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Adnoc defies retreat from oil with push to pump up output

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Some of the world’s biggest oil groups are increasingly on the defensive, as investor pressure over climate change forces them to retreat from dirtier businesses and funnel cash into greener energy. 

But Sultan Al Jaber, head of the Abu Dhabi National Oil Company, is unapologetic for accelerating crude output — and is primed to swoop in.

“We see the writing on the wall and see opportunity from decisions being taken from other companies,” he told the Financial Times.

Mr Jaber has a singular vision: to raise the output capacity of the United Arab Emirates — already Opec’s third-biggest producer — from around 3m barrels of oil a day in 2016 to 5m b/d by 2030.

“We will not leave any opportunity unturned,” he said. “We are continuing exploration programmes, identifying proven reserves, increasing production and, wherever we can, we will attract strategic partners.”

The stance is particularly stark, given Mr Jaber also counts the role of climate tsar among his various government positions. Abu Dhabi holds the vast majority of the UAE’s oil, which generates 42 per cent the capital’s income.

He insisted the UAE’s crude — among the cheapest to extract — would be needed even in a world that turns away from fossil fuels. And unlike some global oil executives who believe demand may have peaked, he expects global consumption to recover to 105m b/d by 2030 — more than its lofty pre-pandemic levels of about 100m b/d. 

Column chart of Barrels per day (m) showing United Arab Emirates’ oil production has been steadily rising

“We are a long-term player,” Mr Jaber said. “The future will require more oil and more hydrocarbon resources . . . Being the lowest-cost producer will always give us a competitive edge.”

Adnoc’s partners back Mr Jaber’s strategy.

“This oversupply of oil right now is not going to last,” said Vicky Hollub, chief executive of Occidental Petroleum, which has an exploration deal with the Gulf group. Given rapid recoveries in China and India, the global rollout of coronavirus vaccines and recent lack of investment by many other companies, “this is going to cause an oil shortage and Sultan . . . understands this”.

In the short term, Mr Jaber’s production ambitions run counter to the supply restraint shown by Opec and its allies. The 23-member alliance — of which the UAE is part — agreed last year to curb output by a record 9.7m b/d as demand collapsed. 

The country faced claims late last year that it was failing to comply with its share of cuts, which Opec delegates attributed to a divergence between the goals of the state oil company and the obligations of the ministry of energy. 

People familiar with the discussions say top executives at Adnoc have been lobbying to leave Opec, arguing that the UAE’s production quota is unfairly low. They say the country needs to maximise output to generate greater profits to funnel into non-oil economic growth. 

Abu Dhabi's oil exposure

Mr Jaber, however, said the UAE had done more than required and that it had “always been fully committed” to the supply cuts deal. But he emphasised that the “interim” curbs were not in conflict with Adnoc’s longer-term goals.

He realises the company will not be untouched by rising opposition to fossil fuels and that it must bolster its finances for a time when oil demand might peak. “We must be lower-cost and the lowest-carbon,” he said.

Line chart of Brent crude, $ a barrel showing Oil prices are at their highest since Covid-19 crisis began

The company is seeking partners to build expertise in carbon capture technology and hydrogen energy. The green expansion follows the radical opening-up of the conservative institution to overseas capital as a means to generate cash and reduce costs since Mr Jaber took the helm in 2016 in the aftermath of the 2014 oil price shock.

From floating its retail arm to luring global capital into pipeline infrastructure, Adnoc has since attracted $65bn in foreign direct investment, including a wider pool of industry partners that are helping drive down costs. 

In its latest moves, it has hired banks including MUFG to sell a stake to overseas investors in a $2bn-$6bn project to link the oil company’s offshore production facilities to the onshore electricity grid using subsea cables, people briefed on the transaction said. Credit Suisse has been lined up to sell a stake in Adnoc’s power station at its Ruwais refinery complex in a deal valued at more than $1bn, they added. Adnoc, MUFG and Credit Suisse declined to comment.

