Could it be climate change? I realize that my sample size is small. Basically, it is just me. Sometime around Thanksgiving, it dawned on me that I could not find my gloves from last year. Then I forgot to ask my spouse for gloves for Christmas. Before telling what happened to those gloves, I'll let you know that typically, I get through the winter in New York with two jackets, an old army jacket for when it's just sort of cold outside, and a New York Rangers hockey jacket that would keep me warm if I lived north of the Arctic Circle.
The point here is that I have no idea where my Rangers jacket is, probably buried in a closet somewhere. Today is Feb. 12, and I haven't thought of looking for my warmest winter jacket yet this season. In fact, I have only needed the army jacket a few times. This has been the winter of the hoodie. My gloves? Probably with that hockey jacket. Never had the thought to either find them, nor buy new ones.
I am not smart enough to know if all climate change lays at the feet of mankind, but I am smart enough to know that things are different now, and even if we, as a species, can somehow find a way to cast blame without looking in a mirror, it most likely behooves us to at least try to do what we can to not exacerbate the condition.
About a week ago, BP Plc. ( BP) reported the firm's fourth-quarter financial performance. In terms of both adjusted earnings per share and revenue generation, BP beat Wall Street's expectations. BP even raised the dividend, which will play into this article a little later on. The firm talked of keeping expenses under control, of reducing debt levels, and of divesting assets -- really to no avail. As an investor, I have long depended on the large exploration and production names with huge cash flows as the cornerstone of my dividend book, and of those names, BP itself has long been my flagship holding.
The problem with that has been that investors have increasingly embraced a more environmentally friendly, or socially aware style of asset allocation. The acronym "ESG," which stands for Environmental, Social and Corporate Governance has quickly become a significant part of the industry lexicon, and has become a serious point of consideration among portfolio managers. They care about more than dollars and cents these days. They really do.
On Wednesday morning, from London, BP's new CEO, Bernard Looney, acknowledged that his firm needed to "reinvent itself." Looney, now famously said, "The world's carbon budget is finite and running out fast; we need a rapid transition to net zero. We all want energy that is reliable and affordable, but that is no longer enough. It must also be cleaner." Ever hear a "big oil" executive talk like that? Me neither.
The firm has now pledged to cut greenhouse gas emissions to net zero by the year 2050, or sooner. To get this done, BP will re-organize a simple upstream / downstream model into four units. These four businesses will be Production & Operations, Customers & Products, Gas & Low Carbon, and Innovation & Engineering. BP will in addition to setting that date for net zero emissions, also target a 50% reduction in the carbon intensity of the products the firm sells over a similar timeline.
Why Would BP Do This?
Well, there are the obvious, environmentally responsible reasons to be sure. Beyond that, there is no secret that as the already mentioned portfolio managers as a group have voted with allocation dollars, that Wall Street has assigned a far lower multiple in terms of valuation to the entire Energy sector. Whether or not one buys into the cause, this impacts everyone.
As of Monday, the S&P 500 traded at 18.8-times forward looking earnings. That stacks up either very well, or overvalued depending on one's point of view, against a five-year average of 16.7-times. Now, we isolate the energy sector. This group now trades at just 16.5-times forward looking earnings, meaning that the street values these businesses more cheaply than it does large cap equities in general. The kicker is this: The Energy sector has traded at an average of 29-times forward looking earnings over five years. The Energy sector has entered into an epic battle with the health care and financial sectors for the least valued by investors, after having enjoyed the largest premium paid by far for many years. Like I said, things have changed. Demand for fossil fuels may or may not wither over coming decades, but willingness of the investing public to highly value these businesses? That ship has sailed.
Larry Fink of BlackRock ( BLK) told you as much in his annual letter this year. BlackRock only had more than $7.4 trillion under management at the end of 2019. Fink's opinion might just matter. Shortly after that, it was Microsoft's ( MSFT) Satya Nadella committing to not only get that firm to get to net negative in terms of carbon emissions by 2030, but to "remove" all carbon ever emitted by the firm since its founding in 1975 by the year 2050. The handwriting is more than on the wall.
Here's What I'm Doing
I wrote to you earlier this month stating my intention to work my way out of my oil longs. Those stocks, you might recall are Exxon Mobil ( XOM) , Royal Dutch Shell ( RDS.A) , and my favorite, BP. The good thing is that these names are quite easy to manage in terms of net basis. For the most part, these firms pay huge dividends and when writing calls vs. long positions, investors have not really had to worry too much about being called away. The point is that these positions had to be constantly managed. The idea behind running a dividend book is that one can "set it and forget it." Revenue without the work. If share price erodes faster that the dividend-driven revenue accumulates, that pretty much becomes an exercise in futility.
I told you in that piece that these names were to go ex-dividend in the near future, and once I was a shareholder of record on the date that got me paid, I would be free to adjust these holdings. Exxon Mobile will pay 87 cents to shareholders of record on Feb. 11. That was Tuesday. Poof ... you're free. Royal Dutch Shell will pay 94 cents to shareholders of record Feb. 13. That's Thursday. BP will pay 64 cents to shareholders of record on Feb. 14. That's not only this Friday, that's Valentine's Day. Feel the love.
There is no doubt in my mind that these names will be difficult to replace as dividend names. XOM yields 5.75%, RDS.A yields 7.23%, and BP after the hike, yields 6.89%. I have no problem parting with XOM and RDS.A. But has BP given me enough to believe and will investors reward that firm for its stated intention? I don't know. I do know that among my energy holdings it will be the last one standing. I will at least give BP that chance.
(BP, MSFT are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells them? Learn more now.)
