It's Intern Week for Industry Focus. On today's energy edition, Sean O'Reilly and Taylor Muckerman answer some of intern Lindsay Zadunayski's questions about investing in energy. Find out how much green energy can be expected to grow given the context of today's energy glut; how self-driving car technology is being affected by the sluggish pace of legislation; and how feasible asteroid mining and space-based solar energy harvesting will be in the next few decades.
Also, the hosts take a look two pieces of this week's energy news: Rigs are starting to come back online, and natural gas has finally surpassed coal as the main source of power for the United States' electricity.
A full transcript follows the video.
This podcast was recorded on June 23, 2016.
Sean O'Reilly: This Motley Fool podcast is supported by Wunder Capital, an investing service that allows individuals to invest in solar projects across the U.S. Earn up to 11% annually while diversifying your portfolio, curbing pollution, and combating global climate change. Create an account for free at wundercapital.com/fool. Wunder Capital. Do well and do good.
Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, June 23, so we're talking about energy and industrials. I am joined by Motley Fool Canada lead analyst Taylor Muckerman, and we are both joined via Skype by Fool intern Lindsay Zadunayski, who is currently working out of our Denver, Colorado office. Hi, Lindsay! How are you?
Lindsay Zadunayski: Good, how are you?
O'Reilly: Not too shabby.
Taylor Muckerman: Yes, we're good here.
O'Reilly: We've got a born and bred Canadian on the line here, and one of the heads of Fool Canada. Do you guys have anything to...?
Muckerman: Not really.
O'Reilly: Okay. You were just in Toronto, right?
Muckerman: Yeah, we were there last Tuesday through Friday. Had a Fool Canada member event on Thursday night. Tremendous turn out. Probably more members showed up than every single meet up we've had combined since 2012.
O'Reilly: Awesome! Lindsay, how are you enjoying your internship?
Zadunayski: Good! It's going really well so far.
O'Reilly: What exactly do they have you doing out there?
Zadunayski: I'm working on analyzing the feeds and then making a website for it.
O'Reilly: Awesome! Very good! Thank you for your hard work.
Muckerman: Yes, we appreciate that.
O'Reilly: Really quick, before we dive into the questions that you have lined up for us, because it is Intern Question Week on Industry Focus.
Muckerman: What will we think of next on Industry Focus?
O'Reilly: Does this make us really creative or really not creative? I don't know which it is.
Muckerman: I haven't heard of an intern week on any other podcast.
O'Reilly: Good point! Lindsay, what school do you go to?
Zadunayski: I go to Rensselaer Polytechnic Institute.
O'Reilly: Awesome, cool. Do you want to give a shout out to anybody?
Zadunayski: Shout out to my parents.
Muckerman: Yeah, there we go!
O'Reilly: There we go!
Muckerman: Welcome to the podcast!
O'Reilly: All right, Lindsay, we are ready. Feel free to hit us with your first question.
Zadunayski: Okay. Since oil prices have dropped, and people in governments are no longer forced to pursue alternative solutions, how much can sustainable energy companies really be expected to expand in the next few years? How is the lack of demand affecting their businesses?
O'Reilly: I have to tell you, when I first saw this question, I had a big smile across my face. I was like "Man, not only do we have these really smart interns, but that is a really, really good question."
Muckerman: Yeah, it's pretty loaded, I'm not going to lie.
O'Reilly: Taylor, what comes to mind immediately?
Muckerman: What comes to mind immediately is that if what we've been seeing in the oil markets since November of 2014 happened five, seven years earlier, I think we could be in a situation where renewable energy companies begin to take a backseat again.
O'Reilly: Right. They wouldn't even have gotten off the ground.
Muckerman: Yeah. You've seen ridiculous growth over the last five years especially. I think they've gotten to a point where there's just no turning back. Still though, you're looking at renewables only accounting for around 3% of total global energy consumption. Ninety-seven percent of it is still available for disruption. The U.S., I think we saw, two-thirds of all electricity generating capacity in 2015 was renewable, and 30% of that was solar. You're still seeing very broad adoption from a small base of renewable energy in terms of solar. Wind is still doing very well. A bigger base than solar in the United States, but solar continues to dominate.
For some perspective, we use 1100 gigawatts of energy generating capacity in 2012. Last year, we only added 7.3 gigawatts, so very small fraction of what we actually use. That was just solar. We added 7.3 gigawatts of solar energy last year. That's 16% more than we had in 2014, so we're seeing some big numbers being thrown around, but in the grand scheme of things, renewables is still relatively small.