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“Before 2016, we used to be seen as a black box to most sophisticated financial institutions — this was a missed opportunity,” said Mr Jaber. 

Bruce Flatt, chief executive of Brookfield Asset Management — part of a consortium that invested in the country’s gas pipelines last year — said foreign partners had been reassured because Mr Jaber “has lived up to everything he has said”. 

The aim of the dealmaking, Mr Jaber said, is to “stretch the value” of every barrel of oil and contribute to diversification beyond oil to future-proof Abu Dhabi and the UAE. Sheikh Mohammed bin Zayed al-Nahyan, Abu Dhabi’s crown prince and de facto ruler of the UAE, said in 2015 that the right investments would allow the federation to celebrate its final crude export shipment. 

Bayo Ogunlesi, chairman of GIP, which also invested in the gas pipelines deal, said Mr Jaber was “a tough but fair” negotiator.

Educated at a regular government school, Mr Jaber started his career at Adnoc, which had awarded him a scholarship to study in the US. He later received a PhD.

“As a young boy growing up in the UAE, the dream job for my generation was to eventually work for Adnoc,” he said. 

Plucked from engineering obscurity into the limelight of Mubadala, the sovereign fund then tasked with diversifying the emirate’s economy, Mr Jaber went on to launch Masdar, Abu Dhabi’s renewable energy initiative.

Since then, he has become an indispensable technocrat at the highest levels of government, known to brush aside niceties in his determination to deliver change for Sheikh Mohammed.

The overhaul of Adnoc has cemented his reputation as a man who gets things done. 

The restructuring included aggressive cuts to a bloated workforce, a move that triggered criticism from those accustomed to a job for life.

Mr Jaber said he was determined to modernise a business where, like many state companies in the region, job opportunities and promotions have often been based as much on patronage as talent.

“We are instilling a culture based on high performance, making sure meritocracy takes shape in a critical company such as Adnoc,” he said — just one prong in a multi-faceted strategy to future-proof the business. It is already paying off. 



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Value investor John Rogers sees an end to Big Tech’s stock market dominance

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The veteran value investor John Rogers predicted the US is headed for a repeat of the “roaring twenties” a century ago that will finally encourage investors to dump tech stocks in favour of companies more sensitive to the economy.

The founder of Ariel Investments told the Financial Times in an interview that value investing “dinosaurs” like him stood to win as higher economic growth and rising interest rates took the air out of some of the hottest stocks of recent years.

Rogers, who has spent a near four-decade career focused on buying under-appreciated stocks, said the frenzied buying of special purpose acquisition companies, or Spacs, signalled frothiness in parts of the market, even while a coming economic boom underpinned other share prices.

“This will be a sustainable recovery. I think there’s going to be kind of a roaring twenties again,” Rogers said, adding that the strength of the economic recovery would surprise people and challenge the Federal Reserve’s ultra-dovish monetary policy.

The US central bank is “overly optimistic that they can keep inflation under control”, he said, and higher bond market interest rates would reduce the value of future earnings for highly popular growth stocks such as tech companies and for the kinds of speculative companies coming to market in initial public offerings or via deals with Spacs.

“Spacs are a sign that growth stocks are topping. A signal that the market is frothy,” said Rogers, a self-styled contrarian and famed for his Patient Investor newsletter for clients that debuted in 1983.

Value investing is based on identifying cheap companies that are trading below their true worth, an approach long espoused by Warren Buffett. Value stocks and those sensitive to the economic cycle boomed after the internet bubble burst in 2000, but the investment strategy has been well beaten over the past decade by fast-growing stocks, led by US tech giants. 

“We’ve been looking like the dinosaurs for so long,” said Rogers. “We’ve been waiting for that booming economic recovery since 2009.”

Proponents of value investing believe that the combination of expensive growth stock valuations and a robust recovery from the pandemic will cause a significant switch between the two investing approaches.

