Norway’s Oil Disposal Drama Descends Into Farce

(Bloomberg Opinion) -- I’ll confess, despite the best efforts of Netflix, my exposure to Norwegian comedy is very limited. That said, the finale to the one show I’ve vaguely followed – “What to Do With All Our Oil Stocks?” – has a pleasing subtlety to it; a knowing wink; the faintest tug of a leg-pull.

Roughly 16 months ago, Norway’s central bank advised ditching oil and gas stocks from the country’s trillion-dollar sovereign wealth fund, to mitigate the risk from “a permanent drop in oil and gas prices.” However, a plot-twist arrived last August, when a government commission recommended against such divestment. It reasoned selling wouldn’t reduce risk much; in fact, narrowing the fund’s diversification and shifting its composition so markedly away from the broader market’s could increase risk.

On Friday, the government approved the sale of some oil and gas stocks, in what appears to be a classic example of having it both ways. Rather than divesting the fund’s entire holding – 341 stocks worth about $37 billion, as of December 2018 – it will dispose of 134 stocks, worth roughly $8 billion, or 0.8 percent of the fund. 

There is surely some financial model somewhere in Oslo proving mathematically the risk-weighted wisdom of this slight touch on the tiller. The stated rationale is that the disposals focus on exploration and production companies, which have the highest correlation to oil and gas prices. These firms are distinguished from integrated oil and gas companies, which are, Norway reasons, less directly correlated with prices and include several companies investing in renewable energy. Selling those wouldn’t curb commodity exposure much and could actually lead to missing out on exposure to a growing sub-sector of energy hedging its oil-and-gas risk.

Neat, but then you dig into it. For example, the single largest exploration and production stock held by the fund at the end of 2018 was ConocoPhillips. Yet this isn’t being sold, according to the list I obtained from the Ministry of Finance, because it is classified as an integrated oil company by FTSE Russell, the index benchmark used by the fund to segment its holdings. But Conoco spun off its refining and marketing subsidiary Phillips66 as a separate company in 2012 for the express purpose of refocusing as an E&P company.

There are other seeming anomalies in there. Phillips66 isn’t on the hit list, but rival refiners PBF Energy Inc. and HollyFrontier Corp. are. Maybe the fund has sold out of Phillips66 since year-end, which might explain it. In any case, these are all refiners, not upstream E&P companies. Same goes for Cheniere Energy Inc., which develops and operates terminals for importing and exporting liquefied natural gas but is also on the block.

Index industry classifications are always a bit rough around the edges, which makes the fund’s approach of just excluding any stocks falling into a certain category look strangely blunt. Surely an analyst or two could have been employed to clean up the list?

As it is, disposals fall most heavily on North America – no surprise, as that’s home to the vast majority of independent E&P companies (and a lot of independent refiners). The following table shows the top 10 countries with companies due to be divested, ranked by market capitalization on December 31, 2018 :

There’s a certain financial logic to exiting many shale stocks, given their relatively higher correlation to oil prices and, let’s face it, pretty woeful track record in translating that correlation into shareholder gains.

Yet the notion this moves the needle overall is laughable. Two majors that feature in the fund’s top 10 oil and gas holdings, Exxon Mobil Corp. and Chevron Corp., just announced enormous expansion plans in shale.

Meanwhile, just the top two oil and gas holdings in the fund at year end – Royal Dutch Shell Plc and BP Plc – are worth more than the fund’s entire holding in the 134 stocks due to be sold. Yes, Shell and BP, along with some other majors, are investing in renewable energy. But those efforts are dwarfed by their core oil and gas operations.

As if to counter that argument, Friday’s announcement observed that “companies that do not have renewable energy as their main business will account for about 90 percent of the growth in listed renewable energy infrastructure towards 2030.” That appears to be based on a McKinsey & Co. study prepared for the Finance Ministry in December and is a valid line of reasoning. However, the same report’s list of examples of such “portfolio companies” (in footnotes on page 16) consists of the likes of Berkshire Hathaway Inc., E.ON SE, and Enel SpA – utilities or businesses with utility arms. It does note the move of “large listed energy companies” into renewables, but also notes:

However, most of the large listed companies entering the renewable energy space will still have most of their investments in non-renewable energy assets.

The politics of environmentalism in Norway likely demanded that, despite the commission’s finding against divestment, there had to be some follow-through on the central bank’s original bombshell. The episode demonstrates that, as for the companies involved, managing the energy transition is also fraught with difficulty for money managers. Oil majors, meanwhile, have plenty of reason still to worry about their deep unpopularity in financial markets. But what began for them as a grim Nordic drama has concluded with a touch of farce.

This is based on the 120 stocks listed in the fund on that date that appear on Friday’s list

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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