Posts tagged “investing”
Shareholders Quiz ExxonMobil on Climate Risks
Last fall I devoted a lengthy post to the notion that future policies to address climate change expose investors in companies producing fossil fuels to a bubble in asset valuations. So I was particularly interested to see that ExxonMobil (XOM) issued a report this week responding to specific shareholder concerns along these lines. Although the term “carbon asset bubble” did not appear in XOM’s report, the latter’s references to carbon budgets and the risk of stranded assets in a low-carbon scenario were aimed directly at this emerging meme.
Unsurprisingly, ExxonMobil’s management reassured investors that, “none of our hydrocarbon reserves are now or will become ‘stranded’.” Wisely avoiding past tendencies to question interpretations of climate science, the company’s analysis appears to be grounded in mainstream views of climate change. It focuses on the costs and achievability of an extreme low-carbon scenario, and on the resilience of the company’s portfolio under various climate policies.
You Can’t Get There from Here without Breaking the Economy Again
XOM’s analysis is based on the company’s latest Outlook for Energy, an annual global forecast broadly similar to the main “New Policies” scenario of the International Energy Agency (IEA). It has fewer similarities to the IEA’s “450″ scenario that underpins carbon bubble claims. The company expects energy demand to grow at an average of about 1% annually over the next three decades–faster than population but much slower than the global economy–with increasing efficiency and a gradual shift toward lower-emission energy sources: Gas increases faster than oil and by more BTUs in total, while coal grows for a while longer but then shrinks back to current levels. Renewables grow fastest of all, producing about as much energy in 2040 as nuclear power does today. As a result of these shifts global greenhouse gas (GHG) emissions peak around 2030 and then decline gradually.
In their Wall St. Journal op-ed this week, Al Gore and one of his business partners characterize the current market for investments in oil, gas and coal as an asset bubble. They also offer investors some advice for quantifying and managing the risks associated with such a bubble. Their article is timely, because I have been seeing references to this concept with increasing frequency, including a recent article in the Financial Times, as well as in the growing literature around sustainability investing.
Although bubbles are best seen in retrospect, investors should always be alert to the potential, particularly after our experience just a few years ago. In this case, however, I see good reasons to believe that the case for a “carbon asset bubble” has been overstated and applied too broadly. The following five myths represent particular vulnerabilities for this notion:
1. The Quantity of Carbon That Can Be Burned Is Known Precisely
Mr. Gore is careful to differentiate uncertainties from risks, which he distinguishes for their amenability to quantification. For quantifying the climate risk to carbon-heavy assets, he refers to the widely cited 2°C threshold for irreversible damage from climate change, and to the resulting “carbon budget” determined by the International Energy Agency. As Mr. Gore interprets it, “at least two-thirds of fossil fuel reserves will not be monetized if we are to stay below 2° of warming.” That would have serious consequences for investors in oil, gas and coal.
This week I decided to analyze and recommend an energy company I feel is worthy of investing in. In the coming weeks, as we prepare to launch Energy Trends Finance — a service for investors, executives, and others involved in the energy sector — be sure to look out for similar analyses on companies across the energy industry.
Protect Your Downside
With all the crosscurrents in the markets, Europe in recession, Japan with no economic growth, and the U.S. registering slow GDP growth that keeps energy demand sluggish, and continued high volatility in oil and gas prices, I remain cautious in the energy sector. However, although cautious I am not absent from the market as I do believe that with a diligent and “defensive” investment philosophy one can achieve positive results over the long-term.
(Related: Three Reasons to Invest in Energy Long-Term)
Indeed, as I have outlined in several of my energy trend notes over the last few weeks, I remain bullish long-term in energy equities, as investors will continue to be attracted to energy equities due to long-term structural supply/demand imbalances that will continue to see demand – consumption increasingly outpace production growth.
Invest Defensively for the Long-Term
The key is to pick and choose wisely by not focusing on the overall broader energy market, but to seek out energy stocks that are “infrastructure” related as pipeline MLPs, or niche providers to the energy market as offshore rig providers, deep water drillers and specialty pump and valve flow systems.
In the current market of volatile share price swings, seek out companies with high dividend yields or MLPs with high distribution yields that will protect your downside by providing support to share prices in down turning markets. I’m talking about specialty companies with above average dividend yields, solid balance sheets, low debt, a sound credible and simple business plan, and — most importantly — high growth prospects. And that brings us to our energy investment idea this week: Magellan Midstream Partners LP (NYSE: MMP).
Oil Demand Shift
From 2000 the increasing industrialization of the developing world has been the primary catalyst driving the demand for global crude oil. Among non-OECD nations, China and India have led the charge, with Chinese oil demand growing at a torrid 6.7% per annum rate and India’s oil demand growing at 4.0% per annum. Overall non-OECD demand for oil has increased at a comparable rate of 3.6% per annum, with the Asia/Pacific region growing oil demand at roughly 2.7%. Developed nations, however, have seen diminishing oil demand with a negative -.04% per annum growth rate.
As I shall point out, the decline in OECD oil demand is not enough to offset the rising demand for oil from the developing world, so the net result going forward will be an increasing supply/demand imbalance. My analysis points to an increasing deficit — gap in global wellhead oil supply — to meet demand. CONTINUE»
In my previous column, Energy Industry Capital Spending Reaching New Highs, we looked at how the industry continues to ramp up spending across its sectors. As I noted, this is no surprise given the enormous capital requirements to sustain its business models.
However, what is surprising is that despite the significant tailwind of high crude prices since 2010 to current, net free cash flows (operating cash flow less cash capital spending) have actually declined for the industry overall. Operating costs are increasing crimping margins, and investment spending is rising faster than top-line revenue growth. To put things into perspective, although total industry operating cash flow (OCF) dropped only 1% in 2012 from 2011, from 2007 to 2012 spending grew at a per annum rate of nearly 10% while OCF increased at a 5% per annum rate.