Higher bond market interest rates reduce the relative appeal of owning growth stocks based on their future earnings power.

When 10-year bond yields rise, “growth stocks look way, way too expensive versus value,” said Rogers. “Value stocks are going to come out of the recovery very strong, they’re going to have a tailwind from an earnings perspective. Their earnings are going to be here and now, not 20, 30 years down the road.”

The Russell 1000 Value index outperformed the equivalent growth index by 6 percentage points in February, rising 5.8 per cent versus a drop of 0.1 per cent for the growth index. That was the biggest outperformance for value since March 2001, according to analysts at Bank of America.

“Although rising rates triggered the rotation, we see a host of other reasons to prefer value over growth,” the analysts wrote last week, “including the profit cycle, valuation, and positioning that can drive further outperformance.”

Rogers said he expected higher overall stock market volatility from rising interest rates this year but value should reward investors as it did “20 years ago once the internet bubble burst”. Ariel is bullish on “fee generating financials” and Rogers said preferred names included KKR, Lazard and Janus Henderson, while it was also bullish on traditional media, including CBS Viacom and Nielsen.

Chicago-based Ariel is one of the few large black-owned investment companies in the US, with $15bn of assets under management. It manages the oldest US mid-cap value fund, dating from 1986. 



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High-priced tech stocks sink further into bear market territory

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Some of the hottest technology stocks and funds of recent months have fallen into bear market territory and investors are betting on more turmoil to come, as rising bond yields undermine the case for holding high-priced shares.

A Friday afternoon stock market rally notably failed to include shares in Tesla and exchange traded funds run by Cathie Wood, the fund manager who has become one of the electric carmaker’s most vocal backers.

Shares in Tesla fell 3.6 per cent on Friday to close below $600 for the first time in more than three months, although it had been down as much as 13 per cent at one point. The stock is down 32 per cent from its January peak, erasing $263bn in market value.

Wood’s $21.5bn flagship Ark Innovation ETF — 10 per cent of which is invested in Tesla shares — also closed lower on Friday. It is now down 25 per cent and in a bear market, defined as a decline of more than one-fifth from peak.

Clean energy funds run by Invesco, which were last year’s best-performing funds, are also in bear market territory, along with some of the highest-flying stocks in the technology and biotech sectors.

“Bubble stocks and many aggressively priced US biotechnology stocks have been the hardest hit segments of the equity market,” said Peter Garnry, head of equity strategy at Saxo Bank.

The tech-heavy Nasdaq Composite index fell into correction territory — defined as a decline of more than 10 per cent from peak — earlier this week but rebounded 1.6 per cent on Friday as bond yields stabilised.

The yield on 10-year US Treasuries yield briefly rose above 1.6 per cent early in the day after a robust employment report for February buoyed confidence in a US economic recovery. Yields were less than 1 per cent at the start of the year.

Rising long-term bond yields reduce the relative value of companies’ future cash flows, hitting fast-growing companies particularly hard.

These type of companies figure prominently in thematic investing funds run by Wood at Ark Investments. The performance of Ark’s exchange traded funds has abruptly reversed after they recorded huge inflows and strong gains for much of the past 12 months.

“The speculative tech trade is in various stages of rolling over right now,” said Nicholas Colas, co-founder of DataTrek, a research group.

Bar chart of  showing Hot stocks and funds enter bear market territory

RBC derivatives strategist Amy Wu Silverman said investors were still putting on hedges in case of further declines in high-flying securities, including options that would pay off if Tesla and the Ark Innovation fund drop in value.

The number of put options on the Ark fund hit an all-time high on Thursday, according to Bloomberg data. By contrast, demand for put options on ETFs such as State Street’s SPDR S&P 500 fund — which reflects the broader stock market — have fallen as stocks have dropped.

Demand for options normally slides as a stock or ETF slumps in value, given there was “less to hedge, since you got your down move”, Silverman said. The elevated put option activity on speculative tech stocks and funds was “suggesting investors believe there is more to go”, she said.

