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Profiting from the Global Energy Transformation

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The Real Cost of the Clean Energy Transition

January 19, 2022 By admin Leave a Comment

In Focus:

  • Global Coal Consumption
  • The difference between valuation and monetization…
  • How much are we willing to pay?
  • Solutions already exist…

A reckoning in the energy sector is coming. One that is recursive and counterproductive. One that involves an increasing dissonance between intentions and actions.

It isn’t about how we will ultimately change our energy consumption, the “Big Shift” long prophesied. History's long arc will pan out one way or another. The problem is the idealized timeline we're being sold has nothing to back it up, and a chaotic transition is happening.

How much can we truly accomplish if we continue to tepidly attempt to replace historically cheap, abundant energy earlier than we absolutely have to? Can we admit how long it will take and how much it will demand of us?

We stare from one peak to another on the horizon. The path is steep and fraught with peril. We think the valley between is easy to traverse.

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We are woefully wrong.

Global coal consumption is surging even as it falls in developed nations.  The two nations that hold over a third of the global population — China and India — will never stop buying more coal as long as it is cheaper than anything else. It will be.

The situation with natural gas is unsustainable in many corners of the world. No one is selling into the spot or contract-based markets in any way that will move prices down where natural gas costs the most. Even then, shipping it from producers to the neediest markets involves supply lines with little excess capacity.

For similar reasons, oil is sitting around $80 per barrel with little expectation of a meaningful drop in the foreseeable future.

In spite of the rapid percentage gains for EVs and renewables, they are a mere fraction of the larger equation. Ever-increasing energy demand wears away at any gains they make. The mining pollution and baked-in costs for “zero carbon” tech has revealed many companies as shams at worst and “lesser evils” at best.

We are insatiable.

What we’re really starting to reckon with is the difference between theory and application, valuation and monetization. The transition from lab to foundry, scientists to engineers, and viability to profitability.

We face endless issues we choose not to address that are destined to delay, diminish, and thus doom. All the sweeping proclamations from marble parapets by politicians do nothing.

The problem is our “Plan B” or lack thereof. If we buy into this concept that there is a single path forward, an approved list of power sources instead of a flexible mix, we will adhere to dogma instead of demand. We will vilify what we should embrace and further entrench this hypocrisy.

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We have barely begun to stress the system we have today, and the inflation is breaking nearly everything.

We were cajoled with dulcet tones through all means of media that this could be solved by a redistribution of capital, one way or another. The tenured residents of the ivory towers were confident that there was plenty of padding for any contingency. Some chose to think it would happen through the free market. Some chose to think that government-dictated mandates would herd us to a brighter future.

Both have been proven wrong. We're learning we should have worried far more about the transition. This should not be much of a surprise. Assumptions and idealism from the top down have always been divorced from reality in the energy sector.

How much are we willing to pay? Not just in dollars or euros or rupees or yuan. How much can this transition consume as inflation, and scarcity, and the reality of day-to-day costs fall short of best case scenarios? 

These are the questions we must answer now, and few that intend to demand more of us are willing to address them or what they imply.

A society that depends on a lack of change — an assumption that what it exploits will remain static — is a decadent one.

It will cannibalize itself until it doesn’t have the energy or drive  — figuratively or literally — to follow a different path. History is replete with once vibrant and thriving times that could not persist because what seemed like constants ended up being variables.

This is the reckoning we face in 2022, then the next year, then the next. Ever-increasing until we do something, anything, to reduce the pressure in a meaningful way.

There is a real cost if we continue to fail to address the realities we face, and it increases the longer we delude ourselves.

Solutions already exist, but they need time, money, and effort. Will capital markets properly reward them? Will investors fund them and reward their progress?

That we shall see. We will fall short in many ways, I'm sure. Our track record all but proves it.

2022 can be a pivotal year for the stock market to prove it can carve a path forward for the energy sector as central planners continue to fall short. We shall see if it does.

Take care,

Adam English

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Read more from Adam English at OutsiderClub.com

Filed Under: Analysis Tagged With: Adam English, China, Coal, Electric Vehicles, India, Inflation, International, oil and gas, renewables

3 Top Oil Stocks for the Long-Term Investor

January 12, 2022 By admin Leave a Comment

These oil stocks look like great long-term investments.

Key Points

  • TotalEnergies is looking ahead to the future of energy.
  • ConocoPhillips has become a cash flow machine.
  • Devon Energy is on track to pay industry-leading dividends in 2022.

