Sustainable Investing

Kirk Spano

"World's Next Great Investing Columnist" --MarketWatch

Fossil Fuel Divestitures Are Accelerating

Sell! Sell! Sell!

That’s the message from many corners regarding fossil fuel stocks. Institutions, some hedge funds, corporations, banks and several sovereign wealth funds are taking up the cause of going greener. Millennials have no interest in alleviating the downward pressure on coal, oil and natural gas stocks.

I have briefly mentioned the fossil fuel divestiture movement. But that is not doing it justice. That was like saying hurricanes make rain or that tornados are a bit windy. No, I didn’t do it justice. What is happening to fossil fuel stocks now is like the tide going out before a tsunami – it’s disconcerting, but the real damage has not begun.

These boats are in rough shape, but it’s nothing compared to what’s coming…

1000 Divestments With More Coming

Over the past five years, the global fossil fuel divestment movement, led by 350.org, has gone from zero to over 1000 commitments by institutions to sell nearly $8 trillion worth of fossil fuel investments. That pace is not likely to slow down.

A major harbinger happened in 2016 when a large group of the Rockefeller family divested their shares in Exxon. The statement at the time by the family was that there was “no sane rationale” to stay invested in fossil fuels as nations moved to reduce carbon emissions in response to climate change.

(Here is where I put in my regular note that it doesn’t matter what you think about climate change necessarily. What matters is that governments are changing policies and as a “pragmatic” investor, you must react to that information.)

Recently, the world’s largest sovereign wealth fund hinted at plans to begin divesting fossil fuels as well. This is ironic because the fund in question is Norway’s, which was formerly called “the oil fund.”

Norway’s SWF holds roughly $1 trillion of assets on its own. Of that, about $37 billion is in oil and gas stocks. As a first step to divesting, the fund plans to sell off about $7.5 billion of oil gas exploration and production companies.

For now, Norway is holding onto shares of majors, such as Exxon and BP. That won’t be for long though. There is pressure to sell-off the rest of their fossil fuel holdings, not only an ethical objective, but as a pure investment objective. I would not be surprised for them to sell quietly to greater fools without an announcement in order to preserve as much value as possible.

Norway, despite making most of its money for their fund via oil, realizes that we are in fact in the “beginning of the end of the oil age” as I described back in 2015 on MarketWatch. Ultimately, fossil fuel investments will be anchors and not sails for portfolios. That day might be coming sooner than most think.

Why Divestitures Matter

As I discuss regularly, demand for stocks is defined by money flow into or out of stocks. When money flow is accelerating, we see the most rise in stocks. When money flow begins to decelerate, stock prices flatten out. When money flows out of stocks, prices fall.

This is all simple Econ 101 stuff. What do we know about supply and demand. As demand increases, if supply is stable, then price will rise. The opposite is true also.

Look at the fourth quarter of 2019 for the Energy Select Sector SPDR ETF (XLE) versus the S&P 500 ETF (SPY):

Why did the energy market, dominated by oil companies, lag the S&P 500 so bad? Money flows give a yuge clue.

The on balance volume (OBV) is one of the first and simplest measures of money flow. It considers volume on up days and down days. Here’s how it is defined on StockCharts.com:

If the closing price is above the prior close price then:

Current OBV = Previous OBV + Current Volume

If the closing price is below the prior close price then:

Current OBV = Previous OBV  -  Current Volume

If the closing prices equals the prior close price then:

Current OBV = Previous OBV (no change)

In other words, it’s measuring whether up days or down days have the most volume and what is the net impact over time. As you can see in the chart, OBV turns down as the fourth quarter begins and falls off a cliff around Thanksgiving.

A newer money flow indicator is the Chaikin Money Flow (CMF). Here is how it works via StockCharts.com again:         

  1. Money Flow Multiplier = [(Close  -  Low) - (High - Close)] /(High - Low) 
  2. Money Flow Volume = Money Flow Multiplier x Volume for the Period
  3. 20-period CMF = 20-period Sum of Money Flow Volume / 20 period Sum of Volume 

This is a more price sensitive approach to measuring money flow, giving I believe a more accurate representation of the demand for an asset. What’s most important is that demand for energy stocks was negative for most of the period from mid-August until year-end.

There was only one small rally into positive territory and that accompanies a very weak rally. CMF also shows dumping beginning around Thanksgiving.

