Interest in commercial drones has been picking up speed lately, especially in consumer goods and delivery. But these aren't the only sectors eyeing the possibilities that come with usage of flying drones.
In this week's episode of Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman talk about a few oil and gas companies that are looking into drones to more efficiently and safely check for methane leaks, explore for new oil, and more.
Also, the hosts look at two opposing statements from U.S. government agencies -- the Environmental Protection Agency and National Oceanic and Atmospheric Administration -- on the leading contributor of methane production. Find out where the controversy lies, where most methane really comes from, and how much hot-button issues like this should worry long-term energy investors.
A full transcript follows the video.
This podcast was recorded on Oct. 13, 2016.
Sean O'Reilly: Welcome to Industry Focus, the podcast the dives into a different sector of the stock market every day. Today is Thursday, October 13th, 2016, so we're talking about energy, materials, and industrials. I'm your host, Sean O'Reilly, and I am joined by Motley Fool Canada general associate manager, Taylor Muckerman. Mr. Muckerman, any big Halloween plans coming up?
Taylor Muckerman: I don't know yet, I'm deciding whether or not to spend the time in D.C. or New York.
O'Reilly: You and the wife not getting any joint costumes like the Underwoods or anything?
Muckerman: We have before, but I don't know about this year.
O'Reilly: What were you before? Crayons?
Muckerman: I stuffed a pillow under my shirt, and she dressed like a cake. So, I was the fat kid that loved cake.
O'Reilly: Oh my God.
Muckerman: That's about as far as it goes.
O'Reilly: You two are something special.
Muckerman: (laughs) That's why we got together.
O'Reilly: So, for our first segment here, don't know what to say other than drones are coming to the oil patch.
Muckerman: Yeah, they sure are, thanks to GE (GE +0.09%), among others.
O'Reilly: One, I did not know that GE has a fancy $125 million facility called the Oil and Gas Technology Center. They're rolling out this helicopter drone called The Raven, and it's going to help out oil companies cut down costs, be more efficient all that good stuff. Really quick, walk us through what exactly The Raven will be doing, and if you think it's good for the industry.
Muckerman: The latest version of The Raven can fly for about 40 minutes without needing to be repowered. It can fly 50 miles an hour, has infrared sensors on it to test for methane leaks, and they say that it can do the same task as a human can three times more efficiently, in terms of the time it needs. They've tested it with Southwestern Energy and Oklahoma State University, and the test went well enough where Southwestern wants to test again, basically allowing this drone and its pilot to test pipelines or the well site for methane leaks, without the need for a human to be walking around with a handheld infrared scanner.
O'Reilly: That's what I wanted to ask. Let's pretend I'm an employee of Kinder Morgan or whoever. How does Kinder Morgan find these leaks right now?
Muckerman: You literally have people...
O'Reilly: A guy walking around?
Muckerman: Walking, driving along the length to the pipeline with infrared sensors detecting leaks. But the sensors that are predominantly used, apparently, don't tell you the degree of the leak or anything like that, so you basically say, "There's a leak," and you have to determine whether or not it's bad enough to fix. Most of them probably are, especially with the EPA cracking down on methane emissions in the fossil fuel sector.
O'Reilly: How big of a deal is this?
Muckerman: Early on, it's not being used by everyone, it's still being tested. But it seems like there are other applications here. You can imagine drone use being very convenient at offshore oil rigs, people talk about using them to monitor the flaring towers on these rigs, that are often times quite high and if something went wrong, there could be fatal occurrences there because of explosions of natural gases not being flared --
O'Reilly: If only we had drones for the Deepwater Horizon spill.
Muckerman: I know, that could have maybe helped with something. But you would be more reliant on semi-submersibles for that instance, because it was on the ocean floor. But, you could have used drones to go in after the fact...
O'Reilly: Assess the damage.
Muckerman: The environment might not be very conducive to human life. You could have used drones for that. Those are some of the more applicable things. One company imagines drones doing away with exploration teams by using Advanced seismic equipment on these drones to go out and find oil, and not just prevent spills or leaks.
O'Reilly: So, we're going to fly this drone over the Delaware Basin, it's going to do some sub-crust deal.
