Is backing BIG OIL actually a slick move?

As the world transitions towards net zero . . .

The last-minute preparations for the Cop26 climate change summit in Glasgow have been accompanied by a stampede away from investments in the fossil fuels that cause global warming.

This week, about 70 British religious bodies have pledged to shift away from shares in coal, gas and oil companies. ABP, a giant Dutch pension fund, is to sell off €15bn (£12.6bn) of such holdings.

These disposals are estimated to reach $14trillion (£10.2trillion) as more savings are switched to sustainable investments.

Interest in this type of investment was ignited by An Inconvenient Truth, the global warming documentary fronted by former US vice-president Al Gore. This week Gore called for reforms that would curb financial institutions’ ability to back fossil fuel projects.

It could now be a truth – however inconvenient for incomeseekers – that BP and Shell, two of the biggest fossil fuel names, are best avoided.

There is another way of looking at it, though. Some believe the outlook is less straightforward, as fossil fuels still account for 84pc of global usage and demand is likely to rise along with the population.

Oil prices are soaring, propelled by a shortage of supply and the pandemic bounce-back.

Since January, BP shares have risen by 38pc, while shares in Shell are up by 34pc, despite the fact both face many challenges. Third Point, an activist hedge fund, has bought a slice of Shell to urge the group to split off its refining and other legacy businesses from its newer ventures.

Shell also reported lower-thanexpected third quarter earnings, despite the higher oil price.

Under a Dutch court judgement, Shell must make a 45pc cut to its net carbon dioxide emissions by 2030, rather than by 2050. The company is appealing the ruling, but it could still accelerate the shift into renewables, such as solar and wind. These are areas into which Shell, BP (which is set to report its own earnings next week) and the other giants are already diversifying.

Ben van Beurden, Shell’s chief executive, argues it can overcome competition from new entrants to the market because its projects should appeal to the biggest customers. Amazon is already committed to taking half of the energy from a wind farm being built in the North Sea by Shell and eneco, a renewables business.

Other reasons to back Big Oil are the lucrative returns from its traditional operations – on which we will rely while the transition to net zero progresses. Norway, a nation regarded as extra eco-conscious, illustrates that this process may be slower than idealistic Cop26 delegates would hope.

Robert Minter, head of investment strategy at Abrdn, explains: ‘The International energy Authority says that once 60pc of a country’s vehicles are electric, then there should be a 20pc drop in oil use. In Norway, 72pc are electric, but there’s been no fall in oil use, because it’s used for other stuff, and because of the number of the non-electric vehicles that are still on the road. A statement saying that major change can be made by 2030 is designed to inspire; it’s not a firm date.’ he adds: ‘The obstacles on the way to the target include climate change itself. The ambitions for renewables depend on a stable climate, but there has been a drought in many parts of the world this year which has cut hydroelectric power.’

Faced with such evidence, it seems sensible to hold a mix of Big Oil and renewables, but also to have some cash in energy-saving technologies: we waste as much as two-thirds of the energy we produce.

I recently bought shares in SDCL energy efficiency Income Trust because its holdings aim to mend what Jonathan Maxwell, the trust’s manager, calls this ‘broken and inefficient system’.

Such are the claims of greenwashing surrounding BP and Shell, that investors who care about the environment may feel ashamed to own shares in these companies. But Big Oil, if they are the bad guys, have the potential to become the good guys.

Duncan MacInnes of the Ruffer trust, which has stakes in both companies argues: ‘BP is a $92bn company with an additional $38bn of debt. At $75 per barrel of oil, it produces at least $15bn in free cash flow, which is being returned to shareholders through a 5pc dividend yield, with another 6pc coming through share buybacks.

‘BP is also paying down debt, which is worth 5pc. This adds up to a return of 16pc, meaning that in less than six years, you get back what you paid for the shares.’

he continues: ‘These sums take into account that BP is investing $4-5bn a year in renewables. At this rate, within five years, it will have a $20bn renewable energy asset base, making it one of the largest providers in the world.’

Taking a chance on the combination of a handsome payback and playing an indirect role in saving the planet is a gamble on an uncertain future. But long-term thinking is what the world needs now.