Adjustments, Adjustments and Adjustments at Abcam, Oil+Gas Companies and FCA Decision on Woodford/Link.

Abcam (ABC) published their interim results yesterday (on 12/9/2022). I have commented negatively on this company and its Chairman before despite still holding the shares.

The same game continues – revenue up but reported operating profit down and cash flow from operations down. But adjusted operating profit up. What are the adjustments? These include:

£2.6 million relating to the Oracle Cloud ERP project (H1 2021: £2.0m); £6.0 million from acquisition, integration, and reorganisation charges (H1 2021: £3.5m); £9.0 million relating to the amortisation of acquired intangibles (H1 2021: £4.0m); and £13.0 million in charges for share-based payments (H1 2021: £6.7m).

The ERP project costs continue and I very much doubt that they are getting a justifiable return on the investment in that project now or in the future. Together with the acquisition, integration and reorganisation charges it just looks like a whole ragbag of costs are being capitalised when they should not be.

The company also announced there would be a webinar for investors on the day and a recording of it available on their web site later. Neither was available on their web site on the day or at the time of writing this. More simple incompetence!

The share price of Abcam has been rising of late which just tells you that most investors are unable to look through the headline figures and the sophistry of the directors.

As a change from investing in technology companies such as Abcam who of late are massaging their accounts, and not paying dividends, my focus has turned to commodity businesses. I have even been buying oil/gas companies such as Shell, BP, Woodside Energy and Serica Energy plus several alternative energy companies. There is clearly going to be a shortage of energy worldwide for some time while institutional investors have been reducing their holdings in some oil/gas companies simply from concerns about the negative environmental impacts and long-term prospects as Governments aim to reduce carbon emissions. But in reality the progress on carbon reduction is slow and I feel oil/gas companies will be making good profits for a least a few more years. Energy has to come from somewhere and these companies should do well and can adapt to the new environment easily. In the meantime, they will be paying high dividends and/or doing large share buy-backs.

I am generally not a big holder of commodity businesses as their profits can be volatile and unpredictable as they depend on commodity prices. These can be moved by Government actions or political disruptions such as the war in Ukraine. Will the war end soon? I have no idea. But even if it does there is likely to be a new “cold war” if Putin or other hard line Russian leaders remain in charge. I never try to predict geopolitical changes but just follow the trends in the stock market.  

The partially good news for Woodford investors is that the FCA has formed a provisional view that Link Fund Solutions may be liable for £306 million in redress payments to investors for misconduct rather than losses caused by fluctuations in the market value or price of investments. In other words, it may be nowhere near covering investors losses in the Woodford Equity Income Fund. They have announced this simply because Link is currently subject to a takeover bid which they have approved subject to a condition to commit to make funds available to meet any shortfall in the amount available to cover any redress payments. I suspect this is going to make gaining a full recover for investors somewhat problematic.

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

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Frying in Hell and Investing in Oil Companies

Last night and this morning, the national media were dominated by the news from the Intergovernmental Panel on Climate Change that we are all going to fry in a rapidly rising world temperature unless we change our ways. CO2 emissions continue to rise and even to limit temperature rises to 1.5 degrees Celsius requires unprecedented changes to many aspects of our lives.

The suggested solutions are changes to transport to cut emissions, e.g. electric cars, eating less meat, growing more trees, ceasing the use of gas for heating and other major revolutions in the way we live.

So one question for investors is should we divest ourselves of holdings in fossil fuel companies? Not many UK investors hold shares in coal mines – the best time to invest in coal was in the 18th and 19th century. That industry is undoubtedly in decline in many countries although some like China have seen increased coal production where it is still financially competitive. See https://ourworldindata.org/fossil-fuels for some data on trends.

But I thought I would take a look at a couple of the world’s largest oil companies – BP and Shell. How have they been doing of late? Looking at the last 5 years financial figures and taking an average of the Return on Assets reported by Stockopedia, the figures are 2.86% per annum for Shell and 0.06% per annum for BP – the latter being hit by the Gulf oil spill disaster of course. They bounce up and down over the years based on the price of oil, but are these figures ones that would encourage you to purchase shares in these businesses? The answer is surely no.

The figures are the result of oil exploration and production becoming more difficult, and in the case of BP, having to take more risks to exploit difficult to access reserves. It does not seem to me that those trends are likely to change.

Even if politicians ignore the call to cut CO2 emissions, which I suspect they will ultimately not do, for investors there are surely better propositions to look at. Even electric cars look more attractive as investments although buying shares in Tesla might be a tricky one, even if buying their cars might be justified. Personally, I prefer to invest in companies that generate a return on capital of more than 15% per annum, so I won’t be investing in oil companies anytime soon.

But one aspect that totally baffles me about the global warming scare is why the scientists and politicians ignore the underlying issue. Namely that there are too many people emitting too much air pollution. The level of CO2 and other atmospheric emissions are directly related to the number of people in this world. More people generate more demand for travel, consume more food, require more heating and lighting and require more infrastructure to house them (construction generates a lot of emissions alone). But there are no calls to cut population or even reduce its growth. Why does everyone shy away from this simple solution to the problem?

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

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