O'Reilly: To getting around her question then, it doesn't seem like it is affecting the business right now.
Muckerman: No. You saw the big spending bill be passed at the end of last year that basically extended the tax credits for solar, or maybe it was earlier this year, I can't remember the exact date. The tax credits for solar power purchasing on the residential side was supposed to expire in 2017. They pushed that out into perpetuity now. Basically, a give and take on Republicans wanted oil exports from the U.S., which hasn't happened in over 30 years.
Democrats were like, OK, we'll give you that, but we want to extend renewable energy tax credits. I think that there was this mad dash for people to install solar to beat that expiration. So you have seen that maybe the numbers are a little inflated over the last couple of years and people tried to get in before that expired, but now that you see that pushed out, it's going to be a continued grown pattern here for solar and wind in the U.S. and nuclear as well.
O'Reilly: Bottom line, it seems like they don't have an excuse, even though energy prices has come back so much just because, technologically, they're competitive now. Finally.
Muckerman: A big portion of what we're talking about here is electricity production and the bulk of that is coming from coal and natural gas, so it's not even directly competing with oil. That being said, the EIA, which does a lot of forecasting, predicts that 75% or so of all energy production in 2040 will still be from fossil fuels.
O'Reilly: Got it!
Muckerman: That's saying that we're going from only 3% renewable to potentially 25% renewable between now and 2040. Still only a quarter, but the EIA in 2012 was saying that fossil fuels would account for at 84%, so we've knocked off 9% of that in just a couple of years. I imagine that that prediction will continue to come down.
O'Reilly: Awesome! All right Lindsay, what else do you got for us?
Zadunayski: Okay, second question. Multiple states have already introduced legislation to limit or ban self-driving cars. Is the future of this industry legitimately in danger, or are these just pre-emptive moves that will likely relax over time?
Muckerman: That's a question for today's day and age, absolutely.
O'Reilly: Yeah. It definitely seems like Silicon Valley is not waiting for cities and government to come up with the regulations, they're just doing it now.
Muckerman: I feel like there are cars that could. ... I mean, Tesla (NASDAQ:TSLA) could get you on a major highway from on-ramp to exit ramp without even touching the steering wheel for the most part, if it's a heavily trafficked highway. I just saw a company, they came out the other day. It's a small start-up, but basically this is pretty wild. They're basically 3D printing miniature buses that can hold about six to ten people.
O'Reilly: Did you see the photo? They're really cute.
Muckerman: ... Yeah they are. It basically looks like a giant tooth on wheels. A giant molar on wheels.
O'Reilly: Have you seen what he's talking about, Lindsay?
Zadunayski: No, I'll look it up.
O'Reilly: We'll have to send it to you.
Muckerman: We can tweet it out from our Industry Focus Twitter handle, but basically, they're 3D printing these little buses and they're using IBM Watson as basically the tool to communicate and operate between the humans. You can get on this bus and say, "Take me to work!" and it will know where you work, it will know how to get there, and it will take you there. It already ready to drive on the roads. Tesla's driving on the roads. Actually, internally they pulled back on their own automated driving because people were putting YouTube videos up of them, flipping the switch and climbing in the backseat, and leaving the driver's seat completely empty.
Muckerman: Yes. They realized that humans in general aren't quite ready for this. Cars might be, but humans aren't. Then you look at this British start-up that I came across the other day called Immense Simulations. Basically, a video game company that is now digitally recreating virtual worlds. They mapped Manchester, England on a one-to-one digital replica, complete with simulated activity for its 100,000 residents. That's what you're really going to have to see is cities and areas --
O'Reilly: Why did they recreate the Matrix in a suburb of London?
Muckerman: You want these cities to be 3D mapped so that cars know exactly, not just where the roads are headed, but where objects of obstruction, building, or parking garages ... they need to know where everything exists, not just where the curbs do. 3D imaging of the cities is probably what's going to be needed before cities and states completely release the collar here. You see in Nevada, they've already approved the testing of autonomous semi-truck rigs. There's been a fleet of them on the road over there, I can't recall the company that makes them, but fully autonomous semi-trucks. They shut off if there's inclement weather, you have to take over if there's inclement weather, or if it's night time, but if they're on a highway on a sunny or cloudy day, you could push a button and these tractor trailer trucks will be driving around Nevada with no one touching the steering wheel.
