For sale: $25 billion oil shares dumped by world's biggest fund seek new owner

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For sale: $25 billion oil shares dumped by world's biggest fund seek new owner

By Rakteem Katakey and Cole Latimer
Updated

Big Oil is under pressure, unloved and on sale.

Energy giants from Exxon Mobil to Royal Dutch Shell are struggling back to their feet after a three-year oil slump, while also fighting to prove they can survive for decades to come amid an accelerating shift to clean energy.

So getting dumped by the world's biggest investment fund wouldn't be welcome news.

Norway's $US1 trillion ($1.25 trillion) sovereign wealth fund said on Thursday that it wants to sell about $US35 billion of shares in oil and gas companies to make the nation "less vulnerable" to a drop in crude prices.

Big Oil is under pressure, unloved and on sale. So getting dumped by the world's biggest investment fund wouldn't be welcome news.

Big Oil is under pressure, unloved and on sale. So getting dumped by the world's biggest investment fund wouldn't be welcome news.Credit: Bloomberg

Norges Bank Investment Management has nearly 380 investments oil and gas investments worldwide, the majority of which are in the US.

If the strategy is implemented it will have an enormous impact on the market as the fund is amongst the top ten largest institutional investors in some of the world's largest oil and gas companies. It holds stakes worth more than US$5 billion in Shell, US$3 billion in ExxonMobil, and US$2 billion in Chevron, BP and Total.

"This would be hugely impactful, depending on how they do it, especially when many people aren't comfortable with energy just yet anyway," said Elvis Pellumbi, London-based chief investment officer at CF Opportunity Fund. "They would also lose a lot of money doing it, unless spread over a number of years."

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In Europe, Norges Bank Investment Management is among the top 10 shareholders in each of the continent's biggest oil companies. Its largest stake is 2.3 per cent of Shell, followed by 1.7 per cent of Eni. If the sale is approved by Norway's Finance Ministry, it could bring millions of shares to the market and test the appetite of other investors for companies that are striving to show they've seen off the worst of crude oil's slump.

But the sell-off is also likely to create an enormous liquidity event in Australia, especially if the fund was to dump its investments wholesale.

Norges has more than US$431 million ($567 million) in Australian oil and gas investments across 11 companies, as well as more than US$224 million stakes in the energy companies AGL, Origin, and Infigen.

The local oil companies impacted by this decision would include Woodside, Santos, Oil Search, and AWE.

An AWE spokesperson declined to comment on the investment fund's divestment strategy, despite the fact it is one of its substantial shareholders.

"It's a big sale," but the market will be able to absorb it, said John Roe, head of multi-asset funds at Legal and General Investment Management. "There are reasonable fundamentals behind energy companies. Many are already focusing on how to cope with future changes in the energy mix, including reducing investment."

Oil industry shares have gained in recent months, with the 88-member MSCI World Energy Sector adding more than 9 per cent from this year's trough in August. Oil prices have increased as OPEC production cuts help to shrink global inventories and demand strengthened. Major oil companies have also started to demonstrate they can live with prices at $US50 to $US60 a barrel by cutting spending.

Bracing for peak oil

Still, the index is the worst performing sector in the overall MSCI World Index. The industry's future is being questioned like never before as electric vehicles and the fight against climate change prompt some forecasters to predict that within a decade demand could peak for petrol and diesel -- the backbone of the industry in the past century.

Fat Prophets analyst David Lennox said the Norwegian fund's decision was little surprise for the market considering the current role Norway is taking in environmental sustainability. "It makes sense if Norges Bank is following their lead on this," he said.

The fund has forecast its investments in oil and gas will generate dividend returns of about 4000 billion kroner ($645 billion) for the country, however, this figure is highly dependent on continued oil market stability.

Environmental groups have welcomed the move to offload fossil stocks.

"Norway has taken action to protect its sovereign wealth fund assets from the consequences of the coming peak in oil demand," said Catherine Howarth, Chief Executive of ShareAction, an activist group. "We would expect pension funds and other long term investors to follow suit."

Oil and gas equities reacted negatively to the announcement. Shell's B shares led the declines, dropping 2.1 per cent, while Eni dropped 0.9 per cent and BP lost 0.7 per cent.

The Norwegian fund's decision to sell is "further reason to be cautious for oils relative to broader markets over coming one to three years," said Jason Kenney, an Edinburgh-based analyst at Banco Santander.

Institute for Energy Economics and Financial Analysis director of finance, Tom Sanzillo, said the move as a reminder that ongoing low oil prices were a continued risk.

"The Norges Bank recommendation that the Norwegian Fund remove oil and gas stocks from its benchmark indexes reflects the long-term deterioration of these stocks," Mr Sanzillo said.

"Oil and gas stocks are no longer stable providers of cash or value added contributors to institutional investment funds. The bank's decision now incorporates the risks from these increasingly speculative investments.

New opportunities

Yet, some investors saw Norges Bank's proposal as a chance to make a buck.

The sell-off prompted by Thursday's announcement "is a great opportunity to buy Shell stocks again," said Danilo Onorino, fund manager at Dogma Capital in Lugano, Switzerland, who owns stock in several European oil majors.

"This announcement is extremely bad for Norges. Not only will they be selling at minimal levels," but they will also give up very high dividend yields, he said.

Others saw a different opportunity.

"From a financial point of view this makes perfect sense" because Norway's economy already has considerable exposure to oil and gas, said Jan Erik Saugestad, Chief Executive Officer of Storebrand Asset Management, Norway's largest private pension fund with $US80 billion under management.

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"This also represents an opportunity for the oil fund to invest more in renewable industries and infrastructure."

Bloomberg with BusinessDay

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