Looking Back on Energy's Glory Days -- and Trying to Predict the Future

It's throwback week for Industry Focus, and in this energy and materials episode, Sean O'Reilly, Taylor Muckerman, and Tyler Crowe look back on the gentler, more naive days of energy back in the summer of 2013.

The trio explains why the price of oil collapsed the way it did, and why hardly anyone saw the writing on the wall until it was too late; how solar and renewables in general are moving along at a much faster clip than they saw coming; and much more. Each of them also shares a prediction for how they think the energy space will change by December 2018.

A full transcript follows the video.

This podcast was recorded on April 28, 2016. 

Sean O'Reilly: We're going back in time to the days when oil was riding high, on this energy and materials throwback episode of Industry Focus.

Taylor Muckerman: [singing] We're going back in time.

Tyler Crowe: I immediately started thinking about Huey Lewis the second you said that.

O'Reilly: Good morning, Foolish listeners! I am Sean O'Reilly, joining you from Fool headquarters in Alexandria, Virginia. It is Thursday, April 28, 2016. Joining me in this throwback episode is Tyler Crowe and Taylor "Drill Bit" Muckerman.

Muckerman: That's right.

O'Reilly: With his bolo tie.

Muckerman: I have my bolo tie on. It's what we used to wear back in the day on Digging for Value.

O'Reilly: When did you start doing the podcast?

Crowe: I started doing it, I think, middle of 2014. I've been here just under two years, and I think Taylor started a year before.

Muckerman: That was when it was only a show. We did articles and video, and that was all she wrote.

O'Reilly: That was it. So the episode we're throwing back to was in 2013, right?

Muckerman: Yeah, I think it might be the first Digging for Value ever. July 25, 2013.

O'Reilly: Wow. It was you and Joel South.

Crowe: We actually posted the first video we ever did on Twitter. If you follow us at --

O'Reilly: @MFIndustryFocus.

Crowe: -- you can actually see the video of what we were doing the very first time. We have a little bit more practice now.

Muckerman: Somewhat.

O'Reilly: I, for one, watched that episode, and I was impressed.

Muckerman: We had the bottom line; there was some good post-production.

O'Reilly: Yeah, and we were way better dressed than we are now.

Muckerman: Oh, come on, we were just standing. That's why we looked better.

O'Reilly: Posture? Is that what you're saying?

Muckerman: I think that's what it is.

O'Reilly: Did you remember what you did on that episode, when we came up with this idea? Did you remember what you were talking about in the summer of 2013?

Muckerman: No. I looked at it, I had a feeling coal was something, that it at least would have been in one episode.

O'Reilly: It was in its death throes.

Muckerman: So we thought.

O'Reilly: On that note, one of the major topics of that show was coal/steel. 

Muckerman: Yeah, I led the show off.

O'Reilly: Tyler, you had an interesting takeaway from the show, which was [that] China was this black box and we didn't quite know what was going on. Can you add some color to that, Taylor? And then, what were you thinking, Tyler?

Muckerman: Yeah, we were looking at coal shares in that particular time somewhere in 2013. They were doing quite well. Everyone was saying utility stockpiles are low --

Crowe: The recovery was finally coming.

Muckerman: [laughs] Yeah, and that we'd have to start loading up on coal.

O'Reilly: Buy James River Coal shares now! [laughs]

Muckerman: Yeah, get in quick. Clearly that turned out to be a sucker's bet in those few weeks. We were talking about demand up in China, we were talking about demand up in India, demand up in Germany. Not so much anymore, especially in the United States. 

O'Reilly: Even in China, because they're closing coal plants left and right, too.

Muckerman: Yeah, they realized there was oversupply. We talked about that on that show, that China was starting to close. But they're doing so at a much more rapid rate, not because they think there's oversupply, but because they're like, "Oh my god, there's nowhere to sell this."

O'Reilly: What have we learned about the black box that is China's economy in the last two-and-a-half years, to you guys?

Muckerman: It has a much bigger impact than I think a lot of people think, I think that's the big takeaway.

O'Reilly: Even a little bit of slowing growth there...

Muckerman: Yeah, if you miss an estimate, or any growth slows even a fraction of a percent, it could be the size of small countries' GDPs that we're losing right off the top.

