Tag: Shell

Tariff Wars and Book Review

We woke up this morning to the news that President Trump is getting tough on trade tariffs to reduce US imports. With up to 25% on imports from China, Mexico and Canada this could be seriously damaging to their economies and raise the cost of living in the USA. Although it is not clear what the impact will be on the UK or the rest of Europe we cannot expect to get off completely free.

Trump is aiming to reinvigorate US industry by ensuring it can compete with economies where labour costs are lower. That is not an unreasonable proposition but the method chosen is a very blunt instrument. It has already had an impact on worldwide stock markets (my own stock market portfolio is down 1.6% today at the time of writing and it was down also on Friday).

Some of the damage done is from the aggressive rhetoric that Trump has chosen which may fade over time as countries affected retaliate but clearly some sectors of the economy could be badly affected.

The world is now a very complex economy with industries and countries very dependent on each other. A recently published book that explains some of this is the book “Material World”.

Book Review: Material World by Ed Conway (subtitled: A Substantial Story of Our Past and Future).  

This is an educational tome which explains what the sources and uses of common products such as sand are – in that case in the semiconductor industry in the form of silicon.

It’s certainly a very good analysis of some industries but at 501 pages it is yet another book that is too long for my liking. However it helps to explain why countries are so interdependent. Although interfering in the free economies can often be worked around at pace (as happened in World War II when Germany had to invent substitutes for some products as it lost access to oil and rubber) it is economically damaging in the short-term.

Free trade is important to maintain if you want a vibrant economy.

The UK has just decided to damage its own economy by a decision in a Scottish court that permits for oil and gas exploration should take into account end-user emissions. This is judges taking decisions that should be reserved for politicians and the electorate. This could be very damaging for companies such as Shell who planned to develop the Jackdaw gas field. Let us hope that this decision is overturned but with Ed Millibrain as Secretary of State for Energy and Climate Change I am not hopeful that the UK Government will see sense.

Meanwhile China and the USA are expanding energy production (hundreds of more coal mines in China for example) while the UK simply reduces its own energy sources and becomes more reliant on foreign imports. We cannot replace electricity production by wind and solar farms alone and expanding the electricity grid is not a short-term fix.

Politicians need to read the Conway book for enlightenment.

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

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BP and Oil Demand

Yesterday saw a significant drop in the share price of BP (BP.) in which I have a holding. This resulted from a trading statement that forecast lower margins in its refining business and weak oil trading performance. Earnings in the second quarter will be between $500 million and $700 million lower than for the previous three months. There will also be major write-downs on a refinery in Germany.

BP shares have performed very badly this year compared with Shell. Should I dump BP shares and switch into Shell or US competitors as many institutions seem to be doing? This is not a simple question and without a simple answer. Trading shares based on short term events or commodity prices is usually a mistake.

The key question for BP is have they moved too quickly into alternative energy projects and hence are reducing profits on their traditional oil/gas refining and distribution businesses. The market seems to think so.

Will electric cars replace internal combustion engined ones and undermine one of the major markets for oil? Saudi Aramco (the world’s largest oil company) are betting otherwise. There was a good article in the FT yesterday on this subject – see https://www.ft.com/content/a3019ce4-be91-4dc8-83c5-489f18bf56cf . They are backing the development of new combustion engines. Yasser Mufti, the executive vice-president at Saudi Aramco is quoted as saying: “It will be incredibly expensive for the world to completely stamp out, or do without internal combustion engines. If you look at affordability and a lot of other factors, I do think they will be around for a very, very long time.”

The UK and many countries in Europe are trying to move away from oil rapidly when the US and rest of the world are not doing so. They are taking a more pragmatic and realistic view in my opinion.

