the USA.

BP is paying about six times Travelcenters EBITDA and their share price rose by 71% on the news. BP is also planning to invest $1 billion in electric vehicle charging across the USA by 2030. This is part of BP’s five “transition growth engines”.

As a shareholder in BP, this looks a sensible investment and is a rebuttable of those who say big oil companies are not doing enough to move away from oil.

Tesla is also expanding its charging network and making it accessible to other vehicle makes. The electric vehicle revolution is clearly accelerating in the USA partly due to US government encouragement.

The bad news today for wealthy investors was that according to the FT Portugal is scrapping its golden visa scheme that gives non-Europeans the right to claim residency in return for investment. With Portugal having low tax rates and a good climate this was a good location for the moderately rich (it only required property investment of Euro500,000).

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

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It’s All Good News Today

With my stock market portfolio picking up in value, the even better news was that Nicola Sturgeon is resigning as First Minister of Scotland. I don’t often comment on politics but Ms Sturgeon was a very divisive leader who chose to push for Scottish Independence in the face of any rational analysis of what might happen to Scotland economically if that was achieved. Even after she lost the referendum vote on it she persisted in pushing for it. She also managed to mismanage the Scottish NHS and more recently fell over backwards over what is a woman.

Whenever she spoke on television I was revolted by her ignorance of the outcome of the policies she was pursuing. Like Sadiq Khan in London, she blamed all her problems on central Government when they were of her own making.

Other good news is that inflation has fallen slightly to 10.1% and the sun is coming out. Crocuses are flowering in our garden and spring is on its way.

In addition I had a phone call from Computershare about my problem with Diploma dividend payments (see previous blog post) and it seems they are going to waive the claimed administration fee. It always pays to complain!

What cheered me up also was reading about the problems of Rolls-Royce (RR.) in Investors Chronicle. The article headlined “Is Rolls-Royce in decline?” and covered recent comments by the new CEO such as “Every investment we make, we destroy value”, “We underperform every key competitor out there…” and “This is out last chance. We have a burning platform… it cannot continue”. What a way to demotivate staff or put a rocket under their backsides.

I worked very briefly for Rolls-Royce 50 years ago and did hold the shares a few years back – sold at 300p in 2015 when they are now 108p. So I missed that falling knife. I sold way before the pandemic hit airline travel and sales of jet engines because I came to the conclusion that their accounting was way too optimistic.

Incidentally I am currently reading a book entitled “Power Failure” on the rise and fall of General Electric who are of course one of the competitors for Rolls-Royce in the aero engine market. I may write a review of the book at a later date. It’s only 800 pages long. Oh so I hate these lengthy tomes when the authors could have communicated their message in so many fewer words.   

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

Unreasonable Dividend Replacement Charge

I have been a holder of shares in Diploma Plc for some years. As a personal Crest member I have been happy to receive dividends in the form of cheques. But registrar Computershare have decided that they will only be paying dividends via bank transfer in future. So they sent me a “Dividend Mandate and Claim Form” to enable me to submit my bank details which I duly completed and returned (I have no objection to receiving dividends that way because the postal service is not reliable now with strikes happening and my local bank has closed also).

But now Computershare are requesting an Administration Fee of £63 “in order to issue a replacement payment”. But no payment was ever issued so I have refused to pay. This is not the same as the situation where a cheque is issued but then lost.

Computershare also do not seem to understand that if a new holding is purchased via a personal (sponsored) Crest account or in certificated form, there is no way to record bank payment details unless they ask for them.

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

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Legal Action Against Shell Directors for Dragging Feet over Climate Change

The FT and other newspapers have reported the threat of a legal action against big oil company Shell (SHEL) and specifically against its directors individually for failing to prepare for the risk of climate change. The threat is based on a possible breach of company law by not acting in the best interests of the company and not taking into account the foreseeable risks from climate change. Wikipedia reports that this is a “derivative” action where shareholders are invoking the company to pursue actions against the directors.

The legal action is being promoted by ClientEarth, an environmental campaign organisation and is allegedly supported by a few institutions. Shell lost a similar case in the Netherlands but it is appealing that decision.

Comment: As a shareholder in Shell, I suggest this is an unwise attempt to get the courts involved in overruling the decisions of the directors. The directors are appointed to manage the affairs of the company in the interest of all stakeholders and they will be put in an impossible position if all their decisions might come under scrutiny in the courts. Judges are not qualified to decide on the merits of the business decisions of company directors.

In summary, this is a misconceived legal action and I hope the application for a hearing is rejected. Companies such as Shell and BP have already taken major steps to reduce their carbon emissions and to stay within the law of the land.

They not only provide oil and petrol which are essential for the next few years, but also provide a range of essential chemicals, plastics and fertilizers which cannot be otherwise created.

The Government is aiming for “NetZero” carbon emissions when they have not calculated the full cost or practicality of achieving it. It’s driven by sentiment not economics and belief in a false reality. The ClientEarth organisation is clearly being run and funded by extremists who have no understanding of the underlying issues.

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

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Unintelligent AI Wipes $120 Billion off Google Share Price

The strangest financial story yesterday was surely the fall in the Google share price after their new Bard AI tool gave the wrong answer to a question. This allegedly caused the share price to drop by 8% and damaged the whole technology sector with it apparently impacting the share prices of big technology trusts such as Polar Capital Technology and Scottish Mortgage.

Search engines are becoming a new battleground for Google and Microsoft with the latter owning ChatGPT. The addition of AI features is seen as a way to improve the answers that search engines produce and might undermine the dominance of Google if Microsoft can develop the technology and incorporate it into their products such as Bing.

To remind readers, Google became such a successful business after they were the first to produce a search engine that was based on keywords and which articles were most referenced by others. Microsoft have been playing catch-up ever since but still haven’t managed to undermine the dominance of Google.

ChatGPT can already be used to generate somewhat anodyne articles when prompted with a few questions and keywords so allegedly is being used by students to cheat in essay writing examinations. Both Bard and ChatGPT are using the information on the internet to construct “intelligent” answers to questions.

In the case of Bard it was asked the following question: “what new discoveries from the James Webb telescope can I tell my 9-year old about”? It answered “JWST took the very first pictures of a planet outside of our solar system”. This is not correct. This is surely simply a case of garbage in and garbage out. There was probably an internet article it relied upon. ChatGPT and Bard are interesting mainly because they attempt to interpret and understand natural language and phrase the answers using it. But that does not mean they are infallible because they rely on unverified information on the web. Also they may not be really intelligent but just rely on improved heuristic methods.

This is not as revolutionary as it is made out to be so the fact that they sometimes give the wrong answers is hardly surprising. Google’s dominant market position may not be undermined even if ChatGPT can help Microsoft and Bing to improve their technology. Google has become such an intrinsic part of the internet eco-system not just because of its great technology but also because of its business and marketing strategy.

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

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