O'Reilly: Bringing it around to her question then, it seems like just competition between cities and continued technological advancements are going to win out, and these eventually will get relaxed.
Muckerman: I don't necessarily think it's a competition, I think these cities want to -- for a lack of better term -- pump the brakes on this. They don't want to inhibit the technological growth, but they don't want cars out there driving by themselves without some semblance of direction and regulation.
O'Reilly: Got it. Cool. Okay, so Lindsay do you got one more for us?
Zadunayski: With Luxembourg setting aside 300 million euros to develop asteroid mining, is it time to begin seriously considering the industry as a possibility in the next 10 or 20 years?
Muckerman: I don't know. I can't predict a time frame, but I can tell you that Jeff Bezos believes that one day, all heavy industry will take place in space.
O'Reilly: He said that, because the energy for industry is way better with solar up in... That's why, right?
Muckerman: Yeah, because you don't have to fight with the atmosphere, the ozone layer and any of that, so you're just harnessing pure power of the sun when you're in space.
O'Reilly: The moon's going to be a giant factory.
Muckerman: Yeah, it really could be, and then just people living and light industry on planet Earth. When you look at what they say is the composition of these asteroids in terms of rare Earth minerals, it blows the Earth's compilation out of the water. You could be looking at trillion dollar asteroids.
O'Reilly: Right, because they've got like platinum in them and stuff... My gosh!
Muckerman: Yeah, they have everything. The difficulty here is obviously landing on an asteroid that's flying through space rather than the moon that's in a more predictable orbit.
O'Reilly: Bruce Willis and Ben Affleck will do it.
Muckerman: They'll figure it out. Bruce Willis will be 80, landing on an asteroid in some movie, somewhere down the line.
O'Reilly: Lindsay, I have a question for you. Would you be willing to go up into space to lasso an asteroid?
Zadunayski: It would definitely be pretty fun.
Muckerman: Yeah, I would have to imagine.
O'Reilly: One heck of a ride.
Muckerman: Well, Lindsay, thank you for calling in and we could not be happier with you and the rest of the interns. We've got a great group this year. Have a great rest of your day.
Zadunayski: Thanks, you too.
O'Reilly: Bye bye.
O'Reilly: All right, listeners! Before we move on I wanted to take a moment to talk briefly about our sponsor. This Motley Fool podcast is brought to you by Wunder Capital. Wunder Capital is a Techstars-backed company with headquarters in Boulder, Colorado. Wunder Capital allows investors to invest in solar projects across the country, and since the beginning of this year, Wunder has originated over 25 million dollars' worth of solar projects.
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Taylor, we're diving back in here with the latest news in energy.
Muckerman: A little bit more boring than asteroid mining and driverless cars.
O'Reilly: She asked that question. I had the picture of the guy in Doctor Strangelove, riding the bomb down on the ground, waving his cowboy hat and stuff, yee-haw.
Muckerman: I can see that.
O'Reilly: I guess, Taylor, this section is they're back with land rigs.
Muckerman: It kind of reminded me of Independence Day where he's like "I'm back!" He's looking up into the alien spacecraft. But, yeah, rigs, they're coming back online.
O'Reilly: Third consecutive week of increases. The Eagle Ford Geological Region down in Texas added four rigs. Permian in West Texas added four. National rig count stands for the United States at 424. Increase sounds bad, because this is going to cause another glut, but this is way below where we were.
Muckerman: Yeah, you are looking at basically 80%. October 2014, curiously the month just before OPEC decided to...
O'Reilly: Go figure.
Muckerman: You saw just over 1600 rigs. I think they said 1609 was the all-time peak. In May of this year, we bottomed at the lowest number that Baker Hughes (NYSE:BHI) has seen since they were tracking this since 1944, over 70 years now, and that was the lowest we've ever seen the rig count.
O'Reilly: The previous episode I think we mentioned it was 1952 was the last time that it got this low. What do you think? I saw this quote by this energy executive and he was like "Yeah, this is the beginning of the comeback" and all this stuff. "You're in the bottom of the Grand Canyon right now, man!"
Muckerman: Basically, when you talk about net nine rigs came online in a week, there's a lot of ground to make up, but there is clearly too many rigs to begin with when you had over 1600. Where is that middle ground? I'm not sure.
Muckerman: Okay. You want to take bets? We can take some bets here at the next high water mark.
O'Reilly: What's the over/under on January 2018?
Muckerman: I'll take the under.