Muckerman: Well, Chevron is working with drones, and suggest that drones possess unlimited technological possibilities in the oil and gas sector. That's coming from one of the four or five biggest oil companies in the world. They've been working with them just briefly, but then, you've seen drones also be used Prudhoe Bay in Alaska and very harsh environments.
O'Reilly: Has Core Labs...
Muckerman: To my knowledge, no. I could go back through transcripts, but to my knowledge, no. From what I understand, that company is dealing mainly below the surface. This idea of using seismic equipment on drones could help them out. But, as of right now, I don't think they're using drones for anything.
O'Reilly: Got it. This obviously isn't a tectonic shift, but as you said, unlimited potential is what these guys are saying.
Muckerman: Yeah. You're also seeing this used in the agriculture segment as well, to monitor crops, check out water usage and water reservoirs on distant parts of farms, and just general field maintenance. And, the U.S. government has allowed for the use of drones in the agriculture segment. It's not any man for himself -- there are restrictions. But they have a lot of companies and small farms to use drones to monitor things.
O'Reilly: Before we move on, so, I'm an oil company, I might start using drones to find oil and check gas leaks and all this in the future -- how big a cost savings would you speculate, as a percentage of capex or whatever?
Muckerman: That's hard to estimate. But as they grow in the capabilities that they have, I would imagine you could see some percentage points added back to margins. Granted, you still need someone to fly these drones. They're not completely independent of human interaction. But you will reduce some of the time needed to complete these tasks and also some of the safety risks that you see when a human is involved. So, I could see, not only predictable cost savings but unpredicted events not happening, which is hard to quantify. I could see that impacting that positively.
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So, Mr. Muckerman. EPA coming out with some emissions estimates. Everybody would assume that the culprit for CO2 levels in the atmosphere and all this stuff would be cars. That turns out not to be the case.
Muckerman: Yeah. This data actually came from NOAA, the National Oceanic and Atmospheric Association, to counteract with the EPA. We have two government entities...
O'Reilly: Oooh! Rap battle!
Muckerman: ... battling head to head. Apparently, fossil fuels only account for 20 to 25% of methane emissions globally, whereas if you look at microorganisms and livestock...
O'Reilly: I was about to say, it's cows, isn't it? (laughs)
Muckerman: ... decaying vegetation, they called out rice paddies, they're generating...
O'Reilly: Hold on, rice paddies?! Really?
Muckerman: Yeah. The whole group of microbial sources, 58 to 67% of methane emissions, compared to 20 to 25%.
O'Reilly: Decaying vegetation and wetlands and even termites. But not fossil fuels.
Muckerman: Yeah, they're only a quarter at most, apparently.
O'Reilly: I was thinking about, a couple episodes, we talked about how U.S. gasoline demand is finally at the highest level since the recession. I was also thinking how that's actually an even bigger deal because our cars are more efficient now than they were eight years ago. Is this a product of the last 10 to 15 years of our cars getting better, too? Or has this always been the case?
Muckerman: I can imagine that the cars are getting better, their emission controls are getting better, outside of Volkswagen.
O'Reilly: Cough. (laughs)
Muckerman: (laughs) I guess they're getting their act together.
O'Reilly: Awkward.
Muckerman: Yeah, awkward for them. But, yeah, emissions are definitely down from the fossil-fuel sector, especially when you look at natural gas production.
O'Reilly: Go Big Oil! Yay!
Muckerman: Natural gas production is up 47% from 1990, whereas methane emissions from that is down 21%. Both directions, that's what you want to see.
O'Reilly: Natural gas, as we've covered, is a cleaner fuel.
Muckerman: Yes, cleaner than coal, cleaner than oil. Maybe not so to extract, but to use, it is definitely cleaner. That's been proven. And it's getting better in terms of how much they're producing in terms of methane. The EPA wants levels from 2012 to be down 40 to 45% by 2025. No surprise, some states have come out and filed suit to not have that impact their specific states. Fifteen states.
O'Reilly: Which states are they?
Muckerman: North Dakota and Texas lead the pack, two of the larger oil and natural gas producers in the country. But it's interesting to see the wild swing from fossil fuels being the main culprit, according to the EPA, and them being a backseat driver to microorganisms and microbial sources...
O'Reilly: Don't forget the wetlands.
