For Big Oil’s Future, Look To Big Tobacco’s Past
There’s plenty of money to be made from oil before the dirty fuel is no longer needed, just as there has been from cigarettes.
There’s plenty of money to be made from oil before the dirty fuel is no longer needed, just as there has been from cigarettes.
If you want to know the future of Big Oil, look to the past of Big Tobacco. Depending on who you believe, they will be either greenwashed money machines or transformed businesses dedicated to reversing the damage done by their old products to the planet and health. Confusingly, they might be both.
From the 1980s until a few years ago, Big Tobacco was a money machine. Cigarette sales fell a little pretty much every year, but prices rose more than enough to compensate and profit margins were, well, to die for. New technology changed everything. The development of e-cigarettes, and to a lesser extent heated tobacco, overthrew the business model and the marketing. Now, Big Tobacco is trying to present itself as a leader on environmental, social and governance issues—and even health.
“We think of ourselves as having an ‘H+’ ESG strategy: ‘H’ for health,” says Kingsley Wheaton, chief marketing officer at British American Tobacco, or BAT, the biggest tobacco company by sales. “It’s the sine qua non of our transformation.”
ESG, environmental, social and governance investing, has swept into the world of finance and according to its adherents can help change the world. I’ve taken a critical look at the ESG trend in a series of Streetwise columns. Tobacco offers a guide because 40 years ago it faced similar challenges from investors who took a moral stance against its products and governments who wanted to tax and regulate it out of existence.
Oil has proved as addictive for the economy as nicotine is to smokers. Environmentalists and governments want to wean customers on to alternatives, especially electric cars but potentially also hydrogen or simply lower consumption. Just as the prospect of ever-increasing regulations, combined with limits on marketing, made it almost impossible to launch a new tobacco company, the prospect of action on fossil fuels has hit investment in new drilling. Many investors believe the limited expansion of supply means high oil prices could last.
The oil industry and its investors are now split between the two approaches taken by Big Tobacco.
On one side are those who think the route to lower oil consumption will look like tobacco did from the 1980s to the 2000s. Volumes will fall but higher prices will boost profit margins. Addicted customers meant that cigarette sales continued even when marketing spending was slashed due to legal restrictions. Gasoline sales will continue for many years, but oil companies might not spend the vast sums they did in the past exploring and drilling new wells, leading to higher prices and fatter margins even as existing wells are run down.
As with tobacco, this strategy cannot last forever—but if governments are serious about their 2050 net-zero emissions promises, there’s no future in drilling anyway. And in the meantime the oil companies could pay shareholders the fat dividends offered for decades by tobacco stocks.
Most of the firms following this strategy are privately-held, buying assets being sold off by listed companies trying to cut their emissions. In practice, emissions simply continue under new ownership. But creating a standalone limited-life oil producer was part of the pitch of hedge fund activist Daniel Loeb, who is pushing to break up British oil major Shell.
On the other side are oil majors, mainly in Europe, who think the future involves a steady switch from oil to new energy such as wind farms. Just as with Big Tobacco recently, they are using some of the profits from selling oil to pour money into the new areas.
Like Big Tobacco, these oil companies trumpet their environmental projects, as well as social projects and corporate governance. That disgusts activists, who label it “greenwashing,” designed to distract customers and investors from the harm they do. BAT even removed the word “tobacco” from its brand in 2020, as well as dropping the tobacco leaf from its logo and adding the slogan “A Better Tomorrow.”
“Despite all the prominence the newly re-branded BAT is placing on ESG, what is quite clear is that although the leopard may have changed the colours of its spots from black to green, BAT is still a leopard,” says Andy Rowell from the Tobacco Control Research Group at the University of Bath in England.
Mr. Wheaton bridled at the suggestion that its efforts were all about distraction, during an interview at BAT’s London headquarters. “If you knew the sheer energy that goes into building the new business you wouldn’t think it was greenwashing,” he said. “When you leave the office I’m not going to say ‘hahaha, he believed all of it’.”
At least some of the agencies that rate companies on ESG characteristics do believe it. BAT last year was ranked as third-best in the FTSE 100 by Refinitiv, and Sustainalytics, part of Morningstar, rates it medium risk, 88th out of 598 companies it rates in what it calls the “food products” industry globally. S&P Global thinks BAT is among the best tobacco companies, while MSCI doesn’t buy the story, rating BAT as only average within the tobacco industry. But MSCI thinks Shell is great for an oil company, giving it AA, its second-best rating, while Refinitiv says Shell has the best governance in the world.
