Sold out of BP at US$ 24,06, Shell at US$31,52, opened a new position in the Nasdaq exchange operator, NDAQ at US$109,37 and added to Microsoft at US$ 176,62 and Google at US$ 1328,34. Portfolio page updated.

You will see from the portfolio page that my total fund value has realised a loss from 11^th February 2020 of 5,41% from the disposal of BP and Shell.

What precipitated my action on both companies was Shell’s press release yesterday, where it not only cut its dividend for the first time since the second world war and subsequently destroyed (using this word is not being too dramatic) its reputation of being able to effectively manage the cyclicity of the energy industry while generating good returns for shareholders; but also the severity of the dividend cut. A 66% cut which was not a temporary cut but the new reset to its dividend policy, even at yesterday’s price, would yield just a 4% return.

Oil companies are operationally, high risk companies where its production employees are performing in harsh terrains where safety of its workforce and safe, environmental extraction of its products present far greater risk than in for example, the consumer, technology or financial sectors. The dividend returns to offset this higher risk even with the supermajors such as BP and Shell, who have the balance sheets to sustain themselves through oil price volatility, needs to be nearer 6%.

Shell’s new dividend reset at today’s share price is just 4%. Given heavy demands on capital expenditure, lack of pricing power on its products, abundance of oil supplies over the long term, not just the short term; I can not see anyone willing to take the long term risks involved from an investment case on Shell where it can not yield at least 6%.

This would translate into a share price of US$ 21,30 and a further decline of 33% from yesterday. Shell in my view, has a permanent capital decline in value of its business.

Shell and BP will not go bankrupt but their value over the long term appears to have been permanently eroded. Investment cases in companies in less capital intensive sectors with more pricing power, are more attractive such as the NASDAQ exchange operator.

The CEO of Shell, Ben van Beurden, should resign because his decision to buy BG 5 years ago, without revising the price, has contributed to Shell’s current state and he as CEO, is ultimately, accountable for the company’s strategy.

While BP have yet to announce a dividend cut, for the reasons explained above; I have also decided to exit and take the permanent capital loss from the investment. The new CEO of BP, Bernard Looney comes across as very, very smart if not brilliant from his track record and experience at BP but no matter how great the CEO, if the company is in a sector where the headwinds not just in the short term but in the outerlying years are adverse, it is more prudent to work on the law of probabilities with respect to their likely outcomes.

Why did I fail in these investments when both BP and Shell were held for their balance sheets? In Shell’s case, partly the failure of its management but mainly that I valued them both on the long term, marginal price of oil at a higher price than what it is likely to be, given the evidence presented from the severity of Shell’s dividend cut.

Unfortunately, BP and Shell have zero power over prices and in reality, global oil supplies. This was painfully evident from the actions of the governments of Russia and Saudi Arabia and what I expect will now be the actions in the USA with its own oil industry.

The likely implications of this, are that purely, privately owned companies will not be able to compete with state owned or increasingly government owned competitors over the long term.

I have not completely exited the oil industry since I still retain China’s CNOOC due to its position in China which is the second largest consumer of oil, the company’s lower cost base and its superior investment returns. No surprise that it is partly owned by the Chinese government and its objective is to service essentially, its domestic market.

Still oil and energy now only constitutes 1,7% of my total fund net asset value.

A lesson in capital management is never to have too big an ego and to take the loss when hard evidence presents itself on a long term, permanent decline in value of the business. It would clearly be preferable to do it earlier!

My fund’s cash position has now shot up to 10,3% which is where it should have been in the first place which is another admission of failure in aspiring to be at the very top tier of capital management.

Another key lesson in capital management is to continue to learn from mistakes.

Despite my adverse capital hit from BP and Shell, the current decline of the fund as of 30^th April 2020 is now 17,86% in US dollar terms and 17,17% in UK sterling terms. This is an improvement of 2,13% from last week due to better than expected earnings results from a number of companies held in the portfolio. In comparison, the FTSE 100 index and FTSE all share index have declined 21,3% and 25,6% respectively.