Feb 10, 2020

Axios Generate

By Ben Geman
Ben GemanAmy Harder

Good morning, I'll be interviewing Microsoft chief sustainability officer Lucas Joppa in Vancouver on Wednesday morning 10:45 local time as part of the GLOBE conference. Not there? It's one of three that'll be live-streamed.

I'll share a glimpse of my latest Harder Line column, which pulls together various developments weighing on the oil and gas sector. Then, Ben Geman will get you up to speed on other news. 

Today's Smart Brevity count: 1,100 words, 4 minutes.

1 big thing: Wall Street swipes left on Big Oil

Illustration: Eniola Odetunde/Axios

The world’s oil and natural gas companies are drilling their way into financial and social hell.

Driving the news: The industry’s stocks are in the toilet, and climate change is fast becoming a mainstream investor worry. These problems overlap and neither is going away soon — if ever.

Why it matters: People use products from oil and natural gas, which are heating up the Earth, and many own (perhaps unwittingly) stock in these companies. Whether they love or hate them, the financial and social standing of these companies will likely affect all.

The intrigue: CNBC’s Jim Cramer raised eyebrows by saying recently that he was “done” with fossil fuels and likened them to tobacco. “This has to do with new kinds of money managers, who frankly just want to appease younger people who believe you can’t ever make fossil fuels sustainable,” he said.

“That’s absolutely representative of what a lot of people are thinking in terms of investing,” said Paul Sankey, a veteran oil analyst with the Mizuho Financial Group.

  • When asked if climate change and potential action on it are affecting the sector’s stocks, Sankey replied: “It’s unquestionable. But it is just very, very difficult to put numbers around it.”

The other side: Cramer’s comments hit a nerve. Chevron CEO Mike Wirth went on CNBC last Friday to push back and say this latest downturn will eventually abate.

  • Roughly two-thirds of oil and gas investors think so too, according to a recent survey by consultancy IHS Markit, citing an eventual rebalancing of supply and demand.

Sankey described a negative feedback loop for oil and gas companies where climate change worries are an accomplice, not the main driver:

  • Oil and gas stocks have performed poorly in the S&P due initially to oversupply, while others — especially tech companies — are doing really well.
  • Funds that prioritize ESG factors tend to favor tech companies, instead of oil and gas, so those funds keep doing well.
  • Markets are driven by momentum, so the worse oil and gas stocks do, the less momentum they have, and the worse they keep doing — thus the feedback loop.
  • Global oversupply has been the initial driver pushing stocks down, but now climate worries are among the factors keeping them there, Sankey said.

Read more

Bonus: Charting oil's stock decline
Expand chart
Data: Yahoo Finance; Note: XOP is an exchange-traded fund (ETF) of oil and gas stocks; Chart: Axios Visuals

Energy stocks have dropped from 15% of the S&P 500 in 1990 to just 5% last year, Amy notes.

By the numbers:

  • ExxonMobil, once considered one of the most reliably well-performing stocks of any kind, and the exchange-traded fund XOP, comprised of oil and gas stocks, have performed far worse than the overall S&P since 2014, when oil prices crashed due to oversupply.
  • The stocks haven’t recovered (and neither have oil prices).
2. Big this week: oil markets, climate, budget

Oil: On Thursday the International Energy Agency will release its monthly oil market analysis, while tomorrow the Energy Information Administration will release its monthly short-term energy outlook.

  • What we're watching: How IEA might size up the effects of the novel coronavirus on oil demand. We'll also keep an eye on whether EIA trims its U.S. production growth forecasts.

Climate: New BP CEO Bernard Looney will offer the oil giant's updated climate plan on Wednesday.

  • What we're watching: Whether and how BP will vow to address "scope 3" emissions — that is, CO2 from use of their products in the economy.
  • Why it matters: Scope 3 emissions are far larger than emissions from direct operations, and BP would be joining what's now a small handful of majors — Total, Repsol, Shell and most recently Equinor — with any kind of target.

White House: The fiscal year 2021 budget plan arrives today. I'm not giving this a lot of play because these things are largely symbolic documents that are usually DOA in Congress.

  • Why it matters: It's nonetheless a revealing look at White House priorities — and sometimes policy changes.
  • The intrigue: This year's budget is expected to no longer seek funding for reviving the mothballed Yucca Mountain nuclear waste repository plan. President Trump tweeted last week that "Nevada, I hear you on Yucca Mountain," a nod to opposition there.
  • What's next: Via the Washington Examiner, "Energy Secretary [Dan] Brouillette told reporters Friday that the Energy Department is looking at 'innovative solutions' that could include interim storage or other types of storage."
4. Coronavirus strains OPEC-Russia rapport

Oil prices are at their lowest levels in a year as coronavirus hits demand, and one side effect of the public health crisis is that it's afflicting the OPEC-Russia relationship.

Driving the news: Russia has yet to endorse recommendations from an OPEC+ technical panel to deepen the groups' production-limiting pact by 600,000 barrels per day.

  • “The oil market will be waiting on Russia’s response, to see if the OPEC+ can prove itself as being proactive producer group in dealing the coronavirus virus outbreak which, like SARS, is effectively a negative demand shock," BNP Paribas analyst Harry Tchilinguirian said via Reuters.

Where it stands: Brent crude oil is trading at $54.23 as we sent this newsletter, while West Texas Intermediate is at $50.24.

What they're saying: "The real question is whether the Russians and the Saudis are on the same page on the necessity for collective action," RBC Capital Markets' Helima Croft tells the NYT.

The big picture: "[I]f the group doesn’t act soon, it will find the decision taken out of its hands. Having floated the idea of further cuts they now need to deliver. Anything less will likely send prices down again," notes Bloomberg columnist Julian Lee.

5. Catch up fast: climate, utilities, coal

Climate: The Justice Department dropped its antitrust inquiry into four automakers — Ford, VW, Honda and BMW — who cut a preliminary deal with California on increasing carbon emissions standards for their nationwide fleets.

  • Why it matters: Per the NYT, which first reported the move that Axios later confirmed, the move "could boost the efforts of the auto companies and California to move ahead with tighter vehicle pollution standards than those being finalized by the federal government."

Utilities: Pacific Gas and Electric Company told California regulators via plans filed Friday that it's taking steps to ensure that planned power shut-offs to cut fire risks this year will be "smarter, smaller, and shorter."

  • Why it matters: There's a lot of forces driving California's power woes, including PG&E's missteps. But they also signal how the industry will have to cope with hotter and drier conditions linked to climate change.
  • Go deeper: Expect more blackouts in California, PG&E says. But the utility predicts smaller, shorter shutoffs (Sacramento Bee)

Coal: "U.S. Energy Secretary Dan Brouillette said on Friday that Canada and Mexico could help export U.S. coal to Asia to get around the blocking of shipments by West Coast states concerned about the impact of the fuel on climate change." (Reuters)

Ben GemanAmy Harder