5 Investor Strategies for the Carbon Bubble: Chevron Corporation (CVX), TransCanada Corporation (TRP)

Page 1 of 2

Two developments in the last week are turning the heat up on oil companies: HSBC released an analysis finding oil majors at significant risk from “unburnable” reserves, and a pension fund has agreed to consider divestment from fossil-fuel companies in response to NGO pressure. This signals growing concern among conventional investors that climate change could be creating a “carbon bubble” in equity markets.

Climate change scenarios
Chevron (CVX) Set to Win Lithuanian Shale Gas LicenseConcerns around carbon dioxide emissions are growing as climate science grows ever firmer on CO2′s contribution to climate change. International research bodies – including the International Energy Agency, or IEA – model three possible scenarios for the future in terms of the number of degrees Celsius of average global warming by 2050.

The six-degree scenario, or 6DS, is basically Armageddon. 6DS is the scenario we are expected to see if we continue on our current trajectory. The four-degree scenario, or 4DS, is certainly better, but the World Bank released a report in November 2012 emphasizing that 4DS must also be avoided. The bank projects “unprecedented heat waves, severe drought, and major floods in many regions, with serious impacts on human systems, ecosystems, and associated services.” These effects would lead to spreading tropical diseases, crop failure, inundation of island nations, and more.

World governments and institutions have repeatedly committed to staying below the two-degree scenario, or 2DS. To be clear, scientists still warn that a two-degree Celsius increase is the level at which atmospheric feedback loops could trigger dangerous climate change. Therefore, it is this scenario that HSBC used as the basis for its study.

Unburnable reserves
To achieve 2DS, the IEA calculates that no more than about 1,440 gigatons of carbon can be emitted globally by 2050. Emissions have already reached 400 gigatons, which leaves only around 1,000 gigatons – or just a third of current proven reserves – to be burned.

HSBC’s analysis looked at European oil majors. Norway’s Statoil ASA (NYSE:STO) is the worst affected, with approximately 17% of its market capitalization at risk. HSBC also calculated that 6% of BP plc (NYSE:BP)‘s reserves are at risk, along with 5% of Total S.A. (NYSE:TOT)‘s and 2% of Shell‘s . However, HSBC finds that a bigger threat to the sector’s value comes in the form of reduced demand, which could lead to lower oil and gas prices. In that event, the potential value at risk for leading fossil fuel players could increase to 40%-60% of current market capitalization. The analysts think investors have not priced in this risk, probably because it seems so far off.

But is it so far off? The IEA said in 2011 that on its current trajectory, the world could exhaust its carbon budget by 2017. In 2012, the IEA said that energy efficiency improvements could offer a further five-year reprieve. Even then, the next decade is likely to be when the excrement hits the fan. HSBC projects that a decrease in demand for high-carbon projects could lead to project cancellation, especially for controversial and high-cost projects.

Divestment
Meanwhile, the Financial Times is reporting on the 350.org campaign to divest from fossil-fuel companies. The campaign enjoyed a major victory this past week when the Seattle City Employees’ Retirement System, or SCERS, agreed to discuss the Seattle mayor’s request that it sell its shares of Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) , among others. 350.org urges universities, governments, and churches to divest from what founder Bill McKibben calls “outlaw companies,” whose hydrocarbon assets cannot be burned without serious consequences for climate change.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!