Hedge funds have quietly grabbed stocks of unloved oil and gas stocks rejected by environmentally conscious institutional investors, and are now reaping big gains with soaring energy prices.
Hedge fund managers in the US and UK have gambled that the rush of many large institutions to embrace environmental, social and governance (ESG) standards means they are wholesaling fuel stocks. fossils, although the demand for some of them remains high.
“It’s such a great and easy idea,” Crispin Odey, founder of London-based Odey Asset Management, told the Financial Times.
“They [big institutional investors] are all so keen on getting rid of oil assets that they are leaving fantastic returns on the table, ”added Odey, whose European fund is up more than 100% since the start of the year.
Odey has strengthened its position in oil and gas stocks this year and has significant stakes in companies such as the Norwegian oil company Aker BP, whose shares have risen by around 43%, and the Asia-focused producer. Pacific Jadestone Energy, up 44%. It has also financed unlisted vehicles set up by commodity companies specifically to buy unwanted assets sold by oil majors, he said.
The shift away from fossil fuels by large institutions has often left hedge funds, which are under less pressure to comply with ESG standards than traditional fund companies, among the only buyers. This can present attractive opportunities, although it may expose them to lower energy prices or further sales by large investors.
Alongside Odey’s fund, Goldman Sachs’ main brokerage division – which provides a range of services such as stock lending and execution – recently told its clients that energy stocks had recorded their biggest ever. net purchase by hedge funds since the end of February, according to a note seen by the FT. .
“People don’t understand how much money you can make in things people hate,” said Josh Young, managing partner and founder of Bison Interests, who says his fund shuns “the dirtiest companies.”
Bison Interests has benefited from positions in companies such as Canadian oil and gas company Baytex Energy Corp and US firm SandRidge Energy and is up 377% this year before charges, according to a person familiar with the matter, ranking it as the ‘one of the world’s top performing funds.
“A lot of these companies are trading at very low cash flow multiples and very large discounts off the replacement value of their assets,” Young said. “More people are driving on gasoline [petrol] cars and motorized scooters than ever before.
Pressure on institutional investors by climate pressure groups to stop funding fossil fuel companies has intensified dramatically in recent years.
Pension funds, charities, churches and other faith groups and universities, which may own certain shares either directly or through funds they hold, are among those who have committed to selling these companies in order to to fight against climate change and to redirect investments towards more forms of renewable energy.
Climate activism group Divest Invest, which is pushing investors to make no new investments in the 200 largest oil, gas and coal companies and sell such positions within three to five years, says it has received pledges from over 1,300 organizations managing $ 14.5 tn in assets.
Hedge fund managers who buy back these stocks say investments in areas such as oil and gas production are still essential, as recent developments in the energy market show. Oil prices hit their highest level in at least three years this week, while UK gas prices more than quadrupled.
Companies often use their oil and gas revenues to fund a transition to cleaner energy, say hedge fund managers, and stopping investments in those stocks is hurting that process.
“The guys at ESG are causing terrible problems,” Odey said. “They make sure that price increases are not met by the offer.” Another Europe-based manager said moves by large investors to stop supporting fossil fuel companies could be “counterproductive” and added that the sector offers a “huge investment opportunity” for their fund. .
Renaud Saleur, a former trader at Soros Fund Management and Jabre Capital, who now heads Anaconda Invest, said the effect was particularly striking in Europe, where investors had bought into ESG concerns more than in the United States.
“In Europe, people have been more inclined to launder the oil and gas industry. It’s stupidity, that [sector] produces money to finance the energy transition, ”he said, adding that these investors were also pushing stocks in sectors such as electric vehicles and hydrogen to“ unsustainable levels ”. He has supported companies such as ShaMaran Petroleum and Australian energy group Santos.
As a target-seeking hedge fund, Jadestone has attracted a number of other investors besides Odey, including Tyrus Capital, which owns around 25%, and Polar Capital.
And hedge funds, including Taconic and Kite Lake, this year took control of Norwegian Energy Company (Noreco), a North Sea oil and gas producer whose shares have slumped more than 99% from the market. at their pre-financial crisis peak, taking seats on the board.
Noreco benefited from the purchase of Danish assets upstream from Shell, with the help of hedge fund financing. Shares of Noreco, which also counts hedge fund Astaris Capital among its investors, rose around 10% this year.
Small energy stocks, which hedge funds often favor, have benefited from buying cheap oil and gas assets from oil majors, which are under pressure from investors to disengage from fossil fuels. But there are signs that the oil majors might be wary of these sales.
Earlier this year, Patrick Pouyanné, Managing Director of Total, told the FT that selling assets to other producers who might be less concerned with ESG concerns was not a solution. “Even if BP, Total and Shell are pulling out of oil and gas, it doesn’t change anything,” he said.