«Oil is the new tobacco» - What are the implications?SpareBank 1 Markets – Marine Money, New York

14 November 2019

Peter HermanrudPhone : (+47) 24 13 36 22Mobile : (+47) 95 18 48 86E-mail : ph@sb1markets.no

SpareBank 1 MarketsPhone : (+47) 24 14 74 18Visit address : Olav Vs gate 5, 0161 OsloPost address : PostBox 1398 Vika, 0114 Oslo

Fredrik GundersenPhone : (+47) 24 14 36 28Mobile : (+47) 45 45 29 30E-mail : fg@sb1markets.no

2

“Oil is the new tobacco” – Former California Governor Arnold Schwarzenegger

Source: Futurism, SB1 Markets

March 2019

«Schwarzenegger sees a direct parallel between what happened withthe tobacco industry and what is now happening with the oilindustry»

Source: EY Survey (260 institutional investors globally), SB1 Markets 3

ESG is increasingly important to shareholders, tooEY survey of 260 institutional investors: 50% of investors say they ‘rule out immediately’ investments that ‘disclose risks from climate change’. Up from 8% in 2017. Presumably includes Energy shares?

4

Climate screening is not a Norwegian or U.S. phenomenon. Rather the contraryNorway, Saudi and the U.S. have a large proportion of deniers. Other survey shows Norwegians are least concerned about the consequences (Travel there now and you’ll understand why…). The U.S. has lowest proportion that believe more drastic measures needed now (60%)

Source: Yougov.co.uk, SB1 Markets.

Share price

5

Money flows into ESG funds, and out of ‘Vice shares’And the pace is accelerating. Fossil free funds manage $100bn globally

05

101520253035404550

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E

Estim

ated

Cum

ulat

ive

Flow

s (US

Dbn)

Estimated Cumulative U.S. Sustainable Funds Flows from 2009

Source: Morningstar

6

Resulting in a lot of money chasing the same few “virtue shares”While the horrendous Vice stocks get what they deserve…

• Virtue: Based on OSEBX companies with the strongest E profile (Actively doing good):Solar power: SSO Wind power: BON Hydrogen: NEL Recycling: TOM Waste treatment: SSHIP

• Vice:Based on largest pure play companies, in or close to Norway:Coal: Yancoal and Whitehaven Betting: Kindred, Betsson and LVS Porn: RCI Hospitality Consumer banks: NOFI and KOMPTobacco: S&P 500 TobaccoAlcoh|ol: Arcus Nuclear weapons: BWX Technologies

Indexes are equally weighted and rebalanced quarterly

Virtue vs Vice indexes

Vice Index

Virtue Index

OSEBX

50

100

150

200

250

300

350

400

450

500

550

103%

494%

133%

17 18 19

SB1 Markets/Macrobond

7

Yet nothing compared to the most horrid of them all: Energy stocksEnergy sector is down 12% despite 3 years’ strong cash flow and a 13% increase in the oil price

• Virtue: Based on OSEBX companies with the strongest E profile (Actively doing good):Solar power: SSO Wind power: BON Hydrogen: NEL Recycling: TOM Waste treatment: SSHIP

• Vice:Based on largest pure play companies, in or close to Norway:Coal: Yancoal and Whitehaven Betting: Kindred, Betsson and LVS Porn: RCI Hospitality Consumer banks: NOFI and KOMPTobacco: S&P 500 TobaccoAlcoh|ol: Arcus Nuclear weapons: BWX Technologies

Indexes are equally weighted and rebalanced quarterly

Virtue vs Vice indexes

Reb 2017

Vice Index

Virtue Index

OSEBX

S&P Energy Index

50

100

150

200

250

300

350

400

450

500

550

103%

494%

133%

88%

j m m j s n j m m j s n j m m j s n

17 18 19

SB1 Markets/Macrobond

8

…All virtue shares have been strong, all Vice shares weak

Performance of Vice and Virtue shares since Jan 1. 2018

SB1 Markets/Macrobond

SSHIP

NEL

SSO

BON

TOM

S&P500

OSEBX

BWX Tech

NOFI

Las Vegas Sands

Arcus

S&P 500 Energy

Betsson

Arcus

Yancoal

S&P 500 Tobacco

Rci Hospitality

Kindred Group

KOMP

- 50 - 25 0 25 50 75 100 125 150 175 200

300%

• (1) ESG funds buy ever more ESG shares

• (2) Greenwashing: Traditional institutions make sure they have large stake in at least one Virtue share