The oil industry is coming off one of its best years in quite some time. Oil prices rebounded sharply as the global economy recovered from the pandemic and producers maintained a tight lid on supply. These strong market conditions should continue in 2022 and beyond because the world needs oil despite its shift toward cleaner energy sources. 

With this backdrop, we asked some of our Fool.com contributors for their favorite oil stocks to own in 2022 and beyond. Here's why they chose TotalEnergies (NYSE:TTE), ConocoPhillips (NYSE:COP), and Devon Energy (NYSE:DVN).

Offshore Jack Up Rig

Preparing for the future

Reuben Gregg Brewer (TotalEnergies): If you are looking for an oil stock, you could go with a pure play exploration and production name. Or, if you are a bit more conservative, you would likely select an integrated energy company with assets that span from drilling (upstream) to refining and chemicals (downstream). I'm conservative, so this is my preference. But there's more to the story here because some oil majors, like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) are sticking to the oil patch, while others, like my favorite, TotalEnergies (NYSE:TTE), are looking to slowly shift their portfolios toward clean energy.

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TotalEnergies isn't alone; peers Royal Dutch Shell (NYSE:RDS.B) and BP (NYSE:BP) are also using their oil profits to fund clean energy investments. However, of this trio, only TotalEnergies is going down this road without a dividend cut. And it isn't giving up on oil and natural gas, with a goal of growing both its energy business (with a shift toward cleaner-burning natural gas) and its “electrons” business at the same time. That lets me own a growing energy business and a growing renewable power business with one single investment. 

TTE Dividend Yield Chart

(TTE DIVIDEND YIELD DATA BY YCHARTS)

Meanwhile, I am collecting an industry-leading 6% dividend yield while this diversified oil company prudently adjusts with the world around it. It's a bit of a punt option but one that lets me sleep well at night in a sector that is prone to volatility in the best of times and today is facing something of an existential crisis. 

Returning the windfall to investors

Matt DiLallo (ConocoPhillips): Oil giant ConocoPhillips has taken several steps in recent years to reduce costs to generate more cash flow. Its latest move was acquiring Shell's assets in the Permian Basin to boost its scale in that low-cost oil basin. This strategy is paying big dividends for investors.

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ConocoPhillips expects to return $7 billion to shareholders in 2022. That's 16% higher than last year's total. It set a three-tiered program to send money back to investors: 

  1. The base quarterly dividend: ConocoPhillips increased its quarterly dividend payment by 7% to $0.46 per share late last year. At the current share price, the dividend yield is 2.4%, almost double that of the S&P 500. At the current rate, the company will pay $2.4 billion of dividends this year.

  2. Share repurchases: ConocoPhillips expects to repurchase $3.5 billion of its shares this year, with $1 billion funded by selling its remaining shares in Cenovus Energy.

  3. Variable return of cash: ConocoPhillips plans to distribute about $1 billion of additional cash to shareholders via a variable return of cash. It anticipates making these payments quarterly, with the first one set at $0.20 per share.

Overall, ConocoPhillips expects to return more than 30% of its anticipated cash flow to shareholders in 2022 and anticipates delivering low single-digit production growth in 2022. It will allocate the rest of its cash to expand its operations, reduce emissions, and maintain a top-tier balance sheet. That focus on growing its cash flow and returning it to shareholders is why ConocoPhillips is my favorite oil stock to own for the coming years.

Industry-beating dividends

Neha Chamaria (Devon Energy): Devon Energy started paying out the oil industry's first fixed-plus-variable dividend in 2021. The company adopted a policy of topping up a fixed dividend with a special dividend equivalent. The amount is up to 50% of the cash flows left after paying out capital expenditures and a fixed dividend in any given quarter. That dividend policy hugely helped boost shareholder returns last year; the company paid out $1.97 in total dividends per share in 2021 versus only $0.68 per share in 2019.

Shareholders can continue to expect strong returns from Devon Energy this year. The thing is, oil prices are holding up firm for now thanks to multiple factors, including supply disruption from Libya as the country put key pipelines under repair and declared force majeure on oil exports. Also, OPEC is sticking with its plan to increase oil production only gradually per month. That's good news for Devon Energy shareholders as the company's cash flows, and therefore variable dividend, depend on oil prices.

