Oil and gas in the Permian Basin has been put through the shale shaker in this still-new decade of the 2020s. And still, the energy bulls and the ebullient forecasters keep promising that the Big Bounceback is just up ahead. Is that still the case after a 2021 full of commodity price ups and downs?
This was the story back in October:
“Hedge funds have been quietly scooping up the shares of unloved oil and gas companies discarded by environmentally minded institutional investors, and are now reaping big gains as energy prices surge. Hedge fund managers in the US and UK have been betting that the eagerness of many big institutions to be seen to embrace environmental, social, and governance [ESG] standards means they are selling wholesale out of fossil fuel stocks, even though demand for some of these products remains high.”
So reported Financial Times in their report (“Hedge Funds Cash in as Green Investors Dump Energy Stocks”) published on Oct. 6.
Financial Times stated that Odey Asset Management, a London-based company, has been building its position in oil and gas stocks this year and has sizable stakes in groups that include Norwegian oil company Aker BP, whose shares [were] up about 43 per cent, and Asia-Pacific-focused producer Jadestone Energy, up 44 per cent.
Crispin Odey, founder of Odey Asset Management, told the publication: “They [big institutional investors] are all so keen to get rid of oil assets, they’re leaving fantastic returns on the table.” Odey’s European fund is up more than 100 per cent so far this year.
According to Odey, per Financial Times, “The ESG guys are causing terrible problems. They’re ensuring price rises are not met by supply.”
Earlier in 2021, Patrick Pouyanné, chief executive of Total, told Financial Times that “Selling assets to other producers that may be less mindful of ESG concerns was not a solution. ‘Even if BP, Total, and Shell divest from oil and gas it does not change anything.’”Also in October, Steve Schwarzman, billionaire co-founder of Blackstone, warned at a Saudi conference that an energy shortage could lead to “real unrest” across the world.
As Bloomberg reporter Matt Levine described it, Schwarzman believes “a focus on ESG is driving a credit crunch for oil and gas companies.” In an article entitled “Nobody is Drilling the Oil,” Levine wrote on Oct. 27 that “So-called environmental, social, and corporate governance investing principles have spurred investment giants to divest their holdings in oil and gas companies. That, according to Schwarzman, has made it hard for the industry to invest in new wells and other sources of capacity. ‘If you try and raise money to drill holes, it’s almost impossible to get that money,’ he said.”
Levine continued: “Even Larry Fink of BlackRock, who has been among the biggest advocates for Wall Street adopting E.S.G., is worried that [capital] outflows from the fossil-fuel industry may be overdone. ‘We have these visions we could go from a brown world and we could wake up tomorrow [and] there’d be a green world,’ he said at the F.I.I. conference. ‘That is not going to happen.’”
No, it’s not. Sentiment is still profoundly divided on the whole topic of ESG. While the Left pushes the cause as vital to the survival of the planet, many on the Right reject the proposition on its face and say that it is purely politics. In the oil patch, the sides have divided up pretty much according to balance sheets. Big Cap oil companies are ESG minded. The holdouts, where they occur, are found mostly among small caps and, to a varying degree, among mid-caps. But these latter two categories have been under continuing assault from Wall Street, BlackRock, and other capital sources that are using ESG compliance as a condition of funding.
Such has been the standoff through 2021.
Meanwhile, most recently, the website OilPrice.com raised the alarm that hydrocarbon producers still are not attracting the investment dollars they desperately need, that conditions for them are worsening, and (predictably) laid the blame on ESG-driven politics.
As reporter Tsvetana Paraskova stated on Jan. 2, “While U.S. oil and gas firms are expected to raise their capital spending in 2022, constrained funding could put a cap on their ambitions. Low capital funding availability poses a significant threat to consumers already struggling with soaring oil and gas prices. Some said Wall Street’s ESG trend is to blame for restrained capital, while others laid the blame squarely on the Biden Administration.”
Her piece, entitled “Fossil Fuel Financing Under Pressure As Wall Street Caves To ESG Demands,” included the contention that “Most U.S. oil and gas firms expect to raise their capital expenditures next year, as analysts have largely forecast in recent months. Yet, capital available to the industry is constantly shrinking as banks continue to shun the sector due to ESG pressures and as the Biden Administration, with its green agenda and anti-oil policies, is discouraging many in the shale patch from boosting capital budgets beyond the bare minimum.”
What is the oil patch to make of this? Is cooperating with ESG mandates essentially capitulating to bullying? Must an oil company truly play politics with hydrocarbon hating investors in order to attract capital?
The stakes are clear. The question for 2022 and beyond is simple. Will Woke Oil win? That question may depend as much on the sentiments of a simmering electorate as they do on the deliberations of an investment community that appears to have hit a bump in their road.
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By Jesse Mullins