• (3) Retail momentum bubble: Retail investors see the momentum in green shares and jump on. # of shareholders in Scanship increased from 650 to 1500 from Jan 2019 to April 2019

9

Three phases of the suspected E-bubble

10

Initially, a self reinforcing prophecy: ESG funds are becoming winnersMore money in ESG funds = More buyers of ESG shares = higher ESG share prices = better ESG fund performance = even more money in ESG funds

“Sustainable funds more likely to be top performers, study shows”

11

An increasing share of investors has pledged to exclude fossil fuels1000 institutions with $8.8 tn in assets have pledged to cease new investment, divest within 3-5 years and invest more in ‘climate solutions’. Equity part 5-10% of MSCI World Index ($50 tn)?

» New York City: Decided to divest the $200bn pension fund from fossil fuels (Jan 18)

» University of California: Announced divestment of its $83bn endowment and pension funds from the fossil fuel industry (Sep 19)

» San Francisco Pension System ($25.5bn) will divest of five fossil fuel companies, probably followed by the rest if they don’t reduce oil and gas reserves and stop denying climate change

» Ireland: Euro 8bn national investment fund required to sell all investments in coal, oil, gas and peat «as soon as is practicable»

» University of Oslo: Foundation with MNOK 950 in assets announced to stop all investments in fossil fuel (Oct. 19)

» Impossible to find Norwegian Index Funds that track full indexes: All exclude some shares

» Fossil free funds have assets of more than USD 100bn

» Several banks will cease to finance coal or fossil (World Bank, HSBC, BNP Paribas, Axa)Source: DivestInvest, The Guardian, British Columbia University, CNBC, Dagsavisen

Source += The Economist 12

Low pricing required to make relevant investors 50% overweight on averageIf 20% of funds become fossil free and 43% are indexed portfolios, remaining active managers have a massive overweight position in energy of 9% vs. 6% in the index. Even lower prices than today?

Non-fossil Index

All other

SUM

Share ofassets

20% 43% 37% 100%

Fossil weight

0% 6% 9% 6%

Sum 0% 2.6% 3.4% 6%

Will this trend continue forever?

13

14

Investors are demanding dividends now rather than further investments…

Source: Macrobond, OSE, SB1 Markets.

0

50

100

150

200

0

10

20

30

40

50

60

70

80

90

sep.

11

sep.

12

sep.

13

sep.

14

sep.

15

sep.

16

sep.

17

sep.

18

Inve

stm

ents

USD

bn

Divi

dend

and

Buyb

acks

USD

bn

E&P Majors capex vs dividends and buybacks

TTM Dividends (lhs) TTM Buybacks (lhs) TTM Investments (rhs)

E&P Majors: EQNR, ENI, BP, Shell, Total, Repsol, Chevron, Exxon, ConocoPhilips

Reported Figures

Source: SB1 Markets. 15

At 4.9%, the Energy dividend yield is unprecedentedDividend yield is at a 25-year high, and highest of all sectors globally

MSCI world sector dividend yield %

Perc

ent

0

1

2

3

4

5

6

7

8

0

1

2

3

4

5

6

7

8

Materials: 2,9%

Industrials: 2,1%

Consumer Disc.: 1,9%

Consumer Stap.: 2,7%

Health Care: 1,9%

Financials: 3,4%

IT: 1,4%

Communication: 1,8%

Utilities: 3,5%

Real Estate: 3,3%

Energy: 4,8%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Source: MSCI, SB1 Markets, Macrobond

MSCI World CAPE on sectors

Now Average since 2004

IT

Health Care

Cons. Disc

Cons. Stap

Industrials

Real Estate

Utilities

Materials

Telecom

Finanicals

Energy

36,1x

28,1x

26,2x

23,7x

23,3x

21,9x

19,8x

18,4x

17,0x

16,8x

12,9x

Shiller

P/E

0 5 10 15 20 25 30 35 40

0 5 10 15 20 25 30 35 40

118

115

110

105

109

106

124

92

103

113

80

Current Cape %

of mean

16

Energy is by far the cheapest sector now…Lowest vs historical average, both on CAPE forward P/E. Lowest CAPE overall

Source: MSCI, SB1 Markets, Macrobond.

