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Happy New Year! In this week's episode of Industry Focus: Energy, your host, Nick Sciple, talks with three Motley Fool analysts about their 2019 energy forecasts. Will this year bring back $100-per-barrel oil? What's going to change for shale pipelines? How will U.S.-China trade tensions affect the LNG market? Will tax changes and tariffs shake up the renewables space? Tyler Crowe, Jason Hall, and Matt Dilallo share their takes, plus plenty of energy sector watch-list recs.
This episode was prerecorded in October 2018. Accountability is the new black, so we'll check back on what we got right and wrong. Be sure to tune in next week to find out.
A full transcript follows the video.
This video was recorded on Oct. 4, 2018.
Nick Sciple: This episode of Industry Focus was prerecorded on Oct. 4. Some things have changed, especially oil prices, since this episode was recorded. Make sure to tune in next week, where Jason Hall and I will break down where we went wrong back in October, and we'll go to the Industry Focus mailbag to answer any questions you have in energy and industrials for 2019. To make that possible, we need your questions. To send those in, please reach out to us on Twitter, @MFIndustryFocus, or via email at email@example.com. You can also send questions to Jason on Twitter, @TMFvelvethammer, or you can reach me on Twitter, @NWSGator. We hope you enjoy our conversation on energy trends to watch in 2019. We look forward to talking to you next week.
Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, and we're discussing energy trends for 2019. I'm your host, Nick Sciple, and today I'm joined in studio by Motley Fool contributors Jason Hall, Tyler Crowe, and Matt DiLallo. For our listeners, this episode was recorded on Oct. 4. Things may have changed between then and when you're listening today.
All right, everybody. The fool.com writer's conference is in town this week, so we've got three of our contributors here today. We're talking about the 2019 oil trends. Happy to have you all here.
Tyler Crowe: Glad to be here. It's nice. We always tend to work on different parts of the country, different parts of the world. Getting all together to talk shop is fun. Don't get to do it that often.
Jason Hall: It's strange. We talk literally every single day through Slack. We have a Slack group chat, I guess you could call it. We actually get a lot of articles and content that comes out of our conversations. But being in the same room, it's like it's 2018 or something. It's amazing!
Sciple: We're taking this conversation from Slack to the streets, you might say. We're going to talk about 2019 oil trends, or trends across the energy market for 2019. One of the biggest things that's been discussed, we've seen articles over the past few months, is $100 oil -- is oil going to get back to $100? We've seen the price move up significantly over the past 12 months. We were talking about before the show; the Brent crude price is now over $80. We're looking at about $75 on the WTI crude metric.
First off, can you talk about how we got here? How have oil prices risen over the past year or so? After that, what needs to happen for oil to move from here up to that $100 level?
Crowe: I'll take the how we got here, then I'll let you guys speculate on how we can get there. To understand how we got to where we are today, you have to look back to probably 2013, 2014. Everyone was spending boatloads of money on new projects. A lot of new oil was coming on. All of a sudden shale, was this phenomenon that was growing by leaps and bounds at unprecedented rates across the United States, especially. And what ended up happening was is, all of a sudden, we realized we had way too much supply.
As we had too much supply, people slashed their budgets to the bone. There wasn't a lot of new oil production that was set to come online. People were trying to juice a little bit more out of existing sources. They were backing away from a lot of their projects. What ended up happening is, as those completed projects went to work, we weren't replacing the decline in production in other sources. As that has happened, we've brought the supply and demand aspect back into balance. Now, we're starting to think that we might have a supply deficit, because when we should have been investing for today and probably the next two or three years, we weren't. And now, we've got this gap of not enough supply coming online for a set amount of time.
Hall: This isn't anything that's new or unique to this cycle. This happens every time there's a cycle like this. Oil prices get really high, there's lots of free money, money gets spent, then oil prices crash for whatever reason, and there's significant underinvestment in production or development of new resources. Guess what? It gets tight again and prices go back up. It's just another version. This one's been different. Matt, do you want to talk about shale, why you think that that's where the investment dollars have gone?
