An investor network representing $11 trillion of assets under management announced today that is has filed shareholder resolutions with nine leading oil and gas companies seeking greater transparency on how they manage the environmental risks of their fracking operations. Among the filers are New York City and New York state. The move signals a growing movement among investors to use their equity stakes to influence extractive companies' environmental impact. This mirrors similar tightening in legislation, and some companies will be better equipped to respond to this shifting landscape than others.
Sunshine is the best disinfectant
Unless you've been living in a cave for the last decade, you're probably aware that fracking is a hot topic. Viewed one way, it's the miracle that assures our energy future. From another angle, it's a dangerous technology that's trashing our planet. In reality, fracking has the potential to be both of those things, depending on how companies manage it. The problem is, we really don't know much about how companies are managing fracking's environmental risks. They're not really talking.
Investors in Ceres' Investor Network on Climate Risk (INCR) are trying hard to change this situation. They're pushing oil and gas companies to report on environmental risks and limit methane emissions from fracking operations. The investors' concerns relate to companies' water management, toxic chemical disclosure, greenhouse gas emissions, and other community impacts. The INCR wants the nine targeted companies to disclose critical information about how they manage and measure these risks.
The shareholders have filed resolutions with Cabot Oil & Gas, Chevron, ExxonMobil, EOG Resources, ONEOK, Pioneer Natural Resources, Spectra Energy (NYSE: SE ) , Range Resources, and Ultra Petroleum (NYSE: UPL ) , challenging these companies to quantifiably measure and reduce environmental and societal impacts.
"Now is the time for companies to measure up – literally," said Leslie Samuelrich, senior vice president of Green Century Capital Management, which filed with EOG Resources and Ultra Petroleum and coordinates a shareholder campaign on fracking with The Investor Environmental Health Network (IEHN). "Transparency is the first step, but oil and gas companies must now implement quantifiable plans to reduce the impact of their operations on the environment."
The measure of a leader
I spoke today with Richard Liroff, executive director of IEHN. His organization published a report in 2011 called: "Extracting the Facts: an investor guide to disclosing risks from hydraulic fracturing operations" (link opens a PDF). The report outlines best practices for disclosure and management of fracking operations. In light of the INCR's strong criticism of fracking operators, I wanted to know if Liroff thought any company stood out for doing things right. He explained that while he believes some companies are doing a much better job than others, transparency is so uniformly lacking that he can't call out any single company as a shining example.
Still, "Extracting the Facts" does highlight specific examples of companies performing well on individual indicators. Apache (NYSE: APA ) , Talisman Energy (NYSE: TLM ) , and Southwestern Energy (NYSE: SWN ) appear frequently in the report's positive examples.
For instance, Apache uses a multiwall drilling method that allows it to minimize surface environmental impact at its sites, and often replaces non-biodegradable biocides with less harmful chemicals. Southwestern has a strong approach to ensuring well integrity, and has substantially reduced methane emissions since 2006. Talisman has a water management strategy that defines best practices for water withdrawal, reuse, disposal, and conservation, and has a better-defined stakeholder consultation strategy for new drilling sites than many of its peers.
Further still, in testimony before the Committee on Energy Resources of the Texas House of Representatives on June 26, 2012, Liroff said that Apache, Southwestern, Talisman, and BG Group all support IEHN's "Extracting the Facts" approach.
Quantitative risk reporting
According to INCR's press release, the majority of the shareholder resolutions "focus on quantitative risk reporting, urging companies to issue reports including specific data such as the number or percentage of 'green completions' and other low-cost emission reduction measures; quantifying the sources and amount of water used for shale energy operations by region; systems to track and manage naturally occurring radioactive materials; the extent to which closed-loop systems for management of drilling residuals are used; and the numbers of community complaints or grievances and portion open or closed."
Ultra Petroleum was the target of a similar shareholder resolution last summer that won the support of holders of 21% of the company's shares. To put this in context, that's four times the typical level of support for a first-time environmental proposal.
In addition to those I've already mentioned, resolutions were filed today with Spectra Energy, Range Resources, and ONEOK to limit fugitive methane emissions through a program of measurement, mitigation, and disclosure.
"Given the high short-term climate impact of methane emissions, it is now an open question whether natural gas can serve as a bridge fuel to a more sustainable energy future," said Natasha Lamb, vice president of shareholder advocacy and corporate engagement at Trillium Asset Management, which filed the methane resolutions. "Companies can and should reduce their emissions using new technologies with positive return on investment."
With every passing year, shareholder resolutions related to climate change are winning increasing support. Couple that trend with public opposition to fracking and increasing regulatory involvement in companies' environmental risk management, and you have major pressure building on the oil and gas sector. I've included some of the best and worst performers in this article. Investors can also use the factors outlined in the "Extracting the Facts" report as a guideline. My bet is that companies that get ahead of these issues will benefit in the long run.
Getting ahead of these issues is even more pressing considering that, with the swelling of the global middle class, energy consumption will skyrocket over the next few decades, and long-term investors know that you want exposure to this space now. We've picked one incredible natural gas company that presents a rare "double-play" investment opportunity today. We're calling it "The One Energy Stock You Must Own Before 2014," and you can uncover it today, totally free, in our premium research report. Click here to read more.