Crowe: Yeah, if you look at China's commodities consumption across all various commodities -- copper, iron ore -- just about every commodity you can name, China represents somewhere between a third and half of global consumption. So when you have that large of a factor going into things, which is one that has been hard to predict as of late... For more than a decade, we were looking at double-digit growth in China. The appetite for commodities was just so voracious, everybody on the planet was trying to catch up and build out capacity, thinking that this party would last forever.

O'Reilly: A billion people are joining the middle class!

Crowe: Yeah. You look at the Australian mining operations from BHP Billiton and Rio Tinto, they were building iron ore mines out the wazoo in Australia to actually try to fuel this. As that has started to slow down -- it hasn't stopped, it's not like China's consumption has declined, it's just that the rate of increase has slowed enough that we're in this massive overcapacity. And it's very hard for an investor, especially an individual investor. We don't really have a huge pulse exactly on what's going on on the ground in China. And for an investor trying to understand that, it can be very difficult. And in a way, you really need to tread carefully when you're looking at the commodities markets because of that. I'm not saying commodities are a bad investment. I think we're all here because we're interested in investing in commodities. But you do have to keep that in mind, that there's this major wild card that can throw things off, that's rather unpredictable.

Muckerman: We're interested in investing in companies working in commodities. I'm not buying any direct commodities. [laughs]

O'Reilly: You don't have a gold bar underneath your bed? [laughs]

Muckerman: I don't know about that... it's not as an investment; it's just for a pillow.

O'Reilly: If I went back to you and Joel in that episode, Taylor, and I was like, "Guys, in two-and-a-half years, China's growth is going to slow to 6%-6.5% officially. They're going to have a stated goal that [they] can transition from an export-driven economy to a consumer-driven economy," would you have thought it would get this bad? Feel free to lie.

Muckerman: I probably would have shorted a thing or two, for the first time ever in my life, if you'd told me, for sure. It's like Back to the Future, when he bets on the Cubs to win the World Series last year, in 2015.

O'Reilly: That almost happened!

Muckerman: It almost happened; thank God it didn't.

Crowe: We should mention that Taylor is a very die-hard Cardinals fan.

Muckerman: Yeah, thank God that it didn't, and it won't this year.

O'Reilly: [laughs]

Crowe: [laughs] It's April, and he's already saying the Cubs won't go to the World Series!

O'Reilly: They just had their opening day! Be nice! [laughs]

Muckerman: But yeah, just like Biff bet on the Cubs, I certainly would have bet the house, because China means that much.

O'Reilly: Actually, on that note, one of the companies you guys talked about on that episode was Freeport-McMoRan (FCX 0.52%). They're still around $10 a share or something.

Muckerman: Not what they used to be.

O'Reilly: Has anything changed operationally for them? Because you definitely get the sense that they bet a lot of their chips on oil and gas, and that hasn't turned out so well. And they tried to sell those operations and couldn't.

Muckerman: I can't remember when they made that acquisition into oil and gas, but it was right around that time.

O'Reilly: So they were late to the party and tried to buy into it.

Muckerman: Yeah, they were chasing it a little bit.

Crowe: To be fair... well, maybe "fair" is not the right word, but the acquisitions they made, they already had a partial interest in these companies, and they were cash-strapped at the time to the point that Freeport-McMoRan almost had to make the acquisition to shore up the balance sheet of those companies, and get the money they saved.

Muckerman: Save their already-vested interest, yeah. But, yeah, they've kind of turned almost exclusively away from oil and gas in the last six months to a year in favor, again, of the lesser of two evils in their mining operations.

O'Reilly: Got it. Was it their CEO -- I mean, Core Labs' (CLB) CEO says this all the time -- but the CEO of Freeport-McMoRan who said we're close to the bottom of the commodities cycle? I'm sure I saw that.

Muckerman: I mean, I'm sure he has said it.

Crowe: He might have, but it doesn't matter, because he [James Moffett] got fired by Carl Icahn back in December.

Muckerman: He wouldn't be the only commodity CEO saying that. They're all praying for it.

O'Reilly: Right, they're all going home every night and praying to their higher power.

Crowe: When you're a CEO of one of these companies, to a certain degree, you do have to remain slightly optimistic. You can say the market is brutal today...

Muckerman: Honestly optimistic, hopefully, from a shareholder's perspective.

Crowe: You look at almost any press release, and it's, "The market's brutal right now, we're doing everything we can to cut costs and make ourselves ready."

