The recent halftime disruption at the Yale-Harvard football game by climate activists is another bad sign for an embattled energy industry that is having a harder time attracting investors.
It’s easy to criticize the demonstrators—who were demanding the divestment of fossil-fuel stocks by the universities’ endowments—as a bunch of privileged college students protesting against the fuels that enable modern civilization. But their numbers are growing. The divestment movement is already strong in Europe, where big energy companies like Royal Dutch Shell (RDS/B) and BP (BP) are rapidly becoming pariahs. They can’t even give away money, with leading cultural institutions like the Royal Shakespeare Company cutting ties with them.
In the U.S., energy stocks are having another disappointing year, capping what has been a lost decade. Energy stocks in the S&P 500 index (.SPX) have returned just 5% this year (including dividends), against a 28% return for the S&P 500, despite a 19% gain in crude to $56 a barrel. The performance is also weak over the past 10 years. The sector is bringing up the rear in the S&P 500 with a 6% annualized return, against 17.8% for the index and 22.7% for the market-leading technology sector, according to S&P. Energy is down to a record-low 4% weighting in the S&P 500 and is worth less than the market value of Apple (AAPL).
There is a baby boomer/millennial divide, with younger investors more uncomfortable with energy stocks. “It’s certainly a headwind,” says Mark Stoeckle, chief executive of Adams Funds, of the divestment movement. “It’s hard to determine how much so, because the sector is so out of favor.”
Stoeckle, who runs the energy-heavy Adams Natural Resources closed-end fund (PEO), is upbeat, arguing that the industry is changing quickly under investor pressure, with nearly every major company emphasizing capital discipline and boosting returns to shareholders through dividends and stock buybacks.
That trend is bullish long term, potentially overwhelming any divestment-related selling. “More money is coming back to shareholders and less is going into the ground,” Stoeckle says. “At some point in the next 10 years, that will present an opportunity. Unless global demand falls off, there won’t be enough oil and gas to meet demand.”
Energy could surprise and emerge as one of the top sectors in the next 10 years. Stoeckle favors Chevron (CVX), ConocoPhillips (COP), BP (BP), and Total (TOT). The European stocks are particularly cheap, in part because of the divestment effort. BP stock, at $37, and Royal Dutch Shell, at $58, both trade for just 13 times projected 2019 earnings and yield 6.5%.
As for the Ivies, it seems to be just a matter of time before they divest energy stocks. The activist pressure will only increase, and university brass and boards will probably cave, despite the views of those like the influential Yale endowment chief David Swensen, who has opposed blanket energy divestment.
Here’s what Swensen has said: “If we stopped producing fossil fuels today, we would all die....The real problem is the consumption of fossil fuels, and every one of us in the room is a consumer. And I guess it’s a little harder to look in the mirror and say, ‘I’m part of the problem.’”
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