Top U.S. oil firms are doubling down on drilling, deepening a divide with European rivals on the outlook for renewables, and winning support from big investors who do not expect the stateside companies to invest in wind and solar.
Among a dozen U.S. fund managers contacted by Reuters from companies overseeing about $7 trillion in assets, most said they prefer oil firms to generate returns from businesses they know best and give shareholders cash to make their own renewable bets.
With oil and gas prices jumping this year, the U.S. oil majors mostly have delivered higher returns and achieved better earnings multiples and dividend yields than rivals, cementing shareholder enthusiasm.
“At the end of the day, you don't invest in a company because they promise nice things,” said Adams Funds head Mark Stoeckle, who favors U.S. producers and whose funds do not currently own Royal Dutch Shell Plc, TotalEnergies or BP Plc.
Michael Liss, senior portfolio manager of the American Century Value Fund, said it owns more of the U.S. majors than European partly because the American companies spend a lesser share of capital on things like renewable power and alternative fuels at a time when oil demand remains strong.
"We think their pace is going to be more realistic" in the adoption of new energy sources, Liss said.
The split strategies - returns or a faster energy transition - highlight differing investor and government pressures. They also show the difficulties of crafting a global plan to reduce fossil fuel use, the central topic of the coming United Nations COP26 climate change conference.
NO TREE PLANTINGS
Top U.S. oil firms Chevron Corp, Exxon Mobil Corp and ConocoPhillips reject a direct role in wind and solar and have put less of their outlays into energy transition plans compared with the Europeans. Most expect to increase oil production.
U.S. producers say they share concerns about climate change. They are pledging to produce the same barrels of oil with lower greenhouse gas emissions than before. They are also trying to make burying carbon in depleted oilfields commercially viable, as well as developing new cleaner fuels like hydrogen and biofuels from algae.
But as Chevron CEO Michael Wirth recently said, U.S. companies prefer to generate profits for shareholders "and let them plant trees."
"There are some who believe we should do what the European companies are doing," Wirth told reporters last month after giving an update on the company's energy transition plans. "But I would say that's not the majority of the shareholders that I hear from."
Europe's energy crisis - with natural gas and electricity prices soaring - partially reflects an underinvestment in fossil fuels, Exxon Senior Vice President Neil A. Chapman said at a conference this month.
U.S. and European governments differ on how they want oil companies to cut emissions. Where U.S. lawmakers favor increased spending on carbon capture and storage, German and British governments have passed laws requiring sharp reductions in greenhouse gases.
A Dutch court in May ordered Royal Dutch Shell to cut its carbon emissions 45% by 2030, a decision that would hasten its exit from fossil fuels. Shell and BP have shed U.S. shale holdings as part of their shift, while TotalEnergies has pledged 20% of its capital spending on electricity and renewables.
Shawn Reynolds, a VanEck fund manager, said current high oil prices lend support to the U.S. majors' strategy and illustrate the danger of decarbonizing production without lowering carbon fuel demand.
"There is this slow awakening that an energy transition isn't going to happen overnight," he said. Oil companies that expand into low-margin renewables will miss oil and gas profits, he said.
LIMITS TO GREEN INVESTING
Money flowing in to oil stocks runs contrary to a broader embrace of climate-aware funds. U.S. equity funds ranked as “sustainable” by Morningstar, meaning they largely avoid or underweight fossil fuel stocks, took in $25.7 billion this year through Sept. 30, equal to more than half the inflows into U.S. equity funds without an explicit focus on sustainability.
The total return of the XOP ETF, which tracks oil and gas stocks, was 92% for the year as of Tuesday afternoon, compared with a 22% total return of a representative ESG fund, the Vanguard FTSE Social Index Fund. The total return of the S&P 500 index was 23% over the same period.
Passive investors have become the largest holders of top oil companies. Those firms mostly cannot sell oil stocks to signal displeasure, and instead must channel their climate concerns through talks with companies and proxy votes.
BlackRock Inc and Vanguard, the two largest passive investment firms with some $17 trillion in assets between them, backed dissident directors at Exxon, and supported calls at Chevron's and ConocoPhillips' annual meetings to cut carbon emissions from customers' use of their products. Neither company would comment on specific energy companies, nor would influential state pension funds in California and New York.
Among the 25 largest actively managed U.S. mutual funds, American Funds products were nearly the only holders of top U.S. and European oil firms, according to data from Morningstar Direct.
A spokesperson for American Funds parent Capital Group declined to comment. A Capital equity analyst, Craig Beacock, said in July that higher oil prices could create challenges for oil firms' clean energy approaches.
Harvard University, Rockefeller Brothers and other U.S. institutions have joined a movement led by Norway's sovereign wealth fund to cut exposure to fossil fuel stocks. A recent tally by activists found institutions with a collective $39.2 trillion of assets have committed to some form of fossil fuel divestment.
Investors contacted by Reuters said they were not ready to follow. Better to stay invested and press companies to explain how they can help limit global temperature increases, said Bruce Duguid, head of stewardship for EOS, an arm of Federated Hermes.
Iancu Daramus, senior sustainability analyst at investor Legal & General Investment Management, said companies generally should cut production and pay out dividends. He doubts emerging market growth will keep oil and gas demand high long-term.
Yet too many oil executives figure they can outlast the others as the world shifts to other fuel sources. Few CEOs want to make steep production cuts, he said.
“Every [oil] company we speak to tends to say they’ll be the last ones standing,” Daramus said.
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