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Norway's Wealth Fund to Dump Oil Producers: Should You Too?

Nilanjan Choudhury
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World’s biggest sovereign wealth fund, The Government Pension Fund Global (or GPFG) of Norway, plans to axe oil and gas equities from its investment portfolio.

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.

About the 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 and Microsoft Corporation MSFT. Both Apple and Microsoft currently retain a Zacks Rank #3 (Hold).

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

Why the Strategy Shift

The fund 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 suggested by Norges Bank 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 Friday’s proposal, which should pass the parliament test with ease, 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 are at the Receiving End?

Norway is set to drop 134 upstream energy companies, including top U.S. explorers like Apache Corporation APA, Anadarko Petroleum Corporation APC, EOG Resources, Inc. EOG and Marathon Oil Corporation from its wealth fund. The list also includes several Canadian biggies, such as Canadian Natural Resources Ltd. and Encana Corp. However, the fund will hold on to the integrated oil majors like BP plc BP and Royal Dutch Shell plc RDS.A.

Announcement Hailed by Environmentalists

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. In further boost to the green energy proponents, Norges Bank has been mandated to perform a comprehensive review of GPFG’s exposure to companies that present climate change risk.


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 oil and gas holdings are incredibly wide affairs and have turned into speculative plays as opposed to their earlier status of mainstream, blue-chip investments. But with crude prices in the next few months likely to exhibit a sideways-to-bullish trend, we think that 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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Apple Inc. (AAPL) : Free Stock Analysis Report
Microsoft Corporation (MSFT) : Free Stock Analysis Report
BP p.l.c. (BP) : Free Stock Analysis Report
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
EOG Resources, Inc. (EOG) : Free Stock Analysis Report
Apache Corporation (APA) : Free Stock Analysis Report
Anadarko Petroleum Corporation (APC) : Free Stock Analysis Report
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