Norway's Move on Energy Stocks Gets an Overreaction

 | Nov 18, 2017 | 8:00 AM EST
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The media were aflutter Thursday with stories of Norway's sovereign wealth fund, officially the Government Pension Fund Global (GPFG), dumping its oil and gas stocks. The GPFG's website lists a real-time market value of 8.311 billion krone -- or $1.008 trillion at current exchange rates, and at Sept. 30, 2017, the fund's asset allocation was 65.9% equities. So GPFG is a major player in global stock markets, and hence the sensationalized headlines in the financial press. 

The reality, as usual, is a little more nuanced. In fact, Norway's central bank, Norges Bank, made a recommendation to reduce the fund's holdings in energy stocks to the company's finance ministry under its remit as advisor to the GPFG. So Norway will not be dumping its holdings in BP (BP) stock Monday. The country's finance ministry is studying the proposal, with a final decision expected in the fall of 2018, so there is no immediate impact on the demand for energy sector equities, although the headlines might have made it seem that way. 

Also, I read the Norges Bank letter and it included documentation and I need to correct some misinformation that I found in several published reports, including normally reliable sources, such as the Financial Times. Norges Bank reports that oil and gas stocks make up 4% of the GPFG, not the 6% quoted in many press accounts Thursday. That 6% represents the weighting of oil and gas stocks in the benchmark indices used to manage the GPFG, not the GPFG itself. 

So if Norway's sovereign wealth fund is already materially underweight the energy sector, why would they look to divest from the sector entirely? Because, by Norges Bank's calculations, the value of Norway's 67% stake in Statoil (STO) -- held separately from the GPFG -- is equal to the value of the GPFG's holdings in energy stocks. So, effectively, "Norway Holdings" has roughly 8% exposure to energy stocks vs. the 6% benchmark figure. In the world of index-hugging portfolio management, that is a big overweighting, even if the average investor might not see it as a significant margin. 

That rebalancing would comprehend about $20 billion in market value, and obviously would not be done in one fell swoop. Norges Bank uses MSCI for its benchmarking, and a quick look at the fact sheet for MSCI's World Energy Index shows a market cap for the sector of $2.432 trillion as of Oct. 31. So the GPFG's total potential divestment would represent 0.8% of the total market cap of energy companies, and maybe a tenth of a percentage point more since they obviously will not be selling any Statoil shares. 

This "major move" by Norway's GPFG would affect less than 1% of the value of the world's energy equities. The articles Thursday quoted dollar values of declines in Exxon Mobil (XOM) , Chevron (CVX) , BP, Royal Dutch Shell (RDS.A) . and Total (TOT) without noting that oil prices declined Thursday. Oil prices had a nice bid Friday on the back of benign data from GE Baker Hughes' weekly rig count, and four of the big five oil stocks rose Friday. 

But that's really the point. Oil prices are volatile. So, Norway's wealth fund, built entirely from the proceeds of sales of Norway's carbon-based fuels, is indeed exposed. That exposure is also not declining, as Norges Bank values the present value of the Norwegian Treasury's future revenues from oil and gas at a cool $500 billion. 

At the end of the day, though, Norges Bank's own figures show oil stocks outperformed their benchmark for the period 1970-2017 (see chart below) by more than a full percentage point (1.2 percentage points for the majors, 1.1 percentage points for the broader energy sector.) So, oil stocks have been a good investment over the long term. I believe they will continue to be going forward, and if the management of the GPFG does choose to reduce its holdings in the oil sector, I believe there will be plenty of investors interested in value (especially if one measures value by yield) to snap up those shares. 

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