The historic arguments used by both industries developed the same way: first, denial (of cancer or climate change), then fierce lobbying campaigns to head off restrictive laws, in some cases triggering accusations of outright bribery. The current argument is that people will want or need cigarettes and fossil fuels for many years, so they need to be provided – and are better provided by a big public company than by private firms with no transparency.
Some in Big Tobacco have reached the acceptance stage, that eventually cigarettes will vanish, and their business needs to change or die. Not every oil company is there yet, but the debate is on. Shell and others in Europe are spending heavily on change. But at least some investors prefer the die option, with fat profits to be made along the way and perhaps a longer life than environmentalists wish.
ESG investors expecting big carbon emitters to get their just deserts should think again. There’s plenty of money to be made from oil before the dirty fuel is no longer needed, just as there has been from cigarettes. And that money might end up going to investors who just don’t care about ESG.
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: Jan 27, 2022.
Following the devastation of recent flooding, experts are urging government intervention to drive the cessation of building in areas at risk.
Private club memberships and luxury cars are some of freebies on the table.
When Ryan Wolitzer was looking to buy an apartment in Miami Beach late last year, several beachfront properties caught his eye. All were two-bedroom homes in high-end buildings with amenities aplenty and featured glass walls, high ceilings and an abundance of natural light. But only The Continuum, in the city’s South of Fifth district, came with a gift: a membership to Residence Yacht Club, a private club that offers excursions on luxury yachts ranging from a day in south Florida to a month around the Caribbean. Residents receive heavily discounted charters on upscale boats that have premier finishes and are stocked with top shelf spirits and wine. Mr. Wolitzer, 25, who works for a sports agency, was sold.
“The access to high-end yachts swayed my decision to buy at The Continuum and is an incentive that I take full advantage of,” Mr. Wolitzer said. “It’s huge, especially in my business when I am dealing with high-profile sports players, to be able to give them access to these incredible boats where they experience great service. I know that they’ll be well taken care of.”
Freebies and perks for homeowners such as a private club membership are a mainstay in the world of luxury real estate and intended to entice prospective buyers to sign on the dotted line.
According to Jonathan Miller, the president and chief executive of the real estate appraisal and consulting firm Miller Samuel, they’re primarily a domestic phenomenon.
In the U.S. residential real estate market, gifts are offered by both developers who want to move apartments in their swanky buildings and individuals selling their homes. They range from modest to over-the-top, Mr. Miller said, and are more prevalent when the market is soft.
“When sales lag, freebies increase in a bid to incentivize buyers,” he said. “These days, sales are slowing, and inventory is rising after two years of being the opposite, which suggests that we may see more of them going forward.”
Many of these extras are especially present in South Florida, Mr. Miller said, where the market is normalizing after the unprecedented boom it saw during the pandemic. “The frenzy in South Florida was intense compared with the rest of the country because it became a place where people wanted to live full time,” he said. “Now that the numbers are inching toward pre-pandemic levels, freebies could push wavering buyers over the finish line.”
Kelly Killoren Bensimon, a real estate salesperson for Douglas Elliman in Miami and New York, said that the gifts that she has encountered in her business include everything from yacht access and use of a summer house to magnums of pricey wine. “One person I know of who was selling a US$5 million house in the Hamptons even threw in a free Mercedes 280SL,” she said. “They didn’t want to lower the price but were happy to sweeten the deal.”
A car, an Aston Martin to be exact, is also a lure at Aston Martin Residences in Miami’s Biscayne Bay. Buyers who bought one of the building’s 01 line apartments—a collection of 47 ocean-facing residences ranging in size from 325 to 362sqm and US$8.3 million to US$9 million in price—had their choice of the DBX Miami Riverwalk Special Edition or the DB11 Miami Riverwalk Special Edition. The DBX is Aston Martin’s first SUV and retails for around US$200,000. It may have helped propel sales given that all the apartments are sold out.
The US$59 million triplex penthouse, meanwhile, is still up for grabs, and the buyer will receive a US$3.2 million Aston Martin Vulcan track-only sports car, one of only 24 ever made.