Even if oil prices were to fall, Devon Energy is on solid footing, having kicked off 2021 with an all-stock merger with WPX Energy and then using the rest of the year to repay debt and fortify its balance sheet. With the price of West Texas Intermediate (WTI) crude at $75 per barrel, Devon Energy foresees its cash flows growing more than 35% in 2022. At that pace, its total dividend could potentially grow by almost 80% this year over 2021. That's huge, and when combined with the oil stock's latest share repurchase program, could translate into solid returns for shareholders.

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Matthew DiLallo owns ConocoPhillips. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer owns TotalEnergies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Read more from Matthew DiLallo, Neha Chamaria and Reuben Gregg Brewer at Fool.com

Filed Under: Oil and Gas Tagged With: BP, clean energy, COP, CVX, Dividends, DVN, Oil Stocks, renewables, TTE, xom

Why the Age of Oil Will End With a Bang

April 7, 2021 By admin Leave a Comment

After more than a century, it appears that the age of oil is drawing to a close.

The entire world is rapidly embracing renewables.

Governments everywhere have pledged trillions of dollars toward the transition to clean energy.

China, India, Britain, Korea, Japan, and now even the United States are moving in the same direction: away from hydrocarbons.

While that doesn’t sound very bullish for the price of oil, in the short and medium-term, I’m growing convinced that it actually is…

Suddenly, Nobody Wants to Spend Money Drilling Oil Wells

The world’s oil producers are slashing spending across the board.

Those spending reductions are going to have a big impact on medium-term oil supply.

The moment an oil producer puts a new oil well into production, the rate at which it produces immediately starts declining.

So for oil producers, these production declines create a never-ending treadmill. Producers have to constantly spend money on drilling just to stay in the same place.

To grow production, they need to spend even more.

According to Exxon Mobil (NYSE: XOM), global production from existing oil wells declines at a rate of 7% per year.

On a base of 100 million barrels per day (bpd) of production, that means the world will lose 7 million bpd of production over the next 365 days.

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That means to just keep production flat at 100 million bpd, the oil industry needs to add 7 million bpd of new production.

Without sufficient spending on new wells, global production will fall.

Historically, spending enough on new wells to offset declines hasn’t been a problem.

The oil industry has always notoriously borrowed aggressively and burned through every penny of its cash chasing production growth above all else – often creating no value for shareholders.

But now things are different for two reasons…

  1. Investors have indicated to oil companies (especially shale producers) that borrowing recklessly and burning through cash is no longer acceptable.The market wants to see these companies spend less, improve their balance sheets and return cash to shareholders instead.Oil executives who would like to keep their cushy jobs have received that message, and growth spending has been cut to the bone.
  2. With the long-term future of oil in doubt, the largest oil producers are no longer willing to spend billions exploring and developing the megaprojects that are so crucial to maintaining supply. These companies can’t spend billions developing long-term oil projects if they don’t believe there is going to be long-term demand for that oil. I recently wrote about how oil majors Royal Dutch Shell (NYSE: RDS-A), BP (NYSE: BP), and Total (NYSE: TOT) have all announced plans to intentionally reduce production.

Without these big boys growing new production, oil supply is set to suffer in both the near and long term.

Demand Will Fall Eventually, but Not Yet

Prices are always determined by the relationship between supply and demand.

If supply exceeds demand, prices fall.

If demand exceeds supply, prices rise.

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While huge spending cuts are set to hit short- and medium-term oil supply, demand is not projected to fall until far out in the future.

In China and India, where billions of people live, oil demand is expected to continue growing for a while.

Eventually, the transition to renewables will cause global oil demand to peak. But it can’t happen overnight.

Reuters recently provided a recap of when oil market analysts are forecasting global demand to peak.

  • Bernstein Energy projected it would peak between 2025 and 2030.
  • Rystad Energy was more specific, pointing to 2028.
  • The International Energy Agency believes it will happen within 10 years.
  • Goldman Sachs thinks it will happen after 2030.

Meanwhile, spending cuts are going to hit oil supply much sooner.

Last week in its investor update, the French oil major Total warned that it sees a big oil supply shortfall coming by 2025.

By big, I mean a shortfall of 10 million bpd.

Oil Supply and Demand Outlook to 2025

That is a massive shortage.

If Total is correct and the oil market is headed toward a situation where it is undersupplied by this much, the price of oil is going to surge.

So while the age of oil might be ending, it isn’t going to end without a bang.

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Good investing,
Jody

Read more from Jody Chudley at WealthRetirement.com

Filed Under: Oil and Gas Tagged With: BP, clean energy, global oil demand, rds-a, renewables, TOT, xom

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