Tag: Shell

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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BP Results + BEIS Restructure

BP (BP.) produced some great financial results yesterday and the share price rose 8% on the day and is still rising. Other oil companies rose in unison. What I particularly liked as a holder was the improvement in Return on Capital which is forecast to grow to 18% in 2025 and 2030. This is after many years of quite mundane returns when I judge such a metric to be a key factor in any investment decision.

With increasing share buy-backs and dividend increases you can see why shareholders are happy. Their view might also have been affected by the following comment from the company CEO: “It’s clearer than ever after the past three years that the world wants and needs energy that is secure and affordable as well as lower carbon – all three together, what’s known as the energy trilemma. To tackle that, action is needed to accelerate the transition. And – at the same time – action is needed to make sure that the transition is orderly, so that affordable energy keeps flowing where it’s needed today”.

He is in effect saying that BP will continue to invest in oil/gas production while also investing in “transition growth engines” which includes “bioenergy, convenience and EV charging, hydrogen and renewables and power”. Production of oil/gas will be around 25% lower than BP’s production in 2019, excluding production from Rosneft, compared to the company’s previous expectation of a reduction of around 40%. BP correspondingly now aims for a fall of 20% to 30% in emissions from the carbon in its oil and gas production in 2030 compared to a 2019 baseline, lower than the previous aim of 35-40%.

It is good to see that reality has crept into their plans and forecasts. But the company’s results are clearly very dependent on the price of energy whose cost has shot up sharply because of the war in Ukraine, There is a worldwide energy shortage and investors should keep a close eye on trends in that market if they hold companies such as BP and Shell.

There was an amusing post on Twitter by Philip O’Sullivan pointing out that the Annual Report of Shell in 1944 was all of 8 pages long – see first page above. Last year it was 359 pages!

That would be a good example for Shell and other companies to follow when annual reports are now way to long and voluminous in most cases. This is partly down to increased regulation and expanded accounting standards driven by increases in bureaucracy emanating from the Government BEIS Department  (“The Department for Business, Energy and Industrial Strategy”). For many years this used to be called the Department of Trade and Industry (the DTI) before politicians decided it was a good idea to rebrand it.

Now the Government has decided to split it up into three new Departments to be called “the Department for Science, Innovation and Technology, the Department for Energy Security and Net Zero, and the Department for Business and Trade”. What the benefit of this restructuring will be is not at all obvious and the name “Department for Energy Security and Net Zero” is a particular oxymoron as aiming for Net Zero is not going to improve energy security.

The downside is likely to be another year of musical chairs for civil servants in these departments when one of the issues is lack of continuity of expertise in specialist areas of government such as company law and stock market regulation.

Shuffling responsibilities does not help.

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

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Woke Inc and the Corruption of Capitalism

I have been reading the book Woke, Inc. by Vivek Ramaswamy. It’s not a very good book in my opinion so I will not do a detailed review but it does highlight how corporate profits are being diverted to social causes, good and bad, in the USA. It enables directors of public companies to espouse their favourite causes and signal their virtues while shareholders pay the cost of this munificence.

This largesse is also spreading to the UK. Recently Shell UK announced that “British Cycling has signed a long-term partnership that will bring wide-ranging support and investment from Shell UK as a new Official Partner. The agreement starts this month and runs to the end of 2030. This new partnership will see a shared commitment to; supporting Great Britain’s cyclists and para-cyclists through the sharing of world-class innovation and expertise; accelerating British Cycling’s path to net zero…..”. David Bunch, Shell UK Country Chair, said:  “The partnership reflects the shared ambitions of Shell UK and British Cycling to get to net zero in the UK as well as encouraging low and zero-carbon forms of transport such as cycling and electric vehicles”.

Some cyclists promptly accused the company of “greenwashing”, i.e. offsetting their oil/gas pollution by pretending that their profits are going to good causes. But as a shareholder in Shell I object to them redirecting their profits which should go to shareholders to other purposes. Particularly when the clear objective seems to be to reduce consumption of the company’s products.

But companies are now also interfering in politics. So Paypal has been closing the accounts of people and organisations that hold dissident political views. They even closed the account of a UK group that campaigns for free speech. They closed the account without warning, and companies such as Facebook and Twitter have been censoring users who espouse unpopular political views.  

