Last week, research company Wood Mackenzie reported that oil finds are now lower than they've been since before WWII.
On this edition of Industry Focus: Energy, Sean O'Reilly and Taylor Muckerman talk about what this says for the future of the oil industry, what they see for oil in the next 15-20 years, why oil finds are falling off, and what parts of the industry have been the hardest in the past few years.
Also, the hosts talk about Texas' surprisingly huge role in the renewable energy space, and how investors can start to invest in driverless car technology software and hardware today.
A full transcript follows the video.
This podcast was recorded on Sep. 1, 2016.
Sean O'Reilly: This episode of Industry Focus is supported by Wunder Capital, an investing service that allows individuals to invest in solar projects across the United States. 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, September 1st, 2016, so we're talking about energy, materials, and industrials. I'm joined by Motley Fool Canada associate GM, Taylor Muckerman. Happy September Taylor, how's it going?
Taylor Muckerman: What do you say? Rabbit, rabbit? Is that something you say on the first day of the month?
Muckerman: I've heard that somewhere.
O'Reilly: I've never, never heard that.
Muckerman: I could be totally wrong and dreaming, but ... I don't know. It's just something I've heard someone say it.
O'Reilly: Do we need to google this when we leave?
Muckerman: Our listeners do. I need to, as well.
O'Reilly: Phone banks are standing by. Call in when you know the answer to this problem!
Before we dive into today's topics, we have a mailbag question that I wanted to answer from Bill Melton, who emailed us at firstname.lastname@example.org. He asked, "All of the discussion was around new driverless cars." He's referring to my recent episode with Mr. John Rosevear. "Is there a company or companies that would be positioned to profit from upgrading existing cars to a driverless state?"
This actually reminded me of Back to the Future Part II, when Marty sees the ad for upgrading your car to flight.
Muckerman: That seems a little bit more complicated.
Muckerman: Yeah, maybe.
O'Reilly: Bill, that is a great question. I can't thank you enough for writing in. To our knowledge, there are no direct plays on retrofitting regular cars for driverless functionality. There's no auto body shop or chain, or anything that's doing this. There are companies that are working on this, as well as other stuff. Anybody that's going to be working on upgrading a non-driverless car to driverless functionality in any capacity is probably going to be working on the same thing for new autonomous vehicles. One of the leaders in this was recently acquired by General Motors (NYSE:GM) for $1 billion back in March, it's what's now called their Cruise Division. It was just called Cruise. They were literally a Silicon Valley start-up that focused on creating a self-driving car kit for everybody's cars.
You've, of course, also got, I expect, in the future -- these are publicly traded options -- Delphi Automotive, which, of course, just announced their team up with Mobileye to offer an entire system that will be available to any auto maker for new cars. I would assume that Mobileye and Delphi will have something available for regular cars. You also have a bunch of private companies that are in on this. One of which -- a coworker mentioned to me -- was a Silicon Valley start-up, drive.ai. They're focusing more on the software, as I understand it. The bottom line is, Delphi and Mobileye will probably get in on it. Cruise has a system. But this isn't even the first inning. I don't think we've had the first pitch thrown in the game of retrofitting cars.
Muckerman: Yeah, that seems like a very complicated and expensive process.
O'Reilly: And, would you want to do that? It's a gamble.
Muckerman: You have to put all these radar beams in, and cameras into the bumpers --
O'Reilly: And you've seen the things on tops.
Muckerman: Yeah, you could throw that on top. You would look like a Google car, driving around with that big bubble on top.
O'Reilly: I saw this Audi retrofitted with one of the things you're talking about, the systems you're talking about ... and it's slightly less sexy now. (laughs)
Muckerman: I saw something pretty interesting the other day. They're wondering, drivers communicate with other drivers by honking or giving each other the bird, or waving, but how are driverless cars going to do that? So, this company is not publicly traded. They've come out with a rooftop display that will --
O'Reilly: Give someone the bird?
Muckerman: -- display emojis, and will reflect other road signs, so you know, as the human driver behind a driverless car, you know what the driverless car is thinking.
O'Reilly: "I'm mad at you."
O'Reilly: You use your turn signal and put up a smiley face.
Muckerman: You honk at an autonomous car in the wrong way, and it's going to break check you.
O'Reilly: This is fantastic. Sign me up. Taylor, for our first segment here ...
Muckerman: What's up?
O'Reilly: I wanted to talk about the state that is leading the nation in adding wind capacity to its mix of electricity generation. Surprising to some, the answer is Texas.
Muckerman: Yeah, one of the biggest oil-producing states. Although, oil isn't really used for power in the U.S., but they produce a lot of gas down there, as well.
O'Reilly: You've been aware of this for a while. Can you walk me through where they are now, relative to other states, and what you think their plans are for the future?
Muckerman: Yeah. Here's a state that basically generates about 16% of electrical generating capacity with wind as of April of this year. It's a state that's also been reliant on coal and natural gas for quite a while. When George Bush was the governor, and then Rick Perry was the governor --
O'Reilly: Bush actually pushed a lot of this through, didn't he?
