The world’s largest sovereign wealth fund is exiting the oil market—a fact that is sure to have shaken Big Oil to the core. Divesting $35 billion worth of supermajor stocks is no small thing. Yet opinions are divided on what this means for the industry.
On the one hand, the divestment is all bad news for an industry that has only recently begun to recover from the heavy blow of the 2014 oil price collapse and is still vulnerable to price shocks. If Norway’s fund has decided to curb its exposure to oil, so how many other large investors might follow suit? Especially at a time when the industry is under fire for, well, being the oil industry, and under threat from renewables and electric cars.
On the other, it could actually highlight Big Oil’s resilience to all sorts of shock—a resilience the industry has worked hard to develop over the last few years.
Some analysts believe the sale will indeed spark a selling spree: Catherine Howarth, CEO of activist group ShareAction told Bloomberg, “We would expect pension funds and other long term investors to follow suit.”
Others are confident that the market can absorb the sale without too much of a shock, due to the strong fundamentals behind Big Oil. Legal and General Investment Management’s head of multi-asset funds, John Roe, said, “There are reasonable fundamentals behind energy companies. Many are already focusing on how to cope with future changes in the energy mix, including reducing investment.” Related: Tesla To Spike, Then Crash
Norway’s sovereign wealth fund has solid stakes in all the supermajors, from BP to Chevron, in major independents including EOG Resources and Occidental Petroleum, in oilfield services giant Schlumberger, and a host of state-owned titans, from Petrobras to Gazprom and PetroChina. All these stakes will be sold if the Norwegian government approves the plan.
Now, judging by the reaction of the oil stocks to the initial announcement of the divestment plan, the sale could turn into a bargain for buyers seeking the security of regular dividends. It could also turn sour for the seller: Some analysts suggest the fund will lose money from the whole thing unless it spreads the sale over several years.
Where there are bargains, there’s usually a crowd, so the initial price drop might very well be soon reversed—again, depending on the timeline of the divestments. Oil supermajors have been strong performers historically and there are still enough pragmatic investors for who stable dividends trump environmental responsibility. Can Big Oil actually end up the winner? It can, for a while.
The fund’s decision was motivated by caution: diversification into other industries is crucial for reducing its dependence on a commodity as volatile as oil. At a time where oil is being challenged more strongly than ever, diversifying away from it would make sense for those same pragmatic investors mentioned above. Perhaps not immediately—remember, dividends—but at a later stage, as the adoption of renewable energy and electric vehicles continues to grow.
Eventually, as IG Group’s Chris Beauchamp said in a recent analysis, oil will lose its status as the driver of the global economy. Oil demand will start falling until only plastics and other non-fuel uses for the commodity remain. But this will take time. A lot of time. So, singing dirges for Big Oil now would be a bit premature. Planning a diversification in long-term investments modeled on the Norwegian fund’s approach would be appropriate.
By Irina Slav for Oilprice.com
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