O'Reilly: And a prudent balance sheet, don't forget that.

Crowe: Yeah. There are these cut-and-dried statements that every single CEO is making, and to a certain degree, they are kind of positive of, "When the market turns, we're not completely sure. We think it's pretty close. But when it turns, we'll be ready, and we'll do great."

Muckerman: Yeah, they have their toes on the starting blocks.

O'Reilly: Before we move on, I wanted to point any listeners out there who are hungry for more Foolish content to focus.fool.com, where all Industry Focus listeners have access to a special discount on the Motley Fool Stock Advisor newsletter. The discount works out to $129 for a full two-year subscription. Once again, that is focus.fool.com. You guys didn't pitch anything at all on the show.

Muckerman: Nope. We're pitchless. This is T-ball.

O'Reilly: You were just doing it to inform and educate the world. You're a good man.

Muckerman: That was the good old days. Back in the day. Something we did, I think, a couple times a week, we were doing videos every single day.

O'Reilly: That would get ratings.

Muckerman: Yeah. So now it's just podcasting with you Fools, which is awesome.

O'Reilly: Did you wear the bolo tie on every episode? Was that a thing?

Muckerman: No, not every episode. We went down to Houston once, and we saw a couple guys with it, and Joel got the bright idea to buy a couple off eBay.

O'Reilly: [laughs] Why did we not get bolo ties?

Muckerman: This is mine. I haven't worn it in quite some time. It's lost some of its luster; the tips are missing at the end of the leather cable.

O'Reilly: We'll get you a new one.

Muckerman: No turquoise, though, just stainless steel.

O'Reilly: Wait, what are they usually made out of?

Muckerman: You can usually get gems and stuff in there, a little flair.

Crowe: They're very fancy.

O'Reilly: I have no words. Obviously, the elephant in the room on this throwback episode is, of course, the energy boom.

Muckerman: Yeah, that was the finish of the show; it was all about the energy boom.

O'Reilly: Right. We were, what, two, three years into $100 oil at that point?

Muckerman: I don't know, price-wise, but we were a couple years into the production boom, yeah. Everyone was chasing down that $100 barrel of oil.

O'Reilly: What was it that the CEO of Core Labs said? He kind of predicted that things would get bad in a year-and-a-half.

Muckerman: Yeah, which was much more long-sighted than some of his predictions recently about the oil recovery. But yeah, in one of their quarterly reports back then, he said that he expected the production to plateau in the U.S. Not to decline, but to start to plateau, within six quarters, which would have pegged it right at the end of 2014, which was a few months after OPEC came out and said they would stake their claim on market share, and prices started to fall. So it could have just been a little bit of luck on his end that Saudi Arabia and OPEC came out to say that and the production started to plateau and decline, because it wasn't worth it, because oil prices crashed. But it would have happened regardless.

O'Reilly: He made that call based on geology. Correct me if I'm wrong?

Muckerman: It was a little geology, and also just the fact that we were producing at such a high level that it would be physically impossible to sustain those rates. Then, factor in the decline curves of the type of oil and gas they were drilling for. It was rapid in shale; you lose a lot of your production in that first year.

Crowe: I can remember, right around that time, we were talking a lot about energy independence in the United States.

O'Reilly: That was the other thing! [laughs]

Muckerman: Yeah, it was a very important thing.

Crowe: I can remember, right around that time, it's one of those things where you have a half-brain thought, but you never flesh it out all the way through... right around that time, we were seeing some political instability in Libya, Iraq, Nigeria --

O'Reilly: Egypt.

Crowe: -- places that were major sources of oil production for many years.

O'Reilly: What year did Gaddafi get deposed?

Crowe: 2011?

O'Reilly: Keep talking; I'll look it up.

Crowe: So we have these major lacks of oil production. The thing was, everyone was looking, and it was like, "Wow, all this production has come offline, but we're still at $100."

O'Reilly: October 2011.

Crowe: "By any means, oil should be through the roof right now." In all of these things had happened in any other condition, oil would be super high. But the growth in the United States was keeping it at that $100 level, which seemed spectacular. Had I made that next step...

O'Reilly: Logical leap.

Crowe: ...and thought, "Wait, what happens when all of that comes back online?" [laughs] And now, we're super...

Muckerman: You weren't the only one. I obviously flaked on them, and so did everyone else, because it would have been a logical prediction to assume vast overproduction.