Muckerman: Yeah, they allowed for freer markets, and the capital markets to do as they will. West Texas is where he's from, a very windy area of the country. So, he understood that that could be a potential boon for the state. So, they freed up a lot of things, provided some state and federal subsidies for these things that have wound down, or are winding down. So, you've seen this massive uptick in wind power and solar power. If you look at 2001, renewables are about 2% of Texas' energy source. In 2016, right now, as I mentioned, you're looking at 16% from renewables -- that's wind, solar, and hydro. Fossil fuels shrinking from 92% to 79%. The largest fossil fuel producing state in the lower 48 ...
O'Reilly: Also the leader in wind power. Now, they're hoping to catch California with solar. California is currently the leader in solar installations. But they're hoping to catch up there, too, right?
Muckerman: Yeah, they're trying. You see, they are 10th place right now in solar capacity. They're looking to maybe creep up to second in the next five years. California, obviously, a very sunny state. I think it's bigger than Texas, is it? So, it has equal or similar land mass. So they have the same opportunity there. But they're looking at 19,000 megawatts of solar capacity to be built within 15 years, up from 500 megawatts today. That's a big increase.
O'Reilly: When I saw this, what popped back into my mind was, do you remember about eight years ago, T. Boone Pickens was pushing his Pickens plan? He actually had a cool map. It showed the United States, and they had it color-coded based on average wind speed, and basically the corridor from The Dakotas down to Texas, he described it as the "Saudi Arabia of wind," and how we should just build a bunch of wind turbines throughout that entire section of the country.
Muckerman: That was a total on about face by Pickens and his energy powerhouse. But yeah, you're looking at some of these facilities being 45 acres big.
O'Reilly: That's enormous!
Muckerman: That's pretty massive for solar. And to see a state that most people associate with ... I would be surprised if a lot of people even thought that any solar was going on down there. And that's kind of eating a company like NRG Energy's (NYSE:NRG) lunch, because, traditionally, coal and natural gas, they're trying to get into renewables, but because of this surge in renewable energy production, energy prices for producers are falling. And it's not the only reason NRG Energy has been struggling. It's a very convoluted business model. It caught a lot of hedge funds off guard in the last couple years. But they're losing out on the pricing power --
O'Reilly: Yeah. We don't have time today, but we should almost do an entire show on how in trouble or not in trouble utilities are.
Muckerman: We really could. If you look at windpower and solar thermal power, it's really taking away, because it costs nothing to produce. Once your capital expenditures of building the facilities are there, you have to maintain it, obviously, but you're not continually running anything.
O'Reilly: Right. And speaking of renewable energy, before we move on, I wanted to take a moment to talk briefly about our sponsor. As you know, this episode is brought to you by Wunder Capital. What if you could help combat global climate change and make money at the same time. Introducing Wunder Capital, the award-winning online investment platform that allows individuals to invest in solar energy projects across the United States.
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So, Mr. Muckerman!
Muckerman: You rang?
O'Reilly: You remember an episode a number of months ago when we talked about how new oil discoveries were the lowest since World War II?
Muckerman: Yes, I do remember that.
O'Reilly: That number has now been ratcheted up to 70 years, literally right after World War II. New oil finds, according to consulting firm Wood Mackenzie, are at their lowest since 1947 and headed lower. At what point are we going to get to Drake's Well era oil finds?
Muckerman: That's a good question. You see so many companies pulling back. I think some of the biggest news that came out about this was the fact that ExxonMobil (NYSE:XOM) didn't replace 100% of its oil for the first time 22 years. I would expect that returned to 100%-plus in the next couple years, because they do have 10 major projects coming online in 2016 and 2017. But their capital expenditures budget for this year is down 38% in the second quarter.
O'Reilly: And that's good, compared to a lot of people.
Muckerman: Yeah, exactly. It makes you a little nervous for the distant future. Granted, some of these bigger projects do have long life spans, otherwise they wouldn't be pursuing them as heavily, because they are billions of dollars to build and maintain. But, if you're looking out to 2025, 2040, a lot could change, as we just talked about with Texas moving to renewables. But, if we're still even remotely as reliant on oil and gas as we are now in the next 15 to 20 years, you're going to see a price pinch.
O'Reilly: Yeah. And when this came out, it was troubling because it was also noted that the U.S. EIA, the U.S. Energy Information Administration, estimates that global oil demand will grow from the current 94.8 million barrels per day this year to, by 2026, 105.3 million barrels. There's two questions that I want to get your thoughts on with that. How seriously do you take the 105 number? Everyone is like, "Oh, we're all going to have driverless cars by the end of the decade, that will be there, they will have batteries." The U.S. is still the world's largest consumer of oil. There's that. India, China, everybody, is obviously growing. If you were a betting man, what do you think the odds are that we hit that 105 number in 10 years' time?
Muckerman: Simply because of the fact that so many countries are moving off of coal power. And, we have electric cars. Let's not associate driverless with electric just yet. But, granted, what we're seeing is, driverless are electric, because everyone that's designing driverless is more forward-thinking --
O'Reilly: They are buddies.