Matt DiLallo: There's the shale aspect of it, but there's also a lot of geopolitical things that are happening that are messing with oil. You've got the Iran sanctions. That could take a couple of million barrels of oil off the market. You've got Venezuela in freefall. They've lost like a million barrels over the past couple of years. You're not investing in places like that. And then, shale's having problems with pipelines in the Permian. They're capped out. They can't do too much more until there's some rail coming in, some pipelines. In Canada, they don't have enough pipeline, too. We've shut off some of the valves that we could have opened up to fill in the market. That's when, if something bad happens, a terrorist attack somewhere, or a coup, you could have $100 oil pretty easily.
Sciple: Yeah, geopolitical tensions have definitely been significant. We talk about the high prices of oil, but not every producer is enjoying these high prices. We mentioned shale. In August, a lot of producers in the Permian were getting $17 or more below the benchmark price because of the takeaway constraints. We talked about the lack of pipeline capacity. That's significantly driving down those prices that they can command at the well. If you're going to transport oil by truck, or some other method, that's going to cost double, triple, quadruple the amount that it costs to transmit oil via pipeline.
Over the next 18 months, say, how are we expecting these shale takeaway issues to be resolved? Is the Permian going to bring these pipelines online? Or, alternatively, are we going to see some other basins getting those investment dollars that have been, to date, going primarily to the Permian?
DiLallo: Yes to both. In the Permian, Plains All American has two pipelines. One's coming online next month, and another, they're fast-tracking it. They're spending more money to try to get generators and try to get supplies in as quickly as possible. Then, you've got the Gray Oak Pipeline, which is Phillips 66 Partners. That one should come online by the end of next year. There's a private equity pipeline that they're hoping to build. They've tried to get around the tariffs. That's been an issue. It's costing more because of the steel tariffs.
In the meantime, we're seeing producers move out of the Permian. Conoco Phillips, they've been going to the Eagle Ford. A couple of others have said that they're going to switch out. You're going to see more supplies coming from the Eagle Ford, the Bakken, Powder River Basin, places like that.
Crowe: It seems like, probably by the time that we're recording this, and the time that this podcast actually drops, I wouldn't be surprised if we saw five new pipeline open seasons, basically saying, "Hey, we want to build a new pipeline somewhere." It seems like once a week, we're getting a new pipeline auction or somebody saying they're interested in it. It's amazing to see how fast the infrastructure ramp-up is going to go right now. You're seeing it with those midstream producers, a lot of them are not committing to these huge distribution increases and paying out their shareholders, because they're like, "We are going to spend a ton of money over the next 24 months, maybe even longer," and they're measuring their growth to investor because they have to allocate so much money to construction right now.
Sciple: To follow up on that, looking at these midstream companies investing heavily to bid off these pipelines, is now a time to maybe get involved in those businesses? What's the risk-reward here with the amount of capex these businesses are putting in place to meet this demand?
Hall: It's easy to say it's a healthier time to be looking at that segment now than it was a couple of years ago, the prior peak, when tons of money was getting thrown. Generally, midstreamers are yield investments. You're trying to capture dividend income. A number of them had to slash their payouts substantially because they got over-leveraged. I think it's generally healthier right now. You have to be kind of picky, though. A few that I personally like, I like Phillips 66 Partners. It's partnered with a great, powerful midstream company that's also a big refiner. There's some baked-in interest in them doing it the right way. I'm a big fan of ONEOK as well. And there's a few others. We could probably have an argument about Kinder Morgan that might get a little emotional.
Crowe: We don't have enough time. [laughs]
Hall: [laughs] Yes, that.
Sciple: Let's swing into something else that's affected by pipeline capacity. That's the liquefied natural gas market. That's really been growing over the past few years. It's been promised to be much larger than it has been to date. But there are some signs that it might be starting to scale up. Recently, Shell announced a $14 billion LNG project in Canada, the final investment decision for that project. It had been originally announced back in 2012. But finally, we're seeing that project come online.
Are investments like these signs of a little bit of an inflection point in this LNG market? Where are we expecting this market to go over the next 18-24 months?