Consider how money flow is going to look with more and more intuitions divesting. What happens as investors become fed up with lackluster returns on energy stocks? They will sell out of frustration.

The old idea that value is all that matters is no longer true (if it ever was). And, truth be told, many of the coal and oil companies have very little intrinsic value due to their heavy debt loads and shrinking window that they will be able to sell large volumes of product at price.

Many older investors glom onto their investments in the oil majors Exxon and Chevron. Looking in the rearview mirror at profits past, even though both have trailed the S&P 500 for a decade already.

In addition, Saudi Arabia has made one thing very clear recently, Saudi Aramco will be the last company standing. The Saudis recently reminded us that they have the cheapest oil and intend to pump the last barrels ever used.

None of this bodes well for fossil fuel stocks in general. Oil stocks are facing stronger headwinds than virtually anybody other than Tony Seba anticipated.

There is not going to be a respite from the onslaught of shares being dumped. Only short-term trades on the long side will work with a small universe of focused E&P companies that have strong balance sheets, free cash flow, good rock and the distribution to benefit from periods of higher commodity prices.

It’s time to wake up and realize that fossil fuel investments are doomed. Some faster than others, but ultimately, almost all are doomed – and it’s happening much faster than people thought would happen.

The Great Rotation

If money that used to get invested into fossil fuel stocks is not going their anymore, where is it going? That is an easily answered question: just about everywhere else, but mostly into sustainable investments, many related to alternative energy and technology.

This chart is self-explanatory:

Very few investors are demanding energy shares. They want technology. There are other places the money is going too, no doubt, but tech is the main space.

This fact hit me in the head in the past few years as I watched oil companies that were turning profitable, cleaning up their balance sheets and focusing on shareholder returns get very little love from the stock market. To be sure, there have been rallies, but the downturns have been knee shaking.

(Here, I throw in a note to people who don’t know me, that I have been an oil investor for 20 years now. I’ve been a featured guest oil analyst with Forex Analytix, Cody Willard’s Underground, Dan Dicker, Fox Business and other media. I predicted the shale boom ahead of both Citigroup and Goldman Sachs. I am not preaching ideology here – though I do want to see a carbon neutral economy for health and climate change reasons – I am just reading the tea leaves as an investor.)

Like other trends, some are ready to be broken, others are just getting started. This trend away from fossil fuel stocks has just begun, but it is moving fast and accelerating. Faster than I thought, and my projections were about ten years more aggressive than most other analysts with the exception of Professor Seba’s extremely aggressive projections.

You Must Have An Exit Strategy From Fossil Fuel Investments

There is only one logical course for fossil fuel investors: You must plan an exit strategy from fossil fuel investments.

I know, but Exxon and Chevron used to be good investments. Yes, I know. So were Worldcom and Enron.

You should also plan to invest in the new sustainable world of alternative energy and the “smart everything world” which will drive efficiencies across multiple industries.

Here’s how I see some things and how I am planning.

First, I am looking to close my oil investments in the next 3 to 15 months. That fast.

I plan to sell even though I do expect oil prices to continue to drift higher short-term due to pressure from Saudi Arabia and my analysis that slow growth concerns are overstated a bit at this spot in the calendar.  

As I said in Oil Investing Is Dead, Long Live Oil Trading, I do plan to trade oil stocks for many years. However, I will more likely to be a short in the future than a long. In fact, I plan to literally short coal stocks into the ground starting sometime in the next year or two.  

Once I am out of most fossil fuel stocks (there are few natural gas pure plays I will hold longer), I will begin to add onto my alternative energy holdings and a host of smart everything world stocks. While I will have some megacap core holdings such as Google, I will focus on small and midcaps with great technology and the potential to be acquired or go through other strategic transactions.

Remember this from Peter Lynch: “Big companies have small moves, small companies have big moves.”

We will be discussing many of those small and midsize companies the next few years. In the immediate future, however, figure out how to get out of your fossil fuel stocks. I will give you a few alternative energy and smart everything world dividend stocks to replace them soon.

Kirk Spano covers Sustainable Investing as one of the original contributing analysts at FATRADER. Named the "Next Great Investing Columnist" at MarketWatch, Kirk has been getting the jump on secular trends for over 20 years, and now sees investing in alternative energy, smart grid, EVs, agriculture, healthcare and water as the most likely place to make outsize profits in coming decades.
Sign Up Now - Free 15-Day Trial! Go! Fatty!