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

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Patisserie Valerie and Shell Legal Cases

Shareholders in café company Patisserie Valerie were wiped out in 2018 after the accounts were shown to be fictitious and the company collapsed. It has now been announced that a trial date of four people alleged to be involved in the fraud has been set for March 2026. See https://www.lawgazette.co.uk/news/2026-trial-date-for-patisserie-valerie-criminal-case/5117808.article

Is it not astonishing that it has taken so long to bring the case to court? Compare that with the recent case of FTX/Alameda Research in the USA where Sam Bankman-Fried was prosecuted and found guilty in just a few months. This demonstrates what is wrong with the English legal system for dealing with fraud cases. Justice delayed for years is no justice and is no deterrent to criminal action.  

Another recently reported legal case is that oil company Shell is suing Greenpeace for £1.7 million after “activists” boarded an oil platform that was in transit off the Canary Islands. Shell incurred substantial costs as a result.

Comment: as a Shell shareholder I fully support the company actions. I think more such lawsuits should be pursued against organisations such as Greenpeace and Just Stop Oil who clearly have substantial resources which are financed by the ill-informed and take part in criminal activities in pursuit of their goals.

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

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CTY + JGGI AGMs and Market Trends

Yesterday saw a big improvement in my stock market portfolio valuation (up over 2% on the day). That makes a change from recent trends. Even some of the property REITs I hold picked up despite bank rate being unchanged.

In the last year I have been buying shares in BP and Shell on the basis that oil and gas will still be required for many years to come. This proved to be a big mistake on Tuesday when the share price of BP dropped by over 4% on results that were way worse than forecast. Shell did rather better later in the week but is it not very disappointing that analysts are unable to accurately forecast so much as a quarter ahead for such large and well researched companies? I am still in profit on my BP holdings but I will clearly have to review them.  

I attended the AGMs of City of London Investment Trust (CTY) and JPMorgan Global Growth and Income Trust (JGGI) this week. These were both “hybrid” meetings so I attended on-line. I’ll only cover them briefly as there were no surprises. CTY achieved a total return of 4.6% last year which slightly underperformed their benchmark. But they now have a 57 year record of dividend increases. I have held the shares since 2011 with limited trading in the meantime. Overall return has been 10.9% per annum which I consider satisfactory for a share I don’t need to constantly monitor and an on-going charge of only 0.37%. However stock selection last year had a negative impact.

They hold BP and Shell but sold BHP last year and bought Glencore instead. Long standing manager Job Curtis does not yet see a turning point in property.

The JGGI AGM was held in Edinburgh (they plan to alternate location) after the merger with Scottish Investment Trust. This was said to be “a transformational year” as the size of the trust has tripled due to the mergers and strong investment performance. They achieved a total return of 19.1% last year. Their aim is for long-term capital growth combined with a yield of 4%.

Their biggest holdings are companies like Amazon, United Health, Microsoft, CME, Coca-Cola, TSMC, Vinci, Uber and Mastercard and they have been buying Nvidia.

Questions were raised about them paying dividends out of capital, i.e. uncovered by earnings. But I see no problem with that as most of the profits arise from capital growth. But there were negative comments though from the lack of a resolution to clearly approve the dividend policy. I think they should improve that resolution next year.

Both the CTY and JGGI AGMs were useful events in terms of understanding the investment strategies and I am happy to continue holding the shares.

Lastly a postscript on the conviction of Sam Bankman-Fried (see previous blog post). Is it not astonishing that the SEC managed to prosecute and secure this conviction in just a few months when the FCA takes years to secure fraud convictions in the UK? The FTX bankruptcy filing took place in November 2022. There is clearly a much more effective legal framework in the USA to pursue, and hence deter, financial fraud.

What could have been a horribly complex legal case was dealt with quickly and efficiently in the USA.

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

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Cutting Oil and Gas Production Could be Dangerous

The CEO of Shell has told the BBC that cutting oil and gas production would be “dangerous and irresponsible” because the switch to renewable energy is not happening fast enough. It would result in energy bills rocketing higher again.

The slow energy transition was also obvious from a recent report from the Energy Institute that notes that the consumption of crude oil continued in 2022. Although coal consumption fell in North America and Europe, overall global usage increased by 0.6% due to higher demand in India and China (see last week’s Investors Chronicle for more details).