Even after the declines, stocks in the Ark Innovation ETF remain highly valued, with a median price-to-sales ratio of 22 versus 2.5 for the broader stock market according to Morningstar, the data provider.

Two of the fund’s other big holdings, the streaming company Roku and the payments group Square, were also lower on Friday, extending recent declines.

Ark’s other leading ETFs have also retreated sharply as air has come out of Tesla and other hot stocks. Tesla is the largest holding in Ark’s $3.3bn Autonomous Tech and Robotics fund and its $7.2bn Next Generation Internet ETF.

Wood has also taken concentrated holdings in small, innovative companies. Ark holds stakes of more than 10 per cent in 26 small companies across its five actively managed ETFs, according to Morningstar.

“These large stakes raise concerns around capacity and liquidity management,” said Ben Johnson, director of passive funds research at Morningstar. “The more of a company the firm owns, the more difficult it will be to add to or reduce its position without pushing prices against fund shareholders.”

Ark did not respond to a request for comment. The Ark Innovation ETF is still sitting on a performance gain of 120 per cent for the past year. It bought more shares in Tesla when the carmaker’s shares began falling last month.



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Powell inflation remarks send Asian stocks lower

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Asian stocks were mostly lower after a rout in US Treasuries spread to the region after comments from Jay Powell that failed to stem inflation concerns in the US.

Hong Kong’s Hang Seng dropped 0.3 per cent following the remarks by the chairman of the US Federal Reserve while Japan’s Topix rose 0.1 per cent and the S&P/ASX 200 fell 0.8 per cent in Australia.

China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks dropped as much as 2 per cent before pulling back to be down 0.5 per cent by the end of the morning session, after Beijing set a target of “above 6 per cent” for economic growth in 2021.

Premier Li Keqiang hailed China’s recovery from an “extraordinary” year and said the government wanted to create at least 11m urban jobs at a meeting of the National People’s Congress, the annual meeting of the country’s rubber-stamp parliament.

“A target of over 6 per cent will enable all of us to devote full energy to promoting reform, innovation and high-quality development,” Li said, adding that Beijing would “sustain healthy economic growth” as it kicked off the new five-year plan.

Analysts were less sanguine on China’s economic outlook, however, pointing to the markedly lower growth target relative to recent years.

“There is, in fact, not much surprise from the government work report except for the super-low GDP target,” said Iris Pang, chief economist for Greater China at ING, who estimated growth would be 7 per cent this year. “This makes me feel uneasy as I don’t know what exactly the government wants to tell us about the recovery path it expects.”

The mixed performance from Asia-Pacific stocks came after Powell failed to alleviate fears that the US central bank was reacting too slowly to rising inflation expectations and longer-term Treasury yields, which rise as bond prices fall.

Powell on Thursday said he expected the Fed would be “patient” in withdrawing support for the US economic recovery as unemployment remained well above targeted levels. But he added that it would take greater disorder in markets and tighter financial conditions generally to prompt further intervention by the central bank.

“As it relates to the bond market, I’d be concerned by disorderly conditions in markets or by a persistent tightening in financial conditions broadly that threatens the achievement of our goals,” Powell said.

Yields on 10-year US Treasuries jumped 0.07 percentage points to 1.55 per cent following Powell’s remarks. In Asian trading on Friday, they climbed another 0.02 percentage points to 1.57 per cent. The yield on the 10-year Australian treasury rose 0.07 percentage points to 1.83 per cent

“Based on our growth forecast, longer-term rates will likely rise for the next few quarters — but more slowly,” said Eric Winograd, a senior economist at AllianceBernstein. “And we think the Fed is prepared to push in the other direction if rates rise too far, too fast.”

The S&P 500, which closed Thursday’s session down 1.3 per cent, was tipped by futures markets to fall another 0.1 per cent when trading begins on Wall Street. The FTSE 100 was set to fall 0.8 per cent.



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