Connect with us

Markets

Another shale battle erupts | Financial Times

Published

on


One thing to start: Vicki Hollub, Occidental Petroleum’s chief executive, says her company is doing more to reduce carbon emissions than Tesla.

Joe Biden will enter the White House tomorrow and big energy policy changes will follow — fast. One policy move was leaked on Sunday: as expected, the new administration will scrap the permit for the controversial Keystone XL pipeline to ship bitumen (an ultra heavy oil) from Canada’s oil sands to the Gulf Coast. We’ll be following the other new energy announcements closely and picking up on them in Thursday’s Energy Source.

Our first note today is on a new battle under way in the fractious shale patch, as a private equity group takes on producer Ovintiv. We spoke to both sides.

Our second is on France’s Total, which made waves last week by ditching its membership of Big Oil’s Washington lobby group, the American Petroleum Institute, as well as expanding into batteries and solar power in the US. On Monday, it signed another clean energy deal, this one with India’s Adani.

Thanks for reading. Please get in touch at energy.source@ft.com. You can sign up for the newsletter here. — Derek

Stand-off in the shale patch

A new proxy fight in the shale patch is shedding light on the broken relationship between America’s oil producers and their investors after years of cash-burning underperformance.

Kimmeridge Energy Management, an activist oil and gas fund, launched a public attack last week on leading shale producer Ovintiv’s “dismissive and defensive” management team, accusing it of being “addicted” to debt, making repeated “value destructive” strategic missteps and failing to adequately tackle emissions.

Ovintiv’s chief executive Doug Suttles rejected Kimmeridge’s assertions, telling ES, “the board and management team were focused on sustainable value creation”, pointing to recent pre-released fourth-quarter results showing “debt reduction ahead of schedule, capital investments below guidance and stronger than expected production”.

Kimmeridge’s criticism of Ovintiv, in which it holds about 2 per cent, echoes widespread investor complaints about the shale sector.

Explosive oil and gas output growth over the past decade propelled the US into the top ranks of global producers, remade international energy markets, and was a pillar of America’s economic growth.

But this debt-fuelled production surge failed to yield returns for shareholders, who had turned on the sector even before last year’s price crash. Ovintiv’s shares have rallied on rising prices in recent weeks, but are still trading at a third of their level in mid-2018.

Ovintiv is “emblematic of everything that is wrong with the US E&P sector,” Mark Viviano, managing partner at Kimmeridge, told ES.

Mr Viviano argued that better aligning executive pay with performance is key to turning the company around. He pointed out that Mr Suttles has pulled in around $75m in compensation since taking over in 2013, despite a total shareholder return that lagged competitors’ and came in at 85 per cent.

“As the CEO continues to destroy value, he gets paid over $12m a year. There’s no correlation with shareholder value creation. And if there’s no financial incentive, and no oversight at the board level, the concern among investors would be that track record continues,” said Mr Viviano.

The company’s management, he added, has been tone deaf on growing environmental, social and governance demands, failing to act on a vote approved by a majority of shareholders last year to set emissions targets aligned with the Paris agreement.

Kimmeridge is prepared to announce three new board member nominees for shareholders to vote on in the coming weeks that would “help position Ovintiv for the energy transition with a focus on capital allocation, governance and environmental stewardship,” said Mr Viviano.

Activist investors have struggled to make headway in the shale sector, though they have typically focused on pushing asset sales or mergers and acquisitions, rather than root and branch management reform.

So the market will watch this proxy fight closely. Shale producers are under intense pressure not to return to their free spending ways as US oil prices top $50 a barrel.

Despite companies’ assurances that they have changed their ways, Mr Viviano is doubtful, arguing underlying issues like executive compensation still have not been addressed.

“As far as investors are concerned these management teams are guilty until proven innocent. The industry track record speaks for itself,” he said (Justin Jacobs)

Total’s clean energy pivot gains pace

France’s Total is on a green run.

A $2.5bn green energy deal with Indian tycoon Gautam Adani’s empire was announced on Monday. The company withdrew from the American Petroleum Institute, the most powerful oil lobby group, last Friday. That came a day after forming a joint venture to develop 12 utility-scale solar and energy storage projects in the US. It also said it would acquire a French biogas producer last week.

For Total, all this activity is a sign it is executing on its promises to expand heavily along the electricity supply chain, which includes renewable generation. It aims to have 35 gigawatts of renewable energy generation capacity by 2025 from around 9GW now.

Like its peers BP and Royal Dutch Shell, Total is under mounting pressure from environmentalists and investors to announce plans for shrinking emissions and boosting renewable energy output. But for now it is still its legacy businesses that are the most lucrative.

Total wants to show investors a coherent plan for its own transition, hopeful that the reward from shareholders — and a climate premium — will come.