Muckerman: Exactly. You might as well pair the two if you're going to reach for an automated car manufacturer. I'm a little bullish on the fact that we're going to reduce the amount of oil. Maybe not reduce, but slow the pace more so than people think. Things are just accelerating really quickly these days, in terms of technological change in the automotive space, especially when you look at so many companies sparring, almost, over driverless and electric cars. Uber kicking board members out of the board room that it belonged to, Google partnering with Carnegie Mellon to start producing driverless cars in Pittsburgh, testing them as taxis, maybe.
O'Reilly: Yeah, there's 100 of them right now. How much oil does the U.S. consume? 16 million barrels a day?
Muckerman: Sounds about right.
O'Reilly: Let's pretend something crazy happens, and we cut that in half, thanks to all the stuff you just mentioned. That would get world consumption down to 86 or something, but other countries would hopefully come online. But, 86 to 105, that's a bit more of a jump.
Muckerman: Absolutely. Especially when you look at countries like Saudi Arabia, who's focusing very heavily on renewable energy.
O'Reilly: They invested in Uber recently.
Muckerman: Yeah. One of the members of the Saudi Arabia Sovereign Wealth Fund is on Uber's board. That country is the largest oil --
O'Reilly: Do you think it'll be hard to get to 105 in 2026?
Muckerman: I do. If you look at some of these countries, not only the producing countries, but also the consuming countries, they're changing very rapidly. If you look, 58%, I think, of all new energy production resources that came online in 2015 were renewable. So, more than half of all new energy production is renewable. That's pretty broad --
O'Reilly: Now, that's obviously inflated a little bit because of the lack of oil investment.
Muckerman: Sure. And also, oil isn't necessarily involved that heavily in energy production. You're mostly looking at natural gas. But if you're not drilling for natural gas, you might not be drilling for oil, either. In a lot of instances, especially in the United States, the two go hand in hand.
O'Reilly: Yeah. So, you're a little nervous about it hitting 105.
Muckerman: Well, nervous for the sake of oil companies. Nervous for the sake of humanity? No.
O'Reilly: OK. But, the other party that's hurting because of this is the offshore industry.
Muckerman: Yeah, that's the frontier of oil production right now.
O'Reilly: And literally frontier, because all this fracking, correct me if I'm wrong, is on land, usually.
O'Reilly: Is the offshore sector up a creek without a paddle? Up the Gulf of Mexico without a paddle?
Muckerman: Yeah, it kind of run into some rough seas, no pun intended with the hurricanes that are coming toward Florida right now. But yeah, you're looking at rigs dropping pretty significantly. Expected spending from GE (NYSE:GE) across the board in 2016 down 14% for international oil companies, 9% for national oil companies, and 40% for North American independent companies. Then, a company by the name of the Dril-Quip (NYSE:DRQ), which produces equipment for drill ships and a subsea well heads, they're looking at a bottoming of the floating rig count this year or next year, around 170. But, if you look at 2014 peak, it was 250, 260 rigs out there.
O'Reilly: And these are for long-tail projects.
Muckerman: Yes, these are for very long-tail projects. If you talked to people in the early 20-teens, they expected offshore oil to be the lifeblood of the oil industry for the long tail. And right now, it's just not getting developed. You're seeing companies dry stack rigs, which is basically pulling them off and leaving them in the port, not using them; or, they're just retiring them altogether. And, they're also reducing the amount of rigs that are under construction, which needed to happen, because there was this huge rush to construct these offshore rigs, because everyone thought that was going to be taking place a lot sooner that it has. Obviously, the price of oil collapsing didn't help matters. So, maybe the industry saves itself by dry stacking some of these older rigs and reducing rigs under construction. But at the current time, it's a few years away from a recovery, in my mind.
O'Reilly: Got it. So, steer clear of the offshore drillers, even if they look cheap?
Muckerman: I mean, earnings are down, so they don't necessarily look supremely cheap. Stock prices look cheap, comparatively to where they were a few years ago. But with earnings collapsing the way they have, multiples really haven't done the same. So, don't necessarily always look at P/E multiples when you're looking at energy company -- or any company, really, in general, but especially cyclical industries. With volatile earnings, P/E multiples don't really always resemble how cheap or how expensive these companies truly are, based on how they're currently performing. Granted, you always want to try to time the bottom of the cycle for these companies. But it's particularly tough right now.
O'Reilly: Cool. Thanks for your thoughts, Taylor.
Muckerman: Yeah, absolutely.
O'Reilly: Have a good one.
Muckerman: You too.
O'Reilly: That's 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 email@example.com; once again, that is firstname.lastname@example.org. As always, people on this 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 based solely on what you hear on this program. For Taylor Muckerman, I am Sean O'Reilly, and we also want to give a shout out to our programmer, Austin Morgan.
Muckerman: Woop woop!
O'Reilly: Thanks for listening and Fool on!
Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil, General Electric, and NRG Energy. The Motley Fool recommends General 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.