O'Reilly: You would?
Muckerman: In, what is it, in a year and a half?
O'Reilly: Yeah. You'll take the under?! Okay.
Muckerman: Only because rigs are becoming more efficient.
O'Reilly: That's a good point!
Muckerman: They scrapped a lot of rigs in this downturn, there's less rigs to even bring back.
O'Reilly: ... Everybody keeps talking about scrapping. Is it literally melting the metal down and using it for cars or something? I mean, is it gone, gone?
Muckerman: They could be doing something like that. For the most part though, they're just parting them out because there are a lot of replacement on these rigs in terms of parts, and so you're seeing a lot of these rigs just totally broken down --
O'Reilly: Dismantled and sending widgets to other rigs.
Muckerman: Yeah. X rig needs this. This rig's been sitting here, let's just disassemble it and distribute the parts. Basically, these rigs are just disappearing into thin air and being parted out.
O'Reilly: Got it. This actually leads us into the next segment: Natural gas has just surpassed coal as the United States' major power source for electricity generation.
Muckerman: Yeah, first time ever.
O'Reilly: Of course, Lindsay kind of hinted at this sort of thing, too. I have to tell you, when you sent this over, I was like, "Really? It took us this long?"
Muckerman: Yeah, it did. We saw the lowest increase in carbon emissions since '92.
O'Reilly: 0.2%? Yay!
Muckerman: Something like that, yeah, so pretty impressive. I guess there was -- 2009 was technically the lowest since '92, but the recession, everything just shut down.
O'Reilly: In the report, I didn't see any mention of globally. Am I to assume that globally coal is still kind of used a lot?
Muckerman: It is, but it did drop 1.8% globally in 2015, compared to the 13% drop we saw here in the U.S. We're looking at China and India really driving coal demand. For there to be a big global needle move, they're going to have to get on board, but China, from what they say, is all in on getting rid of coal use.
O'Reilly: Got it. What kind of investor takeaways can we have? Are there definitely stocks that are going to benefit from this? Obviously, we're making this pivot away from coal, which we've been using for a hundred years, to natural gas, so are there utilities that are going to stand to benefit from this? What can Foolish investors do?
Muckerman: Personally, I prefer the pipelines that distribute the natural gas. If you've listened to an episode or two before, you've probably heard me talk about Spectra Energy (NYSE:SE). I'll go ahead and say I personally own it, and I don't talk about it because I own it, I talk about it because I believe in it. Very, very large footprint on the East Coast with some operations in Canada. Predominantly natural gas, so you're diversifying your way away from oil. No coal exposure. That's probably my favorite pick if you want access to natural gas growth. They just got approved to build a pipeline between Texas and Mexico, one of our largest natural gas and oil trade partners. I definitely think that natural gas heavy pipelines will be the way to go. If you want to play natural gas, you get a good dividend yield, and you lose some of the exposure that you get when you buy a producer.
Utilities generally aren't my thing either just because they're complex, a lot of government regulations, generally slow growth.
O'Reilly: Lord knows what's going to happen with solar.
Muckerman: Yeah, exactly. That's probably years away, but it's here, right? You can see it happening. I would stick with the pipelines personally.
O'Reilly: It does seem like a really good way to act as a natural toll collector to natural gas usage.
Muckerman: Spectra Energy continued to pay its dividend through the downturn. The stock did sell off, but not nearly as much as producers did. Natural gas producers didn't really drop as much as oil producers have because natural gas has been in these low price environments since about 2012 and it's still chugging right along. Pipelines are full, they're bursting. Not bursting literally, but you know.
O'Reilly: Yeah, we know what you mean.
Muckerman: Wrong industry to talk about bursting at the seams. That's the way I would go. You want to look for companies that have projects planned in areas that are under-served, which Spectra does. New England is wildly underserved in terms of natural gas distribution. They have probably over 20 billion dollars in projects planned along the East Coast that will help alleviate that.
O'Reilly: Awesome. All right, Taylor! Thanks for your thoughts!
Muckerman: Yes, sir!
O'Reilly: Have a good one! That is it for us, folks. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at firstname.lastname@example.org. Once again that is email@example.com. As always, people on this program may have interest in the stocks that they talk about, and the Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear in this program. For Taylor Muckerman, I'm Sean O'Reilly. Thanks for listening, and Fool on!
Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman owns shares of Spectra Energy and Tesla Motors. The Motley Fool owns shares of and recommends Spectra Energy and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.