11/18/2019

Clear and Present Danger: Unfunded Pension Liabilities

Clear and Present Danger: Unfunded Pension Liabilities

An astounding 15 trillion of global debt, representing nearly 25% of securities rated investment grade, now trades at a negative yield. The desire for yield producing securities has manifested itself in the Utility and Real Estate sectors, with prices bid at record highs. Problem solvers and astute market observers such as Charlie Munger are often fond of inverting an observation to see what information might fall out. Who or what should clearly be harmed by lower rates?

The math of investing for yield when rates are zero represents an impossible situation for pension plans, particularly those that are unfunded. Investing at negative yields is bad, trying to catch up by purchasing even more negative yielding securities seems imprudent. Would pension values be more “safe” if the portfolio was liquidated? Perhaps. The notion that we can even pose this question gives us great consternation with respect to investing in companies with materially unfunded pension liabilities.

Watch what they do in the Oil Patch

Energy stocks now account for less than 5% of United States market capitalization. The last remaining inheritors of the John D Rockefeller’s estate are now divesting themselves of fossil fuel investments. Break even prices of $15.00 per barrel in the Permian Basin seem yet, unbelievably, not to be believed. What if any, good news, can be found emanating from the oil patch? The phrase “skin in the game” has taken hold in recent years as being desirable when divining true intentions. Big oil companies have much skin in the game when setting dividend policies. Additionally, many of these companies have the best knowledge, however tenuous, for the future cash flows associated with short lived wells in the Permian Basin of Texas. Conoco recently announced it was raising it’s dividend by a massive 38%, and buying back $3 billion worth of its shares.

Conoco and Sustainability

 


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About Paul Blinn 16 Articles

Managing Director of Toreador Research and Trading

About Paul Blinn 16 Articles

Managing Director of Toreador Research and Trading