O'Reilly: Not only that, but Iraq getting back to a semblance of where it was before.

Muckerman: And this happened at the same time that we were losing production. So now, they're starting to balance out. But if we ever decide to pick it back up, there's that vacuum that will be filled almost immediately.

O'Reilly: Dun dun dun.

Crowe: It's been a rather spectacular thing. And I think it was one of the lessons about investing in the oil markets versus there's a very political rhetoric associated with oil.

O'Reilly: Especially oil, yeah.

Crowe: And the idea of energy independence sounded great on the surface of it, that we would produce our own oil. But we had gone from a point where we were importing 60% of our oil; in 2008, we were only producing only about 5 million barrels a day, and consuming 15 or 16 million. So not only are we supplying more of our own; we're taking 5 million barrels of oil per day that was traditionally dedicated to the American market from places all over the globe and reintroducing it into the global market. Of all the commodities in the world, oil is probably one of the most liquid markets in terms of the ease of transport, universal pricing around it...

O'Reilly: We built our civilization around it, you can say.

Muckerman: Universal demand. Every country uses oil.

Crowe: Right, versus natural gas, where you have these big arbitrage price spreads because of the high cost of transportation and that it's much more difficult to transport. When you consider that, and how easily we can take a dedicated tanker that's going to the United States, and we have to find somewhere else to put it in a time where, granted, emerging-market demand is growing at a very high rate, but at the same time, developed nations, mature markets like the United States, Europe, places like that, it's been flatlining to declining. Where is that oil going to go? And I think that's something we didn't quite make that connection toward at the time. Hopefully, we can understand that relationship a lot better in the coming years and make better investment decisions because of it.

O'Reilly: Taylor, were there any rumblings whatsoever back in the summer of 2013 on Tesla (TSLA 12.06%), the driverless car happening, and the explosion we've seen in the last few years of solar?

Muckerman: Solar, I definitely think was a hot topic. Stocks were just as volatile as they are now. There wasn't as much concrete evidence that it would pan out.

O'Reilly: And you do think we have that now?

Muckerman: There were definitely shows where we talked about solar quite a bit. It was growing before that, but it was really starting to take hold, with companies taking ownership over it, rather than it just being small bets.

Crowe: In 2013, we'd actually just started to clear a supply glut of solar panels. 

O'Reilly: Just from the cheap Chinese manufacturers?

Crowe: Yeah, in 2011 and 2012, cheap Chinese manufacturers absolutely flooded the market. If you look at a company like First Solar (FSLR -1.46%) or SunPower, they really struggled right around 2011 and 2012 because there was so many cheap commodity panels coming out of China basically flooding the market, to the point where they were actually looking to impose trade sanctions on those sorts of things. But now that several of those companies have gone bankrupt, because that's what happens...

Muckerman: Because capitalism!

O'Reilly: That's what happens when you take a loss on every unit! You can't make it up on volume. [laughs]

Muckerman: That's right. Because capitalism.

Crowe: As that started to happen, you started to see companies like First Solar become much more profitable again. Actually, I think they just, last quarter, had blowout earnings, doubled the revenue and upped their guidance.

O'Reilly: The survivors, the First Solars, their solar panels have gotten way more efficient in the last three years, too.

Crowe: Yeah, and that's what also has made them much more attractive --

O'Reilly: Better technology.

Crowe: -- than the Chinese commodity panel. There was a point where the difference in efficiency between a First Solar panel and a Chinese commodity panel was not that great, to the point where you didn't really want to pay up. And First Solar had actually built itself as a lower-cost producer using a technology called cadmium telluride versus the traditional silicon wafer technology. So, basically, when cheap Chinese knockoffs could compete on price, there wasn't a whole lot of advantage on the cadmium telluride side for solar. Why were people going to buy there? But now that First Solar has increased panel efficiency, it actually makes it worth it buying it versus somebody like a Jinko Solar or something like that.

O'Reilly: Cool.

Muckerman: And Tesla. I can't remember when they first jumped onto the scene. Electric hybrid cars were starting to be a big thing. Back then, it was more, natural gas vehicles were going to be the next big thing, and that's kind of fallen by the wayside, at least in terms of you and I driving a car. But big rigs are much more so still aligned with natural gas.

O'Reilly: Tesla had its IPO in summer 2010, and it soared. But it was still a novelty in 2013.