And well below the average last 15 years

S&P 500 12m fwd P/E on sectors

Now Average since 2004

SB1 Markets/Macrobond

Real Estate

Cons. Disc.

IT

Utilities

Cons. Stap.

Materials

Telecom

Industrials

Energy

Health Care

Financials

41,6x

20,8x

20,1x

19,9x

19,8x

17,4x

17,1x

16,2x

16,2x

15,1x

12,5x

12m fwd

P/E

0 5 10 15 20 25

107

120

128

131

117

113

117

105

99,7

102

99,6

Current P/E in %

of mean

17

Large changes in investor behavior – no change in oil demand!Zero signs that climate actions have affected oil demand, at least yet. If anything, demand growth has been higher than usual!

Demand

19

y = 0,6368x - 0,0091R² = 0,5024

-2 %

-1 %

0 %

1 %

2 %

3 %

4 %

5 %

-1 % 0 % 1 % 2 % 3 % 4 % 5 % 6 %

Chan

ge o

il de

man

d

Global GDP growth

1516

18

17

2015-20181989-2014

Last 4 years

18

Leading to higher oil price, great shareholder returns – and less CO2 emissions! Oil price must increase to level where demand equals supply, leading to lower consumption

If investments stop while demand keeps growing, we will run into scarcity

Oil supply and demand (IEA, 12mma)

mb/d

Production

Demand

60

70

80

90

100

110

120

60

70

80

90

100

110

120

90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 24 26 28 30

SB1 Markets/Macrobond

Tobacco vs S&P500

01.01.2000: Rebased to 100

Total return series

* Morningstar Consumer Defensives Index

S&P500

S&P 500 Tobacco

Defensives*

25

50

100

200

400

800

1600

3200

25

50

100

200

400

800

1600

3200

309

2121

347

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

SB1 Markets/Macrobond/Bloomberg

*Morningstar Consumer Defensive index 19

If fossil fuels are the new tobacco…There will be a great investment opportunity. Now, or soon

“Vice” effect 2

20

While the ESG investors head for the cliff

21

ESG Subsectors with low entry barriers will see low investment returns. If high barriers, high growth and sustained margins

ESG

ESG investors may end up helping save the world, but not their wallets

Phase 1 Phase 2 Phase 3

Time

Share price

ESG shares

Non-ESG shares

More money chasing same stocks

Selling pressure

Takeovers, more dividends, less capex

Stock offerings to fund capex

Overcapacity

Undercapacity

Today

Source: SB1 Markets

22

APPENDIX

23

‘Normal’ shares are not affacted, since ESG ratings vary widely

24

Shale oil cannot supply all the oil we need – no growth from 2025And all relevant research points to slower growth starting today

Mer om Shale

• Fikk også lov av Stortinget til å investere i unotert infrastruktur for fornybar energi

• Inngår nok mer enn bare fornybar energi i «Environment-related Mandates» » «Mandatet for forvaltningen spesifiserer ikke hva som er en miljørelatert investering.

Mulighetsområdet for slike investeringer består av både store konglomerater med en liten andel miljørelatert virksomhet og rendyrkede miljøselskaper i ulike sektorer.»

» Ordrett fra departementet: «Investeringene skal rettes mot miljøvennlige eiendeler eller teknologi, som kan forventes å gi en klar miljøgevinst, slik som klimavennlig energi, energieffektivisering, karbonfangst og lagring, vannteknologi og håndtering av avfall og forurensing»

» NBIM: «Vi har i tråd med dette konsentrert våre miljørelaterte aksjeinvesteringer til selskaper som driver med lavutslippsenergi og alternative drivstoffer, ren energi- og energieffektiviseringsteknologi og teknologi og tjenester knyttet til naturressursforvaltning. I mandatene til forvalterne stiller vi krav om at selskapene som inngår i de miljørelaterte aksjemandatene må ha minst 20 prosent av virksomheten innenfor disse typene miljøvirksomhet. Det er videre bestemt at de miljørelaterte mandatene ikke kan investeres i olje- og gassprodusenter, kullselskaper og gruveselskaper4.»

