The Lex Newsletter: US should be a brave penguin with an energy transition plan

Dear reader,

COP27 begins in Egypt this Sunday. Not a lot came out of the last environmental waffle-fest. Expectations are correspondingly low this time.

That is a drag for global capital, Lex’s main subject. It cannot allocate itself optimally when the path of energy transition is so unclear.

Dithering over climate change is an example of a collective action problem. When individuals cannot co-operate to solve a challenge, individual consequences are worse.

The penguins pictured above are pluckily dealing with the collective action problem of leopard seals. These predators swim around Antarctica’s rapidly disappearing ice floes picking off stray birds. Penguins are safest dashing to their feeding grounds in a group. But someone has to jump in first.

The world’s governments are stuck at the milling-around stage when it comes to combating climate change. They have made plenty of theoretical commitments to restrict global warming to 1.5C above pre-industrial levels. They have taken little practical action to achieve this.

Equity investors, lenders and chief executives tell us they need governments to provide a detailed, multilateral plan for transition. This is the world’s largest-ever capital project and it needs granular itemisation, just like a multi-decade dam or motorway construction project.

The US, as leader of the free world, needs to be a brave penguin and mastermind this plan.

There is only so much the individual eco-conscious citizen can achieve — even if they follow all the advice in Lex’s Carbon Counter series of articles. This just won us a gong for Best Editorial Campaign in the 2022 Aviva Investors Sustainability Media Awards.

No prizes for Lex’s bet on renewable energy companies, such as Denmark’s Orsted. These have performed spectacularly badly of late. Reasons include supply outages, lower wind speeds, the Ukraine war and a cyclical stock rotation away from growth stocks.

To comment on this or any other aspect of our coverage, please email me at Lexfeedback@ft.com.

Investors would have done much better in oil and gas stocks. BP announced bumper adjusted net quarterly profits of $8.1bn this week. That came on the heels of US supermajors ExxonMobil and Chevron raking in almost $31bn in combined net income for the third quarter. US president Joe Biden subsequently ranted against “war profiteers”.

Oil company profits are fuelling a clamour for higher windfall taxes. These levies are sops to populism that distort tax policy and deter foreign investment. But energy groups are mishandling their earnings surge by prioritising payouts over investment. Higher taxes appear inevitable.

Brazil’s Petrobras is already accustomed to being a political plaything. Its shares tumbled this week after Luiz Inácio Lula da Silva won the country’s presidential election. The oil company is publicly listed but state-controlled. It may come under pressure from leftist Lula to cap pump prices.

We think market sentiment and the consensus in Brazil’s Congress should help Petrobras resist. That would mean the stock is cheap at present. Foreign investors are right to take a more sanguine view of Lula’s latest presidency than locals who tend to have affiliations to defeated incumbent Jair Bolsonaro.

If you are British, you may nevertheless feel that Lula bears a suspicious resemblance to firebrand and former UK Labour party leader Jeremy Corbyn (white beard, specs, tendency to shout). Has anyone ever seen them in the same room?

Rates and M&A

Interest rate increases were the big economic news this week. The Federal Reserve raised US rates to a range of 3.75 to 4 per cent and the Bank of England went up to 3 per cent.

This had all been well-flagged. Lex is more interested in what the European Central Bank, at 1.5 per cent, may do by way of a follow-up.

Admittedly, the EU economy is weak and negative rates are a recent memory. Even so, EU institutions have a bias towards inaction — one of those collective action problems again — which suggests inflation-fighting may be belated and understated.

Rates have risen enough already to restore the raison d’être of European retail banks. BNP Paribas is France’s largest lender. But it benefits less than some peers from surging net interest income. This is partly because it has a large investment bank. Business there is hardly brisk at the moment.

It is tough to get M&A deals off the ground in Europe and the US. Debt is scarcer and costlier.

This was brought home to us when we war-gamed a private equity takeover of Adidas. We figured this might be a neatly opportunistic deal. The shares are depressed. Adidas is in turmoil after dropping a key business partner, rapper Kanye West, for posting racist comments.

But after some chats with buyout professionals, we concluded a purchaser might have to finance at least three-fifths of the deal with equity. That would depress potential returns.

Even the mighty Blackstone is finding the going harder. The alternatives giant needed vendor financing to make a $14bn purchase of Emerson’s air conditioning components business. It owes Emerson $2.25bn, due in a decade with interest payments along the way.

Tougher buyout conditions level the playing field for trade buyers, who can find cost savings more easily. That did not apply to Johnson & Johnson’s $16.6bn takeover of Abiomed. But healthcare deals are typically driven by intellectual property, in this case a heart pump.

It is a mystery to us why the Qatar Investment Authority is leading a consortium of Gulf investors putting money into Credit Suisse. This is a lot better for the shambolic bank than it is for the Qataris. Liquidity aside, it could give wealth managers better access to prospective clients. A new Credit Suisse operation in Qatar hardly qualifies as a tech start-up of the kind its rulers want to attract.

Meanwhile, in the parallel world that is the Elonisphere, the entrepreneur began his campaign to turn Twitter into a profitable business. Cutting costs and charging more is a good start. But this still looks more like a $44bn flutter than a calculated investment for Elon Musk.

It emerged this week that Tesla, of which Musk is chief executive, had discussed buying a 20 per cent stake in Glencore. The talks foundered, as well they might. Stock exchange rules would have prevented the miner from selling cobalt for electric vehicle batteries at mates’ rates, shareholding regardless.

Right good reads

Apropos of Glencore, I have just started reading The World for Sale. This is a pacy account of the racy roots of commodity trading groups by Javier Blas and Jack Farchy, two former colleagues now working at Bloomberg.

I have an embargoed review copy of this book, which was published in 2021. That shows how up-to-date I am in my trawl through a bedside book tower.

Journalism is all about timeliness. This week in the FT, I enjoyed Tom Hale’s gripping account of his stay in a Chinese coronavirus camp. Likewise, Josh Spero on the repatriation of Benin art treasures looted by the British in the 19th century.

I also had fun reading up on pickleball, the low-impact US sport that is pushing indignant tennis players off their courts.

As an older member of the community, I am in favour of any sport that de-emphasises mobility. My only regret is that it does not seem to be possible to play pickleball while sitting in a deckchair, bat in one hand, beer in the other.

Enjoy your weekend, whatever you do to keep fit.

Jonathan Guthrie
Head of Lex