Profits Over Preaching

We have titled this week's issue “Profits Over Preaching” as we look to bring together a number of recent themes and address three interesting questions we have received while attending recent macro/industry events in Italy, Calgary, and New York.

Q1: Will peak oil supply fears return? We admit to being surprised at this question being raised, but it’s a good one. Over the past month-plus we have spent considerable time discussing our view that there is no peak to oil (or natural gas and perhaps not even coal) demand coming anytime soon. Trying to guess a future round-number date misses the fact that the total addressable market of future energy demand for the 7 (soon to be 9) billion people in the Rest of the World is massive; we will need all forms of energy to meet that eventual and inevitable demand. We have also noted the steepening oil cost curve (a sign of a shrinking number of low-cost oil projects) and the low levels of industry CAPEX as pointing to a future supply crunch. To be clear, we have never believed the world will be resource short anytime soon but it does require making an effort via CAPEX to grow supply. Right now, economic uncertainty in China, Europe, and the USA have allowed demand to be met by a variety of supply sources and we have stuck with a Super Vol rather than Super Cycle framing. It likely will take a firmer global economic footing to spark an oil super cycle.

Q2: What does XLE outperformance vs ICLN say about opportunities in traditional versus new energies? We highlight ICLN underperformance looks similar to what Goldman Sachs portfolio strategists have observed with unprofitable versus profitable tech. The market is clearly demanding evidence that business models are on-track to profitably scale and punishing those where there have been disappointments. While there is a role for government to play in establishing incentives, rules, and regulations, we believe caution is warranted for businesses where government is picking technology winners and fully subsidizing business models.

Q3: Are we therefore just being polite when we say new energies have a future? No, we are not simply trying to be polite! One should be careful not to assume struggles in one area (e.g., offshore wind) indicate it is all doomed; it isn’t. In fact, new energy opportunities have a wide swath of business models, exposures, capital intensity, geographies, subsidy needs, and ownership structures. Tesla has shown $trillion dreams can be realized. But even on a much smaller scale, there are many interesting opportunities to consider. No one should confuse our pragmatism with pessimism about new energies. We will need it all, both new and old, if the world is to meet its long-term energy needs.