If Mackenzie’s logic holds, you should be awfully worried about expensive projects like Canadian oil sands and arctic drilling.
Taking this logic further, Mackenzie seeks greater emphasis on cost control and capital discipline, particularly around capital expenditure levels. He proposes that investors should scrutinize such measures as return on capital employed (RoCE), and whether or not directors’ compensation and incentives are linked to such measures of capital discipline so as to protect the quality of long-term growth.
The table below provides a snapshot of five of the world’s top holders of carbon reserves. The rank indicates how the company compares to other top holders in coal and in oil and gas, respectively, as measured in Gigatons of carbon dioxide (GtCO2). The cap ex ratio is the company’s capital expenditure divided by total sales. I used my own calculations for RoCE: EBIT divided by total assets minus current liabilities. While some companies provide RoCE in their investor presentations, they don’t necessarily calculate it the same way, and some don’t provide it at all. Thus, I used my own calculations for the sake of consistency.
| Company | Type/Rank | GtCO2 | CapEx Ratio | RoE | RoCE | % 5-year Share Price Change |
|---|---|---|---|---|---|---|
| BHP Billiton Limited (ADR) (NYSE:BHP) | Coal/3 | 16.07 | 28.85% | 15.92% | 22.12% | 21.5% |
| Peabody Energy Corporation (NYSE:BTU) | Coal/8 | 10.23 | 1.59% | -14.92% | 1.39% | -65.7% |
| Exxon Mobil Corporation (NYSE:XOM) | Oil/2 | 41.03 | 7.11% | 21.77% | 29.32% | 28.1% |
| BP plc (ADR) (NYSE:BP) | Oil/3 | 34.6 | 6.04% | 21.79% | 8.95% | -2.3% |
| Chevron Corporation (NYSE:CVX) | Oil/5 | 21.22 | 10.85% | 17.61% | 23.31% | 70.4% |
Sources: The Carbon Tracker Institute , The Motley Fool, Yahoo! Finance
The selection of companies in this table is purely based on which of the top carbon holders in oil and coal were publicly traded on U.S. exchanges. We’d have to be careful comparing Peabody — a small coal pure play — to much larger, diversified BHP, for example. Still, it’s interesting to note the differences in their ratios, especially considering how much better BHP’s share price has held up in recent years. Also note BP’s weaker RoCE and share price performance as compared with its peers.
Foolish bottom line
Now we must never imagine that a single factor explains share price movements. Still, everything about the carbon bubble thesis and the idea that we should look at capital discipline and cost curve position makes sense to me. While sustainability and environmental issues don’t always correspond neatly to near-term share price movements, this is one area where they might be intimately linked already.
The article Oil and Coal Stock Valuation: What You’re Missing originally appeared on Fool.com and is written by Sara Murphy.
Sara Murphy has no position in any stocks mentioned. Follow her on Twitter @SMurphSmiles. The Motley Fool recommends Chevron.
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