The principle that companies should stick to doing what they know best or to areas of business close to their existing areas of competence is by no means mandatory, but it’s one that any company should consider carefully before venturing into some new business area.
In November, I looked at how the Norwegian oil & gas champion Equinor (once more honestly known as Statoil) was doing with its diversification into renewables. To be fair, Equinor’s experience in the North Sea is of some assistance in building offshore wind farms, but this diversification effort has had its difficulties. Undeterred, the company, supported by its majority shareholder, the Norwegian state, which talks out of both sides of its mouth when it comes to oil and gas, has plowed on: bad luck taxpayers! Bad luck minority shareholders!
Norwegian oil and gas group Equinor remains committed to offshore wind and other renewables despite lower returns, as it sticks to a long-term plan to diversify its income, its CEO said on Wednesday.
The offshore wind industry has recently been hit by a perfect storm of rising inflation, higher interest rates and supply chain delays.
“We see a challenging time at the moment, but this is a long-term game we are in and that is why we are investing (in renewables),” Anders Opedal told reporters while presenting the company’s fourth quarter earnings in London.
A slew of downgrades following disappointing earnings last week mean none of the 600 members of Europe’s main stock index has more analyst sell ratings than Equinor ASA.
The report for 2023 integrates the annual financial and sustainability reporting, reflecting the importance of sustainability for Equinor’s operational and financial performance, to our people, investors and other stakeholders.
A good rule of thumb is that if a company highlights “stakeholders,” it’s probably time for shareholders — the investors who, you know, actually own the company — to either replace management or get out of Dodge, unless, of course, the reference to stakeholders is manifestly insincere. In the case of Equinor, where the majority shareholder — the state — is pursuing an agenda of its own, different rules apply, although minority shareholders should note that word “stakeholder” and shudder.
But what does sustainability reporting look like?
Well, here’s a sample:
The average upstream CO2 intensity of Equinor’s operated portfolio was 6.7 kg of CO2 per boe [Barrel of Oil Equivalent] in 2023 (100% basis), down from 6.9kg of CO2/boe in 2022 and well below the industry average. The increase in oil and gas production led to scope 3 GHG emissions increasing 3% from 2022 to 250 million tonnes in 2023.
The use of that information to an investor interested in financial return?
Zero.
But some rent-seeking accountants or other “consultants” were probably paid a nice sum to generate this data. Bad luck taxpayers! Bad luck minority shareholders!
Equinor’s first quarter earnings (which were released in late April) were down from last year, mainly on lower gas prices, but the results beat expectations, which gave the stock a bump. Importantly, the company is continuing with high capital distributions (it is expecting to make total capital distributions of $14 billion in 2024). That’s a plus. If a company has excess capital, it should return it to shareholders.
Turn to the transcript of the company’s first quarter earnings call to discover this on renewables:
Value creation is and will be our top priority. 2024 is the year of de-risking for Empire Wind 1 project in New York, and we are progressing… [We have been] awarded a new off-take agreement with significantly better terms [bad luck ratepayers!]. Next, we aim to take an investment decision and secure project financing later this year. And with a new contract and project financing, we expect a nominal equity return between 12% and 16% for our U.S. East Coast offshore wind portfolio. From there, we also aim to farm down and bring in a new partner, which will significantly reduce our CapEx.
A nominal 12-16 percent equity return sounds fine, until compared with the company’s overall return on equity (not apples to apples, but it gives an idea) of around 23 percent. Quite why Equinor is pouring money into a business that gives a subpar return ought to be a mystery, but it says something — nothing good — about the impact of stakeholder capitalism, ESG (and, in this case, Norwegian energy politics) that it is not.
As I wrote back in November:
Equinor would do better to split the company in two, one focused on oil and gas, the other on renewables. Given renewables’ glorious future, and the outperformance and low risk that would come with an inevitable high ESG rating, the spin-off would surely be able to attract the capital it needed, especially if the state retained a pro rata stake in the spin-off (the Norwegian state owns 67 percent of Equinor’s shares). Meanwhile the stand-alone oil and gas company could be run as, well, an oil and gas company, investing or returning capital in accordance with its view of those markets, rather than ploughing some of its earnings (which ultimately belong to its shareholders) into very different businesses with very different rates of return.
And so, let’s travel a little to the south, to another oil company, Shell, which finds itself embroiled in controversy.
The Daily Telegraph (May 2) (emphasis added):
Shell has unveiled a $7.7bn (£6.2bn) profit driven almost entirely by its oil and gas operations as the business prepares for a showdown with green activists.
