This message is exclusively written for the United Kingdom Investing.com
If you invest in the UK stock market, it is very difficult to avoid large stocks of oil and gas, which currently make up just over 15 percent of the index and just over 12 percent of the index. This counts double if you have a company pension fund – BP (LON 🙂 and Royal Dutch Shell (LON 🙂 are pioneers of such investment products because of their long lifespan and long-term dividend payments.
However, old certainties are crumbling. A recent OPEC report noted that the 2020-2025 period will for the first time reduce the demand for oil from the 36 developed market countries that are part of the OECD
Total global demand for oil will continue to grow, driven by various emerging markets in the world, but this is seen as the beginning of a shift in regime as the use and size of renewable energy sources grows.
Analysis of the number of words in the annual OPEC World Oil Outlook publication shows more mention of & # 39; electric vehicles & # 39; then & # 39; tight oil & # 39; and – in the last year – a sharp increase in the use of the word & # 39; climate & # 39; & # 39 ;. The times are changing & # 39 ;. Perhaps this is why it has been somewhat suppressed in recent years.
Change is also visible at the two major oil companies on the British stock market. BP has just announced that the promotion of Bernard Looney – formerly head of his oil and gas exploration department – the acquisition of corporate legend Bob Dudley as Chief Executive. Traditional head of research would have been a very indisputable way to become BP CEO, as it is a fairly important position at a company like BP.
Given Mr. Looney's comments a few months ago that & # 39; comparing gas to coal is not good enough in itself … we have to compare gas to zero carbon … shout louder about the good that we do is not a winning strategy … we have to prove that we are part of the solution & suggests a recognition of the need for a broader agenda.
If the incoming CEO is really serious about regime change, BP will either be much smaller and / or highly dependent on handling some large coups in the coming years.
Take a look at the recent version of the company. Profits are fully generated in the nuclear oil and gas or closely related activities. Meanwhile, if you look at the line of capital expenditures, spending spends around a 7: 1 ratio in favor of carbon-related activities instead of renewable energy sources or initiatives with low carbon dioxide. Even with a strong pull on the oil super tank wheel, BP will in reality be its belt & # 39; Beyond Petroleum & # 39; not live up to a while.
And then of course there is the dividend payment and other forms of shareholder remuneration, such as the purchase of own shares. One of the main reasons for large-scale oil stocks being held so widely is the 6.5 percent dividend yield currently offered by BP and Royal Dutch Shell. Every conversation about the fading demand for oil and the challenges (and costs) of evolving a business model more towards renewable energy, immediately raises questions about dividend in the medium term and sustainability of share buybacks.
A notable remark in a few weeks ago was the statement that & # 39; the prevailing weak macroeconomic conditions and challenging prospects inevitably create uncertainty about the completion of the share buyback by the end of 2020 & # 39 ;.
This was a striking remark as they also announced results that showed a decline in profits and a rise in the company's debt level, influenced by lower profits and cash flow due to lower oil and LNG prices.
In the meantime, the company felt obliged to make a public statement about the timing of discussions at management level about the company's future dividends. That sounds like a company that feels some warmth for me.
Be it macroeconomic, thematic or individual stock level, the two largest UK oil companies listed (which make up a large part of the country's leading indices, plus corporate and private pensions). Both shares are well above their lows in 2016, but have made little progress in stock prices over the past 2 years.
Royal Dutch Shell PLC Class B
This dullness could very well be a period of calm before a storm. Major decisions await the managers of all major oil companies. Similarly, UK investors must ask themselves whether it is time to renounce such land investments – and perhaps even the passive index tracker funds that are naturally full of such names. That's a big decision … but ultimately, whether you manage a large company pension fund or your own investments, this is what the financial markets stand for.
