However, the renewable energy conversion process will likely take a while, especially in developing markets. My background is in electrical engineering I love renewable energy technologies and the benefits they bring. Unfortunately, most of our electrical grid energy is produced from burning coal and gas, so the second narrative is that solar and wind production will quickly displace those energy sources, for a full renewable future.Īnd that’s true to some extent even though it’s a tiny share of existing production, renewable energy is a rather large share of new energy production, especially in developed markets. One of the narratives right now is that electric vehicles will take over very quickly. So, with the industry in oversupply, companies are slashing capital expenditures, emphasizing free cash flow and capital returns, and preparing for a low-growth future. With so much institutional money no longer desiring to invest in oil and gas for environmental reasons, and with retail investors having lost money in the poor-performing sector for well over a decade, and with everyone worried about the impact of electric vehicles and renewable energy on the sector, there’s not exactly a ton of capital interested in financing oil and gas projects anymore. They have lit their capital on fire, and we thank them for their sacrifice. Thanks to their relentless willingness to lose money, it has made the rest of us feel like we live in a post-scarcity resource world due to how cheap oil and gas have become. Institutional shale oil and gas investors have basically made an unintentional donation to global prosperity, by repeatedly investing in unprofitable oil and gas shale projects which have kept global energy prices low. A handful of the lowest-cost and highest-quality producers have done okay, but the industry as a whole has been an unprofitable mess. shale industry has been free cash flow negative most of the time. This, ironically, could benefit the industry over the next decade. The ESG investing movement is set to result in less investment in oil and gas companies. However, due to how cheap they were, and how they continued to do pretty well fundamentally, the tobacco industry ended up unintuitively beating the market over the next 2-3 decades through to the present day, due to high dividends, share buybacks, and long-term compounding of reinvesting that capital return.Įven as the oil and gas industry is no longer a growth story, with so much capex cuts happening, and a move towards industry consolidation, and an emphasis on cash flows and shareholder returns rather than unprofitable growth, there is plenty of potential in the sector for income investors and value investors (which, I know, are dirty words these days) at these bombed-out levels, if you focus on the top decile companies in terms of quality. The narrative back then was that tobacco companies were in secular decline, and would therefore provide terrible returns. The energy sector looks a lot like the tobacco industry from 25-30 years ago. Image Source: Jefferies Equity Research, via Tavi Costa of Crescat Capital
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