The company earned $7.5bn from oil, gas and petrochemicals in the first three months of the year, compared with just $163m from renewables.
Shell also announced it would spend £3.5 billion on share buybacks.
Controversy?
No good deed goes unpunished.
The Daily Telegraph:
[T]he business is likely to face a backlash from activist investors, who are said to hold up to 5pc of the company’s shares, and are concerned about a decision to reverse its pledges to cut oil production and move towards greener energy.
George Dibb, of the Institute for Public Policy Research, a progressive think tank, said: “For every £1 Shell spent on renewables in the last quarter, they spent £11 transferring excess cash to shareholders.”
It is up to Shell’s management to allocate the company’s capital as it sees fit (assuming that is that the financial interests of its shareholders at the forefront of its thinking). If Shell’s management decides that it is in its shareholders’ interests for their money to be (effectively) returned to them rather than invested in a business that is neither a core competence nor a core business that’s what it should do. At the very least Dibb should be pleased that this particular slice of capital will not now be spent on increasing the company’s oil and gas production.
Meanwhile, Shell says that it invested $5.6 billion in low carbon energies in 2023 — amounting to 23 percent of its total capital expenditure of $24.4 billion.
Sustainability magazine describes this $5.6 billion as including “biofuels, hydrogen, charging for electric vehicles and renewable power generation, and US$2.3bn on non-energy products such as chemicals, lubricants and convenience retail, which do not produce emissions when used by customers.” Much of that, with the possible exception of renewable power generation appears related to what the company is already doing (EV charging could, presumably, fit with the company’s gas station business).
One group of shareholders led, the Daily Telegraph reports, by Follow This, have put forward a resolution for Shell’s AGM urging it to align all its medium-term greenhouse gas (GHG) emissions reduction targets in line with the Paris Agreement target on keeping the global temperature increase since pre-industrial times to below 1.5C. That, as things currently stand, this target is highly unlikely to be met is, it seems, neither here nor there. One of the preconditions of keeping below this 1.5C ceiling is that the Earth should achieve net zero GHG emissions by 2050. Absent a wondrous new technology or massive economic growth destruction that’s not going to happen.
Follow This’s founder, Mark van Baal, was inspired to set up his operation by Al Gore’s Inconvenient Truth, which ought to tell you all that you need to know, but the underlying concept is an interesting one. Van Baal came to the reassuring (but not to him) conclusion that “Shell does not listen to journalists, nor to activist groups, nor to governments. The only ones who can convince Shell to choose another course are its shareholders.” Assuming that those governments are not passing laws affecting its business, which Shell would, of course, be obliged to respect, that’s as it should be. Shell should not pay much attention to journalists, and it should pay even less to “activist groups.”
In Milton Friedman’s New York Times article on shareholder primacy from 1970 (which, in many respects, was an elaboration on long-standing case law), he states that:
In a free‐enterprise, private‐property system, a corporate executive is an employe[e] of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.
That doesn’t leave a lot of room for taking advice from activist groups.
Except in the case of companies formed for specific charitable purposes, Friedman had not anticipated (at least in 1970) that companies might attract shareholders not interested in profit maximization, let alone shareholders who wanted their companies to run down and ultimately exit their core business. Ritual murder/suicide is not a conventional investment discipline.
Investors who don’t like the business that oil companies are in would normally simply be content not to buy shares in them. Follow This is aiming at something more ambitious. The organization provides a mechanism through which investors can buy shares in a company and, for as long as they are holders, allow Follow This to vote those shares. Normally that wouldn’t matter to a large company (the group has a “growing group of 5,000 responsible shareholders”, small potatoes) except that Follow This can coordinate its efforts with larger institutional investors in, say, Shell, who are pursuing similar objectives. Typically, such shareholders are also playing with the money of others, but, often, with one major difference. Unlike those who have made a conscious decision to give voting rights to Follow This, the clients of those institutional investors will generally be expecting them to vote the shares they have bought on their behalf in a fashion designed to generate investment return, not to follow some ideological agenda. Too bad.
Follow This’s resolution has been backed by institutional investors such Amundi, Axa IM, Scottish Widows, and others which together own 2.5 percent of the company. They claim that meeting the Paris goals, (central to which is achieving net zero by 2050) is “essential to preserve the health of the global economy.” If they really believe that (or even if they only pretend to believe that), they should not be in the business of managing other people’s money, but the arrogance of the professional managerial class is what it is, as are the ways that it has found to use ESG and stakeholder capitalism as pathways to power, prestige and profit, for themselves if not their unfortunate clients.
