Oil Is the New Sin Stock, and That’s a Boost for the Sector, BCA Says

Is investing in oil stocks a sin? If so, these energy shares are in good, and lucrative, company.

A BCA Research report finds that investing in oil is acquiring, at least in some circles, a risqué allure. And it has helped keep up oil companies’ share prices.

Classic sin stocks are alcohol, tobacco, gambling, cannabis, and firearms. BCA calculates that they have outperformed the broad market in the U.S. by 28% over 50 years. At the same time, quoting a 2017 academic study, these indecent equities are 8% cheaper compared to the rest of the market, as measured by their price/earnings ratios.

Another advantage for sin stocks is that heavy government regulation has erected high barriers to entry, limiting competition and propelling consolidation.

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Many of those attributes are true to oil companies. While frackers have become a presence in the oilfield, the majors still command the most capital, allowing them a lot of leeway. Even before the energy disruptions wrought by Russia’s invasion of Ukraine, the majors had been dialing back their capital spending, even while demand surged.

Sure enough, they have scored good earnings of late, and their stocks are soaring. Exxon Mobile is up 43% this year and Chevon 45%. It doesn’t hurt that their price/earnings ratios are affordable, with Exxon at 16 and Chevron at 21. The S&P 500’s P/E is 25.

A 2021 report by Goldman Sachs showed that market concentration for oil producers tripled from 2018 to 2020, versus the 2010 to 2014 period. The oil firms “now stand at levels consistent with an oligopoly,” the BCA report says.

BCA also quotes Cliff Asness, founder of AQR, on sin stocks’ bad-boy allure: “How does the market get anyone, perhaps particularly a sinner, to own more of something? Well, it pays them! In this case through a higher expected return on the segment in question.”

BCA notes that climate-minded divesting has prompted numerous institutional investors to ditch oil stocks. The report observes that “what is undeniable is that the combination of divestment and the challenging environment of oil have given an attractive discount to energy stocks.”

The study adds that “oil is not tobacco,” in that the economy needs the energy that petroleum generates, and that’s hardly true of cigarettes.

For investors, the extra enticement of naughtiness may be a nice propellant for oil shares, now and in the future.

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Tags: BCa Research, Chevron, ExxonMobil, Goldman Sachs, oil stocks, Sin Stocks, Tobacco

The Securities and Exchange Commission said it will focus in 2022 on private funds, environmental, social, and governance investing, and crypto assets, among other priorities.

The regulator’s Division of Examinations released its annual Examination Priorities Report for 2022, in which it identifies the areas it believes present the highest risks to investors and the markets. The SEC said it completed more than 3,000 examinations in fiscal year 2021, a 3% increase from the previous year, and conducted hundreds of registrant outreach meetings to monitor significant market events, such as the volatility in the equity and options markets in early 2021.

“In this time of heightened market volatility, our priorities are tailored to focus on emerging issues, such as crypto-assets and expanding information security threats, as well as core issues that have been part of the SEC’s mission for decades,” Richard Best, the SEC’s acting director of the Division of Examinations, said in a statement. “Our priorities cover a broad landscape of potential risks to investors that firms should consider as they review and strengthen their compliance programs.”

Private Funds

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One of the SEC’s focuses for the year will be on registered investment advisers who manage private funds. It said it will review advisers’ fiduciary duty, compliance programs, fees and expenses, as well as conflicts of interest, disclosures of investment risks, and controls regarding material nonpublic information.

The regulator also plans to review the portfolio strategies, risk management, investment recommendations, and allocations of private fund advisers, with an emphasis on conflicts and disclosures regarding those areas.

ESG

ESG-related advisory services and investment products, including mutual funds, exchange-traded funds, and private fund offerings, will also be a major focus of the SEC this year. In particular, the regulator wants to know whether investment advisers and registered funds are accurately disclosing ESG investing approaches, and whether they have controls in place to prevent securities laws violations regarding ESG-related disclosures.

The SEC also said it will review companies’ proxy voting policies and procedures to see if their votes align with their ESG-related disclosures and mandates, and if there are any misrepresentations of the ESG factors considered or incorporated into their portfolios.

Crypto Assets, Emerging Technologies

The SEC will conduct examinations of broker/dealers and advisers using crypto assets and emerging financial technologies to review whether they considered the potential risks involved when designing their compliance programs. The Division of Examinations will review whether market participants involved in digital assets have met their standards of conduct when recommending to or advising investors, and whether they regularly update their compliance practices.

“The division will conduct examinations of mutual funds and ETFs offering exposure to crypto-assets to assess, among other things, compliance, liquidity, and operational controls around portfolio management and market risk,” said the SEC in its report.

It said the examinations will focus on firms that claim to have new products, services, and practices to determine whether they are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations.

The SEC said the scope of any examination is determined through a risk-based approach that includes analysis of a firm’s history, operations, services, products offered, and other risk factors.