The author of the aforementioned book has even launched two ETFs that explicitly aim to pressure companies to drop efforts to diversify their workforces and their focus on climate change according to an article in the FT. That’s contrary to the stance of many institutional investors such as Blackrock. Ramaswamy says: “In reality, companies like Blackrock, and in particular their leaders, are using social causes as a way of assuming their place in a moral pantheon. And in the process, they’re quietly dropping hints to consumers to take the bait and make purchasing decisions on the basis of moral quality rather than product attributes alone…. Woke consumerism is born when woke companies prey on the insecurities and vulnerabilities of their customers…..”.

Ramaswamy argues that capitalism is being corrupted and companies are abusing their public trust.

Businesses have now gone far beyond the promotion of the interests of stakeholders as well as shareholders (reference Section 172 of the Companies Act). Racing cyclists (the main focus of British Cycling) are hardly a stakeholder in Shell.

Yes they are “greenwashing” and they should not be wasting my money on such trivia.

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

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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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Scottish Mortgage Trust Report and Shell Climate Change Votes

The Scottish Mortgage Investment Trust (SMT) recently published their Annual Report and it’s well worth reading bearing in mind the exceptional performance they achieved last year. NAV total return was up 111% and that was way ahead of the global sector average. It was the best ever performance of the trust since it was founded in 1909 and it’s now one of the largest investment trusts.

How did they achieve such a remarkable result? You might think it was because of a strong focus on technology stocks – but that is only 23% of their portfolio. Perhaps you think it was because they made big bets on a few well-known names such as Tencent, Illumina, Amazon and Tesla? But that is not the case.

It is true that Amazon represented 9.3% of the portfolio at the start of the year and Tesla 8.6% but the 30 largest holdings only represented 80% of the portfolio. In other words, it was in essence a large and diversified portfolio. But a few stocks made a large contribution to overall performance with Tesla contributing 36% despite the trust selling 80% of their holding during the year so as to maintain diversification.

In his closing words, fund manager James Anderson suggests that he should have been more adventurous. He says “we have to be willing to embrace unreasonable propositions and unreasonable people in order to make extraordinary findings….”. He discounts the value of near-term price/earnings ratios – understanding how the world is changing seems to be his main focus.

Another share that many private investors hold is oil company Shell (RDSB) who recently held their Annual General Meeting. If you don’t hold it directly you might hold it indirectly as it’s usually a big holding in global generalist funds and trusts.

There were two resolutions on the agenda related to climate change one by the company asking for support for their “Energy transition strategy” and one requisition from campaign group Follow This. The latter demanded more specific targets to achieve reduction in long-term greenhouse gas emissions. The company’s resolution received 89% votes FOR, but the latter achieved 30% FOR. Even so that was higher than previous votes, or similar resolutions at other oil companies with support from proxy advisory services and big institutions.

Even the company’s resolution, supported by a 36-page document and which was only “advisory” includes reference to Scope 3 emissions (i.e. those emitted by their customers using their products). They say “That means offering them the low-carbon products and services they need such as renewable electricity, biofuels, hydrogen, carbon capture and storage and nature-based offsets”.

Are these proposals likely to be effective or substantially contribute to climate change? I think not when China and other countries continue to build coal-fired power stations and many people question whether it’s possible to change the climate by restricting CO2 emissions. These resolutions look like virtue signalling by major investors and may be financially damaging to Shell. It is particularly unreasonable to expect Shell’s customers to swap to other energy sources – they may simply switch to other suppliers if they can’t buy them from Shell. As the Shell report says: “If we moved too far ahead of society, it is likely that we would be making products that our customers are unable or unwilling to buy”.

Shell says that “Eventually, low-carbon products will replace the higher carbon products that we sell today”, but their report is remarkably short on the financial impact. In fact their report reads more like a PR document than a business plan and it also makes clear that projecting 30 years ahead is downright impossible with any accuracy.

Note: I hold Scottish Mortgage but not Shell. I do not hold any oil companies partly because they are exploiting a limited resource making exploration and production costs more expensive as time passes and partly because I see a witch-hunt by the environmental lobbyists against such businesses. I also dislike companies dependent on the price of commodities and vulnerable to Government regulation which Shell certainly is on both counts.

One interesting question is who owns and runs the Follow This campaign and how is it financed? Their web site is remarkably opaque on those questions. Even if they have been remarkably effective in getting media coverage for their activities, I would want a lot more information on them before supporting the resolutions they advocate.

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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