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Norway's $1T Money Manager to Ditch Oil Stocks: Here's Why

Nilanjan Choudhury

Following the go-ahead from the country’s parliament recently, the world’s biggest sovereign wealth fund, the Government Pension Fund Global (or GPFG) of Norway, is set to axe fossil fuel equities from its investment portfolio.

Earlier this month, the nation’s MPs voted a decision to drop around $13 billion in stocks associated with oil, gas, and coal controlled by GPFG. The fund has also been given a green light to set aside up to 2% of its corpus (amounting to $20 billion) for investments in renewable energy projects.

While the $1 trillion scheme’s move is seen by some as part of an ethical drive in shunning stocks that are deemed harmful to the environment, GPFG maintained that the decision was prompted by financial considerations. It must be noted that the Norwegian central bank, which runs the fund, advised the government to ditch energy holdings in November 2017 to avoid the finances from being affected by oil price fluctuations.

The World’s Biggest Wealth Fund

The sovereign wealth fund of Norway (officially known as the Government Pension Fund of Norway) is created on the back of the Scandinavian country's booming oil and gas industry. The fund controls around 1.4% of the world’s market capitalization and is intended to provide the country’s 5.3 million inhabitants with generous welfare state provisions.

Equity investments account for roughly 70% of the allocation of the massive fund, which has stakes in more than 9,000 companies worldwide, including the likes of Apple Inc. AAPL, Amazon AMZN, and Microsoft MSFT.

Financial Concerns (Not Climate Crisis) Behind the Strategy Shift

The reserve may be built by the states' revenues from oil and gas, but has decided to offload investments in firms that are engaged in finding black gold. The reorganization is said to impact a fifth of its oil and gas equity holdings of around $37 billion as of year-end 2018.

The Norwegian government said the motivation behind the move is to minimize the economy's exposure to the volatile commodity prices in general and reduce risks associated with a permanent oil price decline in particular.

The government insisted that climate concerns have nothing to do with this decision and that oil would be an “important and major industry in Norway for many years to come”.

Moreover, the move is solely aimed toward companies engaged in exploring and producing oil and gas and not for the diversified energy companies that have operations in various spectrums of the business. As such, the fund will continue to hold stakes in integrated oil giants that do everything from searching for fossil fuels to selling them to consumers to investing billions of dollars in renewable energy.

Which Companies Will be Stubbed Out?

Norway will gradually drop 134 upstream energy companies, including top U.S. explorers like Apache Corporation APA, EOG Resources, Inc. EOG and Marathon Oil from its wealth fund. The list also includes several Canadian biggies, such as Canadian Natural Resources Ltd. and Encana Corp. It will also step back from investments worth $6 billion in eight coal companies. However, the fund will hold on to the integrated oil majors like BP plc BP and Royal Dutch Shell plc RDS.A. Both BP and Shell currently retain a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Environmentalists Claim Victory

The climate change activists welcomed the fund’s partial oil and gas divestment as a clear recognition of the efforts to move away from fossil fuels to cleaner energy. The ultimate aim, they say, is a quick transition toward renewable energy and other low-carbon solutions.

Conclusion

Considering that the pension fund managers make investment decisions after carefully studying the market and the portfolio companies, should you follow on their footsteps? In the case of GPFG, we believe that mirroring the investment giant’s move might not be a great idea just yet.

Agreed, some people are not comfortable with greenhouse gas-emitting fossil fuels and there are others who just want to shut down the industry completely. However, most would agree that the world will run on fossil fuels for decades to come.    

The institutional investor’s plan is a reflection that energy holdings are incredibly wide affairs and have turned into speculative plays as opposed to their earlier status of mainstream, blue-chip investments.

It’s true that natural gas is currently going through a very difficult phase and coal continues to lose its popularity as an energy source. However, we believe that crude prices in the next few months are likely to exhibit a sideways-to-bullish trend and consequently, the returns on some of these stocks are still not under pressure. Therefore, the ‘financial’ argument put forward by the fund in supporting its decision is debatable.

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