When will pension, endowment and other large investors return to oil and gas stocks?

Some of them simply won’t, said Michael Cembalest, chairman of market and investment strategy for J.P. Morgan Asset Management’s more than $2 trillion of assets under management.

Would CalPERS (the California Public Employees' Retirement System), in particular, return? “No. It’s just that the politics are too difficult,” Cembalest said at an annual University of Texas symposium Sept. 15 hosted by the Kay Bailey Hutchison Energy Center.

Hart Energy looked at what hydrocarbon-investing dropouts have missed out on, examining Devon Energy, for example. The share price on Jan. 4, 2021, was $18.11. On Sept. 18, it was $49.40—a 172% return in approximately 2.75 years.

Meanwhile, dividends paid total $9.24 per share, representing a 51% cash return and a 224% return to date.

Devon has some 640 million shares outstanding. Trading volume most days is about 5% of outstanding.

In contrast, Apple has underperformed in that timeframe, growing from $132.05 to $178.32. Dividends paid total $2.48. The total return in 2.75 years as of Sept. 18 was 37%.

Apple has some 15 billion shares outstanding. Daily turnover in 2023 has averaged less than 5%.

According to Devon’s annual proxy statements, its 5%-plus shareholders have been Vanguard Group, BlackRock and State Street the past two years, holding more than 27% of outstanding shares as of year-end 2022.

Cembalest noted that each time a large U.S. institutional investor drops out of hydrocarbon investing, “oil and gas consumption doesn't drop.” Others, such as Singapore’s GIC and Abu Dhabi's Mubadala Capital, can fill voids. “Somebody like that is just going to step in, and do it instead and charge a higher premium.”

Currently, oil and gas stocks are trading at a historical discount to the broad market. J.P. Morgan Asset Management has “made good money in cashflow terms, owning … midstream, upstream and downstream assets.

“But we have to do so in investment vehicles that recognize that the multiples paid for those may never rise,” he said.

The shares have to be held for their cashflow generation. “They're difficult to sell, and you really can't project the way you would in other growth industries that the multiples paid for those cash flows are [going to work out].

“And I think that's a reasonable way to think about what the oil and gas sector is going to be going through over the next 10 to 15 years.”

Currently, the top U.S. oil and gas operators’ cashflow generation “is off the charts,” he noted, “but the multiples people that are willing to pay for them aren’t there.”

The Dimon reflection

J.P. Morgan Chase & Co. Chairman and CEO Jamie Dimon has been among the loudest voices saying investments in oil and gas need to continue. Cembalest said Dimon’s conviction on the subject is solid.

“Jamie will keep doing that from the afterlife, so I'm not worried about his resilience.”

The others are quiet because the financial sector is regularly bailed out by the federal government, “which has, I think, reduced the appetite of some of the other CEOs to take a hard stand on certain things.”

But some are just oblivious, Cembalest said.

“Some of them are also not informed enough on the topic to really kind of say, ‘This is what we're going to do, and this is why we're doing it. And I don't care how many protestors show up in our lobby and how many people show up in our shareholder meetings. We think this is the right, all-of-the-above strategy for the United States.’”

Morgan Stanley’s position is firm. “I don't see that temperament in some competitors, and that's a shame.”

And “energy's not the only thing that we get protested about. So the organization has reflexive muscles to deal with the fact that some stakeholders and constituents in the places you operate don't like the way you do business.

“A lot of times you adjust to that; sometimes you don't.”

Some other CEOs, “particularly of the big-money managers—the trillion-dollar money managers—went too far in the decarbonization camp and have had to double back because they realized that it was untenable.”

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