The worst offender has been the U.S. E&P sub-sector heavily weighted to natural gas production at low prices; the sector has seen its deficit cash flow grow. In 2012, despite spending decreasing 2% from 2011, OCF dropped a whopping 17%. From 2007 to 2012, capital spending grew at nearly a 7% per annum rate, while OCF increased only 3% per annum.
We all remember our Economics 101 lesson that price is the equilibrium point between supply and demand, and that fact has not changed. Right now, there are a plethora of opinions about the future direction of natural gas (NG) prices, both immediate and long-term, and you have probably heard most of them. Suffice to say, with the range of projected NG prices so wide, I decided to take a hard look at the data and keep my projected view of NG prices on a very short-term timeframe. Quite frankly, looking out more than one year is pure speculation even if it’s based on educated analysis.
The U.S. Energy Department (EIA) reported that U.S. gas inventories were 2.2 trillion cubic feet (Tcf) for the week ending February 22nd, a decline of nearly 6% year-to-date (YTD) compared to last year for the same period; however, storage remains 16% above the five-year average. Comparing the YTD averages since 2008, NG still remains above prior years except for 2012. So we have good news and bad news, good that 2013 NG levels are running below 2012, bad that NG levels still remain at very high levels.
Let’s look at the good news; it appears that NG production has slowed in early 2013. I looked at my NG database that covers U.S. NG production; year-over-year production 4Q 2012 to 4Q 2011 is flat at roughly 0.0% with the multinationals down 4% YoY on the quarter, and the U.S. Independent E&Ps up only 2% YoY on the quarter.
Let’s build upon last week’s long-term bullish case for crude oil. Much has been said about, “Global Peak Oil” production in the last few years, and probably for good reason. We know that U.S. crude oil production peaked in the early 1970s just as Mr. King Hubbert predicted back in the late 1950s.
But, is peak global oil production just around the corner?
Energy industry analysts believe that global oil production will peak sometime between 2015 and 2025. That sounds like a fairly broad range. However, the reality is that it’s a fairly short timeframe in geologic time that does not even register a notch, and it’s rapidly coming upon us.
(Read More: Five Misconceptions About Peak Oil)
I’m not a forecaster, but I have studied oil supply and demand for the last 20 years, and I do believe that global crude oil production has reached a plateau, and may very well peak sooner than we think.
Why? For one thing, on average, the global natural decline rate of producing wells is roughly 7% plus or minus 1% or 2%. That means production has to grow at least 8% a year to register a net positive increase.
Hi, I’m Lou Gagliardi, an energy industry specialist who has ‘lived through the energy cycles.’ I would like to introduce myself to the readers at Energy Trends Insider. The topic of my column will be in energy finance and investment research. My goal will be to lay out the energy terrain to help you manage risk while enjoying the upside benefits of the sector’s long-term bullish trends. I will analyze and explain what energy industry trends you need to focus on to find long-term investment opportunities that balance risk and reward trade-offs.
But first a little bit about my career and experience.
I began my career doing project economics at Texaco for all facets of the energy value chain from upstream, downstream to midstream. I eventually segued to covering oil and gas companies at IHS Herold’s valuation shop. At Herold, I provided fundamental equity investment research. My core specialties run the entire energy value chain from oil, gas, and power markets to company coverage of Western multinationals, U.S. E&Ps, Canadian oil sands, national oil companies, refining, alternative energy, MLPs, pipelines, and oil service providers.
Over the years I have been interviewed by CNBC, the New York Times, Forbes, and the Financial Times, regarding Canadian oil sands, emerging markets, Enron and El Paso. I was featured in Robert Bryce’s book on the downfall of Enron, having notified clients of Enron’s financial inadequacies prior to the market’s awareness.
In my previous post I described a new research paper with University of Chicago Professor Cynthia Wu on the Effects of Index-Fund Investing on Commodity Futures Prices. Previously I discussed what we found for the prices of agricultural commodities. Here I review our findings about oil prices.
Part of the interest in a possible effect of commodity-index funds on oil prices comes from testimony before the U.S. Senate by hedge fund manager Michael Masters, in which he produced a provocative graph of oil prices against an estimate of the number of crude oil futures contracts held by commodity-index funds. We reproduced his methodology to update his graph below. The figure certainly seems to suggest a strong connection between these two series, particularly during 2008 and 2009.
The Big Names in Biofuels
So you’re hoping to strike it rich by investing in LanzaTech. Or Solazyme. Or KiOR. Or Gevo. After all, some of these companies recently had high-profile IPOs, and they are clearly “hot” given all of the press coverage devoted to them. So perhaps you have decided you want to get in on a potentially unique investment opportunity.
I get more e-mails and phone calls about investments than on any other topic. And it’s not just individual investors. I hear from institutional and private equity investors trying to determine what’s true and what’s hype, and asking whether KiOR or LanzaTech might turn out to be the Google (GOOG) or Apple (AAPL) of biofuels. Before offering any guidance, the first thing I try to do is establish your reason for investing. Are you looking for — in the words of former Fidelity Magellan’s Peter Lynch — a “ten bagger?” Are you looking for a hedge against the end of the oil age? Is this money that you are fully prepared to lose?
The second thing I would ask you is whether you really understand the company, their business model, their competition, and their potential technical challenges. (This is typically why people e-mail me — because they have questions about these things). Let me offer an example from my own investing history to demonstrate why these issues are important by telling you about the worst investing mistake I ever made. CONTINUE»