“What we intend to do is transform the company into a broad energy company that will be successful today, tomorrow and the day after tomorrow,” said Philippe Sauquet, who heads up gas, renewables and power at Total.

“Patrick [Pouyanné, Total’s chief executive] said loud and clear that our goal is to be among the five global leaders among renewables,” said Mr Sauquet. This, he said, was a “wake-up call” for some analysts and bankers about the company’s ambitions.

For now, though, like its rivals, Total’s share price has been rescued by a rally in the oil price. While a nearly 50 per cent jump since late October has been welcomed after a brutal 2020, shareholders have yet to validate the company’s climate push. (Anjli Raval)

Data Drill

The amount of methane the US energy sector spilled into the atmosphere last year neared the top of the global charts once again, coming in second only to Russia. 

With venting and leaks in the shale patch continuing to drive the country’s elevated methane emissions, according to fresh data from the International Energy Agency, the US accounted for 16 per cent of the 72m tonnes of methane emitted by the global oil and gas industry.

Emissions fell in 2020 alongside lower production, but they are likely to rebound without new restrictions. After Donald Trump rolled back rules forcing producers to monitor and fix methane leaks (even in the face of opposition by some larger companies), President-elect Joe Biden has vowed to clamp down on emitters when he takes office on Wednesday. 

Bar chart of US oil and gas methane emissions, million tonnes showing Shale venting continues to drive methane emissions in US energy

Power Points

  • New York state is forging ahead with hundreds of miles of new high-voltage power lines. Clean energy advocates want the country to follow suit.

  • Steve LeVine’s essay tests assumptions that another “roaring twenties” of euphoric economic and technological progress will follow the pandemic.

  • Adnoc, the UAE’s state oil company, is unapologetic about its plans to accelerate oil production capacity.

  • The Oxford Institute for Energy Studies took a deep dive into hydrogen’s potential in the European energy sector.

  • China’s economy is rebounding faster than expected.

Endnote

The International Energy Agency, the US Energy Information Administration and Opec have released their first oil market assessments of the new year. Here is our round-up of what matters and what changed:

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.



Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets

Powell inflation remarks send Asian stocks lower

Published

on

By


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.



Source link

Continue Reading

Markets

Financial bubbles also lead to golden ages of productive growth

Published

on

By


Sir Alastair Morton had a volcanic temper. I know this because a story I wrote in the early 1990s questioning whether Eurotunnel’s shares were worth anything triggered an eruption from the company’s then boss. Calls were made, voices raised, resignations demanded. 

Thankfully, I kept my job. Eurotunnel’s equity was also soon crushed under a mountain of debt. Nevertheless, the company was refinanced and the project completed. I raised a glass to Morton’s ferocious determination on a Eurostar train to Paris a decade later.

With hindsight, Eurotunnel was a classic example of a productive bubble in miniature. Amid great euphoria about the wonders of sub-Channel travel, capital was sucked into financing a great enterprise of unknown worth.

Sadly, Eurotunnel’s earliest backers were not among its financial beneficiaries. But the infrastructure was built and, pandemics aside, it provides a wonderful service and makes a return. It was a lesson on how markets habitually guess the right direction of travel, even if they misjudge the speed and scale of value creation.

That is worth thinking about as we worry whether our overinflated markets are about to burst. Will something productive emerge from this bubble? Or will it just be a question of apportioning losses? “All productive bubbles generate a lot of waste. The question is what they leave behind,” says Bill Janeway, the veteran investor.

Fuelled by cheap money and fevered imaginations, funds have been pouring into exotic investments typical of a late-stage bull market. Many commentators have drawn comparisons between the tech bubble of 2000 and the environmental, social and governance frenzy of today. Some $347bn flowed into ESG investment funds last year and a record $490bn of ESG bonds were issued. 

Last month, Nicolai Tangen, the head of Norway’s $1.3tn sovereign wealth fund, said that investors had been right to back tech companies in the late 1990s — even if valuations went too high — just as they were right to back ESG stocks today. “What is happening in the green shift is extremely important and real,” Tangen said. “But to what extent stock prices reflect it correctly is another question.”

If the past is any guide to the future, we can hope that this proves to be a productive bubble, whatever short-term financial carnage may ensue.

In her book Technological Revolutions and Financial Capital, the economist Carlota Perez argues that financial excesses and productivity explosions are “interrelated and interdependent”. In fact, past market bubbles were often the mechanisms by which unproven technologies were funded and diffused — even if “brilliant successes and innovations” shared the stage with “great manias and outrageous swindles”.

In Perez’s reckoning, this cycle has occurred five times in the past 250 years: during the Industrial Revolution beginning in the 1770s, the steam and railway revolution in the 1820s, the electricity revolution in the 1870s, the oil, car and mass production revolution in the 1900s and the information technology revolution in the 1970s. 