Should the Follow This resolution pass, it would be hard for Shell to expand fossil fuel production. This, especially if other Western oil and gas companies followed suit, would create a gap that would (one way or another) be filled by helpful folk from Saudi Arabia, Iran, and all the other miscreants. Quite how this will benefit the clients of Amundi, Axa IM, and Scottish Widows is another mystery.
For its part, Shell seems set on continuing to develop the business in which it is in.
The Daily Telegraph (my emphasis added):
[Shell’s CEO Wael Sawan] took over the company in January 2023 and said last summer that he planned to refocus the business on oil and gas in an effort to win over investors.
He dropped a pledge to cut oil production each year for the rest of the decade, and said Shell would instead increase output – a move that will add to the pressure from environmentalists.
Projects which came onstream in 2023 will, at their peak, add over 200,000 barrels of oil equivalent a day. Along with other projects they will eventually add more than half a million barrels of oil equivalent a day to Shell’s production.
A company’s management doing what most of its shareholders would like it to do. Good.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 168th episode, David is joined by Danielle DiMartino Booth, one of his favorite Fed critics, and now his new favorite critic of those who steal from taxpayers…
The Capital Matters week that was . . .
Energy
Because Mainers rely so heavily on heating oil, extreme winter weather takes a toll on monthly budgets. Natural gas is the cheapest way to heat homes, but Maine has been slow to adapt to it. Past pipelines transporting oil and gas have been scuttled, despite natural gas providing residents with lower utility rates and emissions reductions aligned with the state’s climate goals. Summit Natural Gas of Maine’s $90 million proposed pipeline was withdrawn in 2021 after backlash from environmentalists. Midcoast Maine is still dealing with the consequences of the pipeline’s cancellation: The Dragon Products cement plant in Thomaston cited the pipeline’s cancellation as a factor motivating its decision to shut down and lay off 65 workers, which devastated the town’s tax base..,
A small miracle: Yesterday Georgia Power announced that the second new nuclear unit at Plant Vogtle entered commercial service, “the first new commercial reactors built from scratch in the U.S. in more than three decades.”…
Climate policy rests, to no small extent, on computer models peering quite some way into the future, so there’s a certain irony that a number of renewable energy projects have come to grief because the parties concerned (1) failed to realize that the ultra-low interest rates of the last decade might be vulnerable to some mean reversion and (2) that inflation might one day tick up again…
Labor
Senator Bernie Sanders (I., Vt.) and United Auto Workers president Shawn Fain have been loud advocates for the 32-hour work week. Sanders introduced legislation to implement the measure nationally, and Fain demanded it from automakers during labor-contract negotiations last year. He failed to win that argument in negotiations, and Sanders’s bill isn’t going anywhere.
Even they know their own idea is silly, because they expect their own employees to work more than 32 hours a week…
While the press was celebrating the United Auto Workers union’s win in a representation election at Volkswagen in Tennessee, it mostly ignored that other workers already represented by the UAW were in the process of voting the union out. A majority of Nissan employees at the company’s facility in Somerset, N.J., petitioned to decertify the UAW in early April, and the election was held on April 24…
The Biden administration has been putting in extra hours to quash the burgeoning trend of employment flexibility, and its latest effort is overhauling overtime rules…
Japan
Troubles are coming to the Japanese economy not as single spies but in battalions. Its economy is in recession, its public finances are on an unsustainable path, and its currency keeps plumbing new record lows. If there is one good thing that can be said about Japan’s current economic mess, it is that it offers a cautionary tale for us. If Congress is slow in putting our dismal public finances on a more sustainable footing, we might find, in time, ourselves confronted with a dollar crisis, rising inflation, and a stagnating economy…
The Internet
Congress has a chance to end a pandemic-era welfare program by doing nothing, and proponents of the program are pushing hard to keep it funded. The Emergency Broadband Benefit Program was created on a temporary basis in the end-of-the-year omnibus spending bill in 2020, supposedly as a pandemic-relief program. Then, in the bipartisan infrastructure law, it was rebranded as the Affordable Connectivity Program (ACP), a non-emergency internet subsidy program. It provides $30 per month to qualifying households for internet service. Over 20 million households have enrolled…
I have testified a bunch of times before Congress about various government programs and their efficiencies — and, more often, their lack thereof. One very common pattern I have observed is that legislators tout as successes the mere existence of government subsidies, or the fact that the beneficiaries of subsidies and other handouts enjoy getting “free” money from the government…
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