Wall Street Concerned About Impact of
Oil Prices, Energy Policies, and Climate on Auto Companies
Source: GreenBiz.com
BOSTON, May 1, 2006 - A new Ceres
report finds that the uncertainty in the U.S. regarding the future
course of energy and climate change policy is a major problem for
investors and Wall Street analysts in assessing the value of auto
companies, and that analysts need better disclosure from auto companies
about their strategies for managing the risks and capturing the
opportunities posed by new energy and climate change policies taking
effect worldwide.
The report, "Climate Risk and Energy in the Auto Sector -- Guidance for
Investors and Analysts on Key Off-balance Sheet Drivers," highlights key
findings from an auto analyst briefing last December at JP Morgan in New
York City where Wall Street analysts, institutional investors such as
CalPERS and CalSTRS, and others gathered to discuss the impacts of high
oil prices, fuel efficiency and foreseeable climate change regulations
on the future of the auto industry. Three conclusions were widely agreed
upon by the analysts at the meeting:
- Regulatory uncertainty on climate change is a major problem for
the auto sector;
- Flexibility in manufacturing is a key factor for future
profitability;
- Investors need improved disclosure on the risks and opportunities
posed by fuel prices, climate change, and other factors.
"Given that many corporate CEOs now agree that mandatory climate change
regulations are inevitable, Wall Street needs more clarity from
President Bush and Congress on the eventual structure of climate policy
so analysts can assess the financial and competitive implications on
auto companies accurately," said Mindy S. Lubber, president of Ceres and
director of the Investor Network on Climate Risk, which includes over 50
institutional investors managing nearly $3 trillion in assets.
"Investors are calling for policy certainty and better climate risk
disclosure so analysts can better estimate the fair value of the auto
companies in their portfolios."
Experts also agreed at the December meeting that U.S. automakers have
less flexibility to meet changing regulatory and consumer demands. The
report states that only two manufacturing facilities in the U.S. --
facilities owned by Nissan and Honda -- are capable of rapidly switching
from producing SUVs to more fuel-efficient vehicles.
"Steadily rising fuel prices since January 2002 have already shifted
consumer demand away from large SUVs and pickup trucks, but U.S.
manufacturers responded not by shifting their future product plans but
by lowering prices on the same inefficient vehicles they've been
offering for years," said Dr. Walter McManus, Director of Automotive
Analysis for the University of Michigan Transportation Research
Institute and a keynote speaker at the December briefing. "The SUV cash
cow has turned out to be a Trojan horse." The Ceres report analyzes
several key trends that could affect the valuation of auto companies'
securities:
- High oil prices and unstable gas prices at the pump. Even as
President Bush has called on Americans to reduce their dangerous
dependence on foreign oil, new predictions from the International
Energy Agency (IEA) say that 95 percent of the world's economy may
come to depend on oil from five or six politically volatile Middle
Eastern and North African countries. In February, the U.S. Energy
Information Agency raised its predictions for future oil prices,
saying that oil won't fall below $42 per barrel over the next 20
years. As gasoline prices stay high, Americans will likely increase
their demand for more fuel efficient cars. The Ceres report quotes
Ford Sales Analysis Manager George Pipas, who said: "If gas prices
don't stabilize, I think it's going to be a very tough endeavor to
sell mid-sized and full-sized SUVs."
- New energy independence measures and climate change regulations
taking effect globally. For the first time in 13 years, the United
States passed a federal energy bill in 2005 that provides tax credits
to consumers for purchasing fuel-efficient vehicles, and creates new
mandates and incentives for the production, distribution and sale of
renewable "biofuels." Canada, the European Union, China, Australia,
Japan, Korea and other countries are taking steps to reduce greenhouse
gas emissions and increase vehicle fuel efficiency, in part responding
to the enactment of the Kyoto Protocol in February 2005. California
and 10 other U.S. states have adopted or are adopting mandatory
regulations to curb GHG emissions from vehicles -- actions that are
being opposed by most of the world's leading automakers.
- Alternative technologies and fuels will result in leaders and
laggards. Some automakers, like Toyota and Ford, have increased their
focus on hybrids and clean diesel, while others, like GM, have
concentrated on deploying flex-fuel vehicles capable of operating on
gasoline or ethanol. Hydrogen fuel-cell technologies are still a
decade or more from commercial viability. The December auto analyst
briefing was co-sponsored by Ceres, the Investor Network on Climate
Risk, the Natural Resources Defense Council (NRDC), JP Morgan, Cornell
University and the Office for the Study of Automotive Transportation
at the University of Michigan (OSAT).
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