Each of these revolutions was accompanied by bursts of wild financial speculation and followed by a golden age of productivity increases: the Victorian boom in Britain, the Roaring Twenties in the US, les trente glorieuses in postwar France, for example.

When I spoke with Perez, she guessed we were about halfway through our latest technological revolution, moving from a phase of narrow installation of new technologies such as artificial intelligence, electric vehicles, 3D printing and vertical farms to one of mass deployment.

Whether we will subsequently enter a golden age of productivity, however, will depend on creating new institutions to manage this technological transformation and green transition, and pursuing the right economic policies.

To achieve “smart, green, fair and global” economic growth, Perez argues the top priority should be to transform our taxation system, cutting the burden on labour and long-term investment returns, and further shifting it on to materials, transport and dirty energy.

“We need economic growth but we need to change the nature of economic growth,” she says. “We have to radically change relative cost structures to make it more expensive to do the wrong thing and cheaper to do the right thing.”

Albeit with excessive enthusiasm, financial markets have bet on a greener future and begun funding the technologies needed to bring it to life. But, just as in previous technological revolutions, politicians must now play their part in shaping a productive result.

john.thornhill@ft.com



Source link

Continue Reading

Markets

US tech stocks fall as government bond sell-off resumes

Published

on

By


A sell-off in US government bonds intensified on Wednesday, sending technology stocks sharply lower for a second straight day.

The yield on the 10-year US Treasury bond, which acts as a benchmark for global borrowing costs, climbed to nearly 1.5 per cent at one point. It later settled around 1.47 per cent, up nearly 0.08 percentage points on the day.

Treasury trading has been particularly volatile for a week now — 10-year yields briefly eclipsed 1.6 per cent last Thursday — but the rise in yields has been picking up pace since the start of the year and the moves have begun weighing heavily on US stocks.

This has been especially true for high-growth technology companies whose valuations have been underpinned by low rates. The tech-focused Nasdaq Composite index was down 2.7 per cent on Wednesday, on top of a 1.7 per cent drop the day before.

The broader S&P 500 fell by 1.3 per cent.

The US Senate has begun considering President Joe Biden’s $1.9tn stimulus package, with analysts predicting that the enormous amount of fiscal spending will boost not only economic growth but also consumer prices. The five-year break-even rate — a measure of investors’ medium-term inflation expectations — hit 2.5 per cent on Wednesday for the first time since 2008.

Inflation makes bonds less attractive by eroding the value of their income payments.

“I would expect US Treasuries to continue selling off,” said Didier Borowski, head of global views at fund manager Amundi. “There is clearly a big stimulus package coming and I expect a further US infrastructure plan to pass Congress by the end of the year.”

Mark Holman, chief executive of TwentyFour Asset Management, said he could see 10-year yields eventually trading around 1.75 per cent as the economic recovery gains traction later this year.

“It will be a very strong second half,” he said.

Line chart of Five-year break-even rate (%) showing US medium-term inflation expectations hit 13-year high

Elsewhere, the yield on 10-year UK gilts rose more than 0.09 percentage points to 0.78 per cent, propelled by expectations of a rise in government borrowing and spending following the UK Budget.

Sovereign bonds also sold off across the eurozone, with the yield on Germany’s equivalent benchmark note rising more than 0.06 percentage points to minus 0.29 per cent. This was an example of “contagion” that was not justified “by the economic fundamentals of the eurozone”, Borowski said, where the rollout of coronavirus vaccines in the eurozone has been slower than in the US and UK.

The tumult in global government bond markets partly reflects bets by some traders that the US Federal Reserve will be pushed into tightening monetary policy sooner than expected, influencing the costs of doing business for companies worldwide, although the world’s most powerful central bank has been vocal that it has no immediate plans to do so.

Lael Brainard, a Fed governor, said on Tuesday evening that the ructions in US government bond markets had “caught my eye”. In comments reported by Bloomberg she said it would take “some time” for the central bank to wind down the $120bn-plus of monthly asset purchases it has carried out since last March.

After a series of record highs for global equities as recently as last month, stocks were “priced for perfection” and “very sensitive” to interest rate expectations that determine how investors value companies’ future cash flows, said Tancredi Cordero, chief executive of investment strategy boutique Kuros Associates.

Europe’s Stoxx 600 equity index closed down 0.1 per cent, after early gains evaporated. The UK’s FTSE 100 rose 0.9 per cent, boosted by economic support measures in the Budget speech.

The mid-cap FTSE 250 index, which is more skewed towards the UK economy than the internationally focused FTSE 100, ended the session 1.2 per cent higher.

Brent crude oil prices gained 2 per cent at $64.04 a barrel.



Source link

Continue Reading

Trending