It is very clear that demand for energy is still rising and that the alternative uses of oil/gas in industries such as plastics production and fertilizer production cannot be easily replaced.

The Just Stop Oil promoters are simply ignorant of the consequences of their campaign. See the book “How the World Really Works” which I reviewed for more explanation of the reality – see https://roliscon.blog/2022/02/14/how-the-world-really-works-book-review/ .

It is very clear that so far as investors are concerned, we should not be dashing headlong away from investment in major oil and gas companies. The world’s reliance on them is not disappearing and is actually growing regardless of the hectoring of politicians and environmental campaigners.  

Moving to alternative energy sources for some applications and sectors of the economy, or reducing energy consumption by improved building insulation, may make sense but they are only partial solutions and may only have a major impact in decades in the future, i.e. in longer time horizons than most investors.

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

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Should I Invest in Oil and/or Buy a New Car?

The stock market is quiescent and it is time to ponder questions such as should I buy more BP shares and should I buy an electric or hybrid car? There is an article in the FT today on the rejection of resolutions focussed on climate change at the ExxonMobil and Chevron annual meetings. It said: “shareholders solidly rejected climate change proposals at the US oil majors’ annual meetings on Wednesday, scaling back support from last year and splitting with results at peers in Europe where resolutions related to global warming have won stronger support. Only 11 per cent of Exxon shareholders supported a petition calling for the company to set emissions reduction targets that would be consistent with the goals of the 2015 Paris climate agreement. A similar proposal at Chevron received less than 10 per cent support”. See FT article here: https://www.ft.com/content/7faccadc-beef-4b10-be53-ae7aceaeafce

Resolutions on this subject at the BP and Shell AGMs were similarly defeated even though many institutional holders like to promote their green credentials.

Individual shareholders need to make up their own minds on how to vote on whether to put companies like BP and Shell out of business by stopping their oil development activities. Both BP and Shell argue for a transition to renewable energy at a pace acceptable to their customers and which does not impose unreasonable short-term costs and I agree with them. The transition to renewable energy for many purposes may make sense but for transportation carbon fuels have a very high energy intensity and the infrastructure to support electric vehicles means a high loss in the transmission system.

I have a pressing personal decision to make on this issue. My diesel-powered Jaguar XF is almost ten years old now and I like to buy a new car when they have done more than 60,000 miles as they get more unreliable and expensive to maintain after that. I don’t do many miles now so a somewhat smaller car might make some sense. But should it be an electric vehicle, a hybrid or a petrol/diesel one?

I think a hybrid is the best bet and have booked a test drive of a Toyota Corolla. They are self-charging hybrids but can only run a short distance on battery power so I am betting that petrol will be readily available for at least the next ten years.

I am surprised that Jaguar are still selling XF models but they do now have a petrol option and a “sportbrake” version which probably shows how well liked the car is but I fear that diesel will be discouraged by regulation soon.

They do sell all-electric models now but they are expensive and are bulky SUV style cars when I prefer smaller vehicles. Note that the environmental benefits of electric cars over petrol ones are quite marginal if you take the all-in lifetime environmental impact costs into account and the latest scare is that the heavier weight of electric vehicles is causing damage to our roads – thus explaining why there are so many potholes in our roads of late. The weight of current electric batteries is becoming a major problem while the production and recycling of batteries is a negative aspect not yet confronted.

Electric cars are cheaper than they used to be but they either have limited range or are expensive (£43,000 to £58,000 for a Tesla Model 3 for example, or over £70,000 for a Jaguar I-Pace).

Readers of this article can suggest alternatives for me to look at. Use the comment box below.

I could of course hold on to my current vehicle for another few years in the hope that Sadiq Khan changes his mind on the ULEZ expansion (my Jaguar XF is not compliant) or is not elected again next May. There are several strong contenders lining up to take him on. But I do so few miles within the ULEZ area (current and future) that it does not bother me much what the Mayor decides to do. Whatever he decides he is bound to be wrong based on his past decision record.

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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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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