“We want to give homeowners the chance to live the full Aston Martin lifestyle, and owning a beautiful Aston Martin is definitely a highlight of that,” said Alejandro Aljanti, the chief marketing officer for G&G Business Developments, the building’s developer. “We wanted to include the cars as part of the package for our more exclusive units.”
The US$800,000 furniture budget for buyers of the North Tower condominiums at The Estates at Acqualina in Sunny Isles, Florida, is another recent head-turning perk. The 94 residences sold out last year, according to president of sales Michael Goldstein, and had a starting price of US$6.3 million. “You can pick the furniture ahead of time, and when buyers move in later this year, all they’ll need is a toothbrush,” he said.
Then there’s the US$2 million art collection that was included in the sale of the penthouse residence at the Four Seasons Residences in Miami’s Brickell neighbourhood. The property recently sold for $15.9 million and spans 817sqm feet. Designed by the renowned firm ODP Architects, it features contemporary paintings and sculpture pieces from notable names such as the American conceptual artist Bill Beckley and the sculptor Tom Brewitz.
But it’s hard to top the millions of dollars of extras that were attached to the asking price in 2019 of the US$85 million 1393sqm duplex at the Atelier, in Manhattan’s Hell’s Kitchen neighbourhood. The list included two Rolls-Royce Phantoms, a Lamborghini Aventador, a US$1 million yacht with five years of docking fees, a summer stay at a Hamptons mansion, weekly dinners for two at lavish French restaurant Daniel and a live-in butler and private chef for a year. And the most outrageous of all: a flight for two to space.
It turned out that the so-called duplex was actually a collection of several apartments and a listing that went unsold. It did, however, generate plenty of buzz among the press and in real estate circles and was a marketing success, according to Mr. Miller.
“A listing like this that almost seems unbelievable with all the gifts will get plenty of eyeballs but is unlikely to push sales,” he said. “Empirically, it’s not an effective tactic.”
On the other hand, Mr. Miller said that more reasonable but still generous freebies, such as the membership to a yacht club, have the potential to push undecided buyers to go for the sale. “A nice but not too lavish gift won’t be the singular thing toward their decision but can be a big factor,” he said. “It’s a feel-good incentive that buyers think they’re getting without an extra cost.”
Examples of these bonuses include a membership to the 1 Hotel South Beach private beach club that buyers receive with the purchase of a residence at Baccarat Residences Brickell, or the one-year membership to the Grand Bay Beach Club in Key Biscayne for those who spring for a home at Casa Bella Residences by B&B Italia, located in downtown Miami and a residential project from the namesake renowned Italian furniture brand. The price of a membership at the Grand Bay Beach Club is usually a US$19,500 initiation fee and US$415 in monthly dues.
Still enticing but less expensive perks include the two-hour cruise around New York on a wooden Hemmingway boat, valued at US$1,900, for buyers at Quay Tower, at Brooklyn Bridge Park in New York City. The building’s developer, Robert Levine, said that he started offering the boat trip in July to help sell the remaining units. “We’re close to 70% sold, but, of course, I want everything to go,” he said.
There’s also the US$1,635 Avalon throw blanket from Hermes for those who close on a unit at Ten30 South Beach, a 33-unit boutique condominium; in Manhattan’s Financial District, a custom piece of art from the acclaimed artist James Perkins is gifted to buyers at Jolie, a 42-story building on Greenwich Street. Perkins said the value of the piece depends on the home purchase price, but the minimum is US$4,000. “The higher end homes get a more sizable work,” he said.
When gifts are part of a total real estate package, the sale can become emotional and personal, according to Chad Carroll, a real estate agent with Compass in South Florida and the founder of The Carroll Group. “If the freebie appeals to the buyer, the transaction takes on a different dynamic,” he said. “A gift becomes the kicker that they love the idea of having.”
Speaking from his own experience, Mr. Carroll said that sellers can also have an emotional connection to the exchange. “I was selling my house in Golden Isles last year for US$5.4 million and included my jet ski and paddle boards,” he said. “The buyers were a family with young kids and absolutely loved the water toys.” Mr. Carroll could have held out for a higher bidder, he said, but decided to accept their offer. “I liked them and wanted them to create the same happy memories in the home that I did,” he said.
The family moved in a few months later.