• Dette betyr at i NBIM sine øyne er investeringer i miljørelaterte aksjer basert på et marked med en størrelse et sted i mellom hva FTSE fremstiller innenfor «Green Economy» og hva Allied market research definerer som «Renewable Energy Market».

Sources: https://www.nbim.no/no/publikasjoner/brev-til-finansdepartementet/2018/de-miljorelaterte-investeringsmandatene-i-statens-pensjonsfond-utland/, https://www.nbim.no/no/publikasjoner/brev-til-finansdepartementet/2019/mandat-for-statens-pensjonsfond-utland--investeringer-i-infrastruktur-for-fornybar-energi/ 25

NBIM har økt taket på sine investeringer i «miljørelaterte» aksjer til 120 milliarder NOK

• «Renewable Energy investment in 2018 hit USD 288.9 bn»» 11% down vs. 2017 (Driven in part by falling solar costs)» Investment in Europe rose 39% to USD 61.2 bn» Does not include hydropower above 50MW (USD 16bn)» Solar: USD 139.7bn» Wind: USD 134.1bn» Biomass and waste-to-energy: USD 8.7bn (54% incr. YoY)

• China led investments worldwide at USD 91.2bn (7th consecutive year) 37% down from 2017

• Both Europe and US up YoY

Source: https://www.unenvironment.org/news-and-stories/press-release/renewable-energy-investment-2018-hit-usd-2889-billion-far-exceeding

• Sammenlignet med oljesektoren:» IEA: USD 477bn upstream oil & gas supply investments 2018» IEA: USD 249bn downstream, midstream and refining (oil & gas supply investments)» Renewables IEA: Renewable power: USD 304bn Networks: USD 293bn

Source: https://www.iea.org/wei2019/26

Investeringsnivå innenfor fornybar energi

Source: Planet Podium, Graham MFT, SB1 Markets. 27

Ekstremt enkelt å skape interesse for ‘ESG Aksjer’. Og Vice versa..Gjelder selvsagt ikke når SB1 Markets er vert…

Vice Ltd Company PresentationVirtue Ltd Company Presentation

28Source: SB1 Markets.

• Virtue: Based on OSEBX companies with a strong ESG profileSSO (solar), NEL (Hydrogen), TOM (recycling), SSHIP (waste treatment)Vice:Based on largest pure play companies, in or close to Norway: Niche banks: NOFI and KOMP – Tobacco: S&P 500 TobaccoBetting: Kindred, Betsson and Las Vegas Sands - Coal: Yancoal and Whitehaven - Porn: RCI Hospitality – Alcohol: Arcus

Vice index constituents

Reb to 100 in 2017

25

50

75

100

125

150

175

200

225

250

275

25

50

75

100

125

150

175

200

225

250

275

NOFI

KOMP

Whitehaven

Yancoal

Kindred Group

Betsson

Las Vegas Sands

Rci Hospitality

S&P 500 Tobacco

Arcus

j a j o j a j o j a j o

17 18 19

SB1 Markets/Macrobond

Virtue index constituents

NO

K/Sh

are

NO

K/Share

Reb to 100 in 2017

SSHIP reb to 100 in 2018

0

100

200

300

400

500

600

700

0

100

200

300

400

500

600

700

SSHIP

NEL

SSO

TOM

BON

j m m j s n j m m j s n j m m j s n

17 18 19

SB1 Markets/Macrobond

29

Virtue index vs EUA (CO2) cost, EUR/mt

Ret

urn

%EU

R/M

etric Ton

Virtue Index Reb to

100 1/1 - 2017

Virtue Index return

EUA (CO2) EUR/mt

- 50

0

50

100

150

200

250

300

350

0

5

10

15

20

25

30

306%

24,9

jan mar mai jul sep nov jan mar mai jul sep nov jan mar mai jul sep nov

17 18 19

Source: ICE, S&P, SB1 Markets, Macrobond

• NBIM 1%» Fill in details. 100 mrd vs 277 . Hvor mange andre

• Dersom halvparten utelukker Energy og en halvpart til er indeksert. Må resten ha ekstrem andel Energy» Dobbelvekt? Enda mer? Hvor mange har så mye

• Mer om tobakk. Relative estimater mm

• Svensker utelukker Energi. UiO det samme. Hvor mange globalt?