Muckerman: ... from the National Oceanic and Atmospheric Association. And when the EPA was enacting this ruling, they did get called out for cherry-picking their data sources.
O'Reilly: Oh, really! So, bringing it back around, I'm an oil and gas investor, let's say. How much time do you spend thinking about this stuff long term?
Muckerman: Companies have started to try and fix their methane emissions in terms of flaring.
O'Reilly: And you have Total, with Crowe, you hear about what they do.
Muckerman: Yeah. So, companies are addressing it. I guess it goes to show that even the government might not have a full grasp on exactly where these emissions are coming from, because two competing organizations in the same government...
O'Reilly: I want to see these two government agencies throw down. It could be good.
Muckerman: Yeah, we could have a debate.
O'Reilly: A mic drop.
Muckerman: It does kind of show that there might be a virtuous cycle of decaying plant matter, warmer climates, warmer climates causing more decaying plant matter, warmer climates, then being amplified by that additional decaying plant matter and this whole feedback loop.
O'Reilly: Dun dun dun.
Muckerman: The Earth is slowly killing itself.
O'Reilly: Actually, when you sent over this topic earlier, I was curious as to what countries are currently consuming the most oil, because we all know that the United States is No. 1.
Muckerman: By far.
O'Reilly: Yeah. I actually didn't know we were this high.
Muckerman: Yeah. I knew the level we were at, but I didn't know comparatively. Especially when you talk about the growth in China and India of gasoline demand.
O'Reilly: Yeah. So, according to the United States Energy Information Administration...
Muckerman: The EIA, very good source for data and general information, for anybody out there: www.eia.gov.
O'Reilly: For all you oil and gas nerds (laughs) in present company.
Muckerman: Yeah, fair enough.
O'Reilly: Is that the last website you look at at night and the first one in the morning?
Muckerman: Yes.
O'Reilly: I'm screwing with you. But the United States, EIA says, consumes 18.96 million barrels of oil per day. That is...
Muckerman: That's a lot.
O'Reilly: That's some oil.
Muckerman: It might sound like a lot, but then when you compare it to the next closest user of gasoline...
O'Reilly: China, 10.5 million.
Muckerman: See? Now you really realize just how much the United States consumes.
O'Reilly: It really tapers off from there. Japan, number three, is 4.5 million. Less than half. They import all of it. India, 3.6. Russia. 3.5.
Muckerman: Meanwhile, Russia is the world's leading producer of oil, and they consume very little comparatively.
O'Reilly: Yeah. I was actually surprised how much Saudi Arabia consumes. They're in the seventh spot here, and they actually consume just under 3 million barrels. Don't they use it for other stuff than cars?
Muckerman: Yeah, a lot of their energy and power comes from oil.
O'Reilly: Yeah, they burn it.
Muckerman: Yeah. It's such an abundant resource over there. But, they realize that oil revenue is not going to last forever, so they've been really gearing up for a renewable revolution in Saudi Arabia.
O'Reilly: Solar.
Muckerman: Yeah, absolutely. They're in the right part of the world for it.
O'Reilly: One of the only things more abundant than oil in Saudi Arabia is sunlight.
Muckerman: Well, sand. But that's a great reflector.
O'Reilly: Before we head out, Taylor, any stocks you're interested in right now?
Muckerman: Yeah, we can link the stock back to the first topic, drones. The company is called AeroVironment (AVAV +1.78%), ticker AVAV. Traditionally has been linked to the government and military spending, through unmanned aircraft systems. Been a contractor with the government for 20-25 years. That's the biggest portion of their business, but they are branching out into drones for use in oil, gas, additional applications in the U.S. military, also, electric vehicle charging stations. So, kind of a diverse company here with the backbone of the U.S. government for the majority of their revenue right now. But then they give you avenues of growth with drones and electric vehicle charging stations, among other things. The stock sold off quite recently, end of August, August 31st. Looking good. Balance sheet is pretty strong. But because it's a contract-based company at the moment, revenue isn't quite as visible, so there is some lumpiness there. But a business that anyone that's interested in profiting off of increased use of drones and the like, I think this is a cool company to take a look at. That's ticker AVAV.
O'Reilly: All right. Thank you for your thoughts, Taylor! 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 protected]. Once again, that's [email protected]. 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. Thanks for listening and Fool on!