Muckerman: Yeah, I don't know if they were even slinging any cars then. They had that roadster, and that was it.

O'Reilly: Wow, OK. Before we wrap up, any predictions for two-and-a-half years from now?

Crowe: That's a tough one.

Muckerman: No more OPEC.

O'Reilly: Really?

Crowe: Whooooa.

Muckerman: No more OPEC.

Crowe: That's a big one.

O'Reilly: The organization is actually going to disband? They'll close their offices? Or it'll be a joke?

Muckerman: Well, it's already losing some of its power. I think it'll be half of what it is or less, in terms of numbers.

O'Reilly: Oooh, membership, like, we're actually pegging a number on this, OK.

Crowe: Two-and-a-half years from now... I think we're still underestimating growth in renewables. We're doing it right now. You see the growth rates.

O'Reilly: Solar, wind, that?

Muckerman: Hydro.

Crowe: Yeah. I think there'll be a very rapid deployment of it, and it'll rattle a lot of cages in the electricity market.

O'Reilly: Domestically, or just on the planet?

Crowe: Especially domestically, because we are a mature market. As we've seen in commodity markets, when you have a mature market and there's a rapid growth transformation happening in one aspect of it, it really upends the market.

Muckerman: There's no new demand to absorb the new supply, so somebody has to go.

Crowe: Yeah, less so in emerging markets where you're trying to develop rapid infrastructure as quickly as possible. But certainly, in emerging markets, it's going to cause a lot more headaches. It's already starting to cause some pain, but I think in two or three years from now, it's really going to disrupt people much more.

Muckerman: What was it, San Francisco, or the entire state of California, I think it was just San Francisco that's now mandating solar panels on the roofs of new residential and commercial buildings. And that's just last week.

O'Reilly: Wow. It's still amazing to me that, I think it was 12 days out of the year last year, there were negative rates for power in California because of all the panels.

Crowe: It's the same in Texas, because of wind power.

O'Reilly: They're literally telling coal and natural gas plants, "Shut down; we're not giving you any money."

Muckerman: Easier said than done. [laughs]

O'Reilly: Right. My crazy prediction, two-and-a-half years from now, late 2018, I think one of the people at this table, within two degrees of separation, will know somebody who has a driverless car.

Muckerman: That's fair.

Crowe: That's bold.

O'Reilly: It's fun. I don't know.

Muckerman: Well, there'll be 400,000 new Teslas on the road, supposedly.

O'Reilly: I did say two degrees of separation. It could be your best friend's roommate knows a guy in San Francisco. 

Crowe: OK. Your father's brother's cousin's roommate?

Muckerman: Does family have to be the first link? Because we already know several Fools that have them.

O'Reilly: That's true. Obviously, David Gardner has a Tesla, though I don't think --

Crowe: Wait, are you saying Tesla, or a driverless car?

O'Reilly: Driverless car.

Muckerman: Oh, OK.

O'Reilly: Although, Tesla is probably a good bet, because they already do this stuff on the freeway.

Muckerman: How driverless are we talking here? Completely?

Crowe: Like, autonomous, we can sit in the backseat and let the machine do the work?

O'Reilly: Yeah.

Crowe: That's bold.

O'Reilly: Well, we're not getting any money; why not go big? [laughs]

Crowe: Fair enough.

Muckerman: If we did, you would have ridiculous odds.

O'Reilly: Yeah, I would need 50-to-1 or something.

Muckerman: At least.

O'Reilly: At least?

Muckerman: I believe in it. It's going to happen. I just don't know if you can cross the country autonomously. I think you'll be able to do it in a city or two, if they could 3D map it --

O'Reilly: That would fall under my bet.

Muckerman: Oh, I guess. If you want to go city, that you could drive around a city autonomously...

O'Reilly: I don't know if I would go D.C. for my bet. I don't know if I would do that.

Muckerman: [laughs] Their Metro can't even drive autonomously.

O'Reilly: Oh, gosh. [laughs]

Crowe: That's a whole 'nother can of worms that we will save for another time.

O'Reilly: Thanks, guys! If you're a loyal listener and have questions or comments, we would love to hear from you, just email us at [email protected]. Again, that's [email protected]. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything -- or wear a bolo tie -- based solely on what you hear on this program. For Tyler Crowe and Taylor Muckerman, I'm Sean O'Reilly. Thanks for listening, and Fool on!