By Graham Copley
Whether you are a hedge fund manager, 401(k) holder, or someone in between, you have heard the term environmental, social, and governance. ESG has brought about a fundamental shift in investment strategy. OPEC’s recent production cuts, motivated by a desire to keep income for its member countries high, underscores why this change in investment strategy might short-change investors.
ESG has made its way into political circles, too. The Biden administration has leaned into tax credits and other policies that promote ESG-friendly investments. The Inflation Reduction Act allocates a historic $369 billion to these environmental investments, with nearly three quarters of that being delivered through tax incentives. On the flip side, the U.S. House voted to block a rule from Biden’s Labor Department allowing retirement plans to consider ESG in their investment decisions.
ESG critics say activists are imposing their “wokeness” and inflicting cancel culture on traditional energy companies. This canceling has reached a fevered pitch. Environmental law firm ClientEarth, an investor in Shell, is suing all 11 members of the company’s board of directors – in their personal capacity. This first-of-its kind lawsuit claims the directors are mismanaging climate risks. For Shell’s directors to do what the lawsuit requests would create a separate liability around fiduciary responsibility to several stakeholders, including most of their shareholders, their workforce, and the countries in which they operate who are asking for more oil and gas production today. Separately, this week we have seen a move by a group of UK pension funds against the Chairman of BP, because of the company’s recent strategy shift to produce more oil and gas, while also boosting investment in energy transition. The change in strategy was seen favorably by the stock market and it is not clear that the pension funds are acting in the best interest of their clients with this protest.
Energy is a national security issue for all countries, something accepted by even the stronger climate advocates. Allowing frivolous lawsuits to distract companies from strategies that seek to balance the complex challenge today of ensuring energy supply, while at the same time managing the energy transition, is a mistake. Governments in the U.S. and Europe should step in to stop this.
As investors navigate the new era of politicized investing, one fact rises above the rest: traditional energy companies will likely perform for your portfolio in 2023. In fact, we recently suggested that commodity shortages would reappear this year and next.
With economies expanding, natural gas investments are likely to increase due to rising demand. U.S. natural gas demand has increased more than 60% over the last two decades. LNG demand in Europe is surging, too, rising 65% year-over-year. Germany added one import terminal at record pace in 2022 and has two more planned for this year.
In emerging markets, natural gas also has significant potential. High-population countries such as India are transitioning from coal and wood toward cleaner fuels. In addition to natural gas being reliable and cost-effective, it is also one of the cleanest burning fossil fuels. In response to growing global demand, energy companies are continuing to expand LNG export terminals to ship more U.S. natural gas to developing countries and other allies. Pipeline operator Energy Transfer has invested heavily in an LNG export project in Southwest Louisiana, for example.
While renewable sources such as wind and solar are increasingly popular, they do not provide enough power to meet rising energy needs. At this year’s CERAWeek, I met with industry stakeholders from around the world. It is clear oil and gas will remain an essential part of the global energy mix. Investing in these more conventional energy companies is likely a net positive for investors’ portfolios, providing steady returns and healthy dividends over the long-term. At the same time, these companies continue to provide safety and security thanks to their established infrastructure and technological acumen.
Despite challenges presented by the Biden administration, which has been hostile to fossil fuels, traditional energy companies are strong performers in today’s market. Again, take Energy Transfer. The company’s adjusted earnings for the fourth quarter 2022 were up more than 20% versus 2021, coming in at $3.4 billion. Energy Transfer’s total earnings for 2023 are looking even rosier, as current expansion projects like the Louisiana LNG facility start to generate cash flow. The company expects its 2023 adjusted earnings to range between $12.9 billion and $13.3 billion; the high end of that range would be a company record.
A recent rebound in BP’s stock is another indication that traditional energy is due for a strong year. As noted above, after announcing plans to scale back emission reductions to 35-45% by 2050, the company’s stock jumped 8.3% in one day. BP’s experts are clearly indicating they think oil and natural gas will still produce the lion’s share of the company’s profits for longer.
The list of oil and natural gas stocks is long, and they have been performing well for investors’ portfolios for decades. For any investor looking to diversify his portfolio, political posturing and ESG trends shouldn’t cancel out the right financial or fiduciary decision. Investing in traditional energy companies that produce and transport oil and gas will likely provide promising returns this year. No amount of politicizing, suing, or canceling will change that.
Graham Copley is founding partner of C-MACC, a chemical consulting firm, and co-CEO of Issaquena Green Power. He previously served as a board member of Macquarie Securities USA.
Originally published by RealClearEnergy. Republished with permission.