• Sjekke oljefondet ESG

30

TO DO

31Source: Macrobond, OSE, SB1 Markets.

0

50

100

150

200

250

0

20

40

60

80

100

120

01.1

2.19

94

01.0

7.19

95

01.0

2.19

96

01.0

9.19

96

01.0

4.19

97

01.1

1.19

97

01.0

6.19

98

01.0

1.19

99

01.0

8.19

99

01.0

3.20

00

01.1

0.20

00

01.0

5.20

01

01.1

2.20

01

01.0

7.20

02

01.0

2.20

03

01.0

9.20

03

01.0

4.20

04

01.1

1.20

04

01.0

6.20

05

01.0

1.20

06

01.0

8.20

06

01.0

3.20

07

01.1

0.20

07

01.0

5.20

08

01.1

2.20

08

01.0

7.20

09

01.0

2.20

10

01.0

9.20

10

01.0

4.20

11

01.1

1.20

11

01.0

6.20

12

01.0

1.20

13

01.0

8.20

13

01.0

3.20

14

01.1

0.20

14

01.0

5.20

15

01.1

2.20

15

01.0

7.20

16

01.0

2.20

17

01.0

9.20

17

01.0

4.20

18

01.1

1.20

18

01.0

6.20

19

USDb

n

USDb

n

Annual Capex vs. Dividends and Buybacks

DIVIDENDS (lhs) BUYBACKS (lhs) CAPEX (rhs)

E&P Majors ex. EQNR: ENI, BP, Shell, Tota l , Repsol, Chevron, Exxon, ConocoPhilips

Source: Bloomberg

32

Number of shareholders has gone from 650 to 1500 the last months with limited volume…

Source: SB1 Markets.

• Hver enkelt Vice shares

• S&P Tobacco

• Arcus

• Marihuana produsent?

33

Graf alle aksjene i Vice index. Prisgraf og P/E graf. Samt prisgraf Virtue

34Source: Bloomberg, SB1 Markets.

Tobacco vs. Consumer Defensives

Rebased to 100:

01.01.2000

Tobacco S&P 500

Morningstar Consumer Defensive Index

50

100

200

400

800

1600

3200

50

100

200

400

800

1600

3200

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

SB1 Markets/Macrobond/Bloomberg

/S&P Dow Jones Indices

Tobacco vs. Consumer Defensives

Tobacco S&P 500

Morningstar Consumer Defensive Index

0

500

1000

1500

2000

2500

3000

0

500

1000

1500

2000

2500

3000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

SB1 Markets/Macrobond/Bloomberg

/S&P Dow Jones Indices

Rebasert til 29000

Til 1990 men rebasert til 2000

35

S&P 500 12m fwd P/E Tobacco vs. Cons. Staples

3m moving average

S&P 500 Tobacco P/E

S&P 500 Cons. Stap. P/E

Equity Indices, S&P, 500, Tobacco, Index, Price Return, USD

Equity Indices, S&P, 500, Consumer Staples, Index, Price Return, USD

S&P 500 Consumer Staples Index 12m fwd PE (Kalibrert før 2000). Ligger i "Fredrik/for peter/Tobacco

0

250

500

750

1000

1250

1500

0

250

500

750

1000

1250

1500

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

SB1 Markets/Macrobond

/Bloomberg

36Source: Macrobond, OSE, SB1 Markets.

S&P 500 12m fwd P/E Tobacco vs. Cons. Staples

S&P 500 Tobacco P/E

S&P 500 Cons. Stap. P/E

5,0

7,5

10,0

12,5

15,0

17,5

20,0

22,5

25,0

5,0

7,5

10,0

12,5

15,0

17,5

20,0

22,5

25,0

Cons. Stap. P/E relative to Tobacco

- 50

- 20

10

40

70

- 50

- 20

10

40

70

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

SB1 Markets/Macrobond

/Bloomberg

37

The trend is not particularly strong in Norway

Source: Macrobond, OSE, SB1 Markets.

Share price