Crowe: I think it's just a sign that the oversupply that people thought we were going to have never materialized to the level that they were predicting. If you look back and read an energy article back in 2015, 2016, I think it was Chevron's Gorgon LNG project. They thought it was this monster that was going to completely change the way that we talk about LNG. Between that and Gulf LNG facilities coming online, we were going to have an oversupply for years.
It hasn't materialized because demand has picked up almost as quickly as that supply has been coming online, to the point where prices for LNG in spot markets, in places like China or most of the Southeast Asian markets, they're at four-year or five-year highs. All of those concerns about oversupply haven't materialized in a way that they'd thought. So, you're seeing a lot of these companies, like Shell, give the green light to these projects because instead of thinking, "There might be a market opportunity past 2025," they're seeing it as, "Wow, we could have an opportunity 24-36 months from now."
Hall: One of the things we talked about briefly before the show was how Europe has relied on Russia so much for natural gas, and how the leaders are looking to diversify their supply. That's generally going to be a good thing for a lot of this LNG.
Sciple: Let's tie in, we talked about Europe, one of the largest markets for LNG demand in the world is China. Just a couple of weeks ago, September 24th, China announced the latest round of tariffs on the United States. That included a 10% tariff on LNG. We talked about, maybe there's some demand coming up in Europe that wasn't previously there for these North American producers. How do you think these Chinese tariffs are going to affect the global LNG market, in particular, those producers based in the United States and North America?
Hall: I think they're going to use a foreign proxy to buy it from the U.S. and then buy it from that country.
Crowe: Yeah. Even if those direct cargoes don't go to China, they'll get absorbed. It's one of those things where demand for the product seems to be so high that if China decides to buy from somebody else, the shortage that is going to, I don't know, Vietnam or the Philippines or whatever other country, is going to absorb that. China has been a huge growth market, but it's not the only growth market. You're seeing large uptake in LNG in South America. You're seeing it in the other Southeast Asian countries. Places, for example, like Japan, where they're trying to move away from their nuclear plants and not use coal. There are other places for it to go. For us to be wholly concerned about the one country misses the whole global opportunity there.
Hall: I think it's bigger than energy, it's also a petrochemical manufacturing, it's a big feedstock, too. As oil all prices continue to climb, it makes it more competitive for petrochemical manufacturing, too.
DiLallo: There's also India. We haven't talked about that. I saw that Brookfield Infrastructure Partners is buying an Indian pipeline system that feeds in from LNG places. They're looking to India being this huge, huge natural gas market coming up. China will be huge, but India is going to be right up there with them, as far as natural gas in the future.
Sciple: Tyler, you had mentioned a couple of companies that you found interesting in the space, specifically Tellurian (NASDAQ:TELL) and NextDecade (NASDAQ:NEXT). Do you want to talk a little bit about those and how those players fit into the LNG story?
Crowe: Sure. I look at those as all-or-nothing bets. These are two start-up companies in the United States who want to build -- similar to Cheniere Energy, they're a company built on a business plan and a hope right now. If things were to materialize like we've been talking about here, with supply being a little bit short and prices are really high, there is an opportunity with these start-up companies. Through the development process, there's a lot of money to be made. You're getting it so early on. It's one of the very few start-up realms that you get in energy nowadays. They're priced as if they're not going to make it. So, somebody who is very bullish on the industry, especially over the next year or so, when we're going to see some catalysts for those guys, when they're going to make their final investment decisions, when we're going to see them present their customers. If those things can materialize over the next year, there's a great opportunity for investors in those two particular companies.
Sciple: Sure. For investors who may not be super familiar with the space, can you talk about specifically what Tellurian and NextDecade do? What are the services they provide for their customers?
Crowe: If anybody has followed the energy market recently, Cheniere Energy owns an LNG export facility. Tellurian and NextDecade are looking to do the same thing. They want to build liquefaction and export facilities on the Texas Gulf Coast, accompanied with pipelines to places like the Permian Basin, the Haynesville formation up in Louisiana. Basically, all these producers that need pipeline access, it's like, "We're going to give you pipeline access to our facilities where we can liquefy and market to somewhere outside the United States where prices are much, much higher than in the U.S." The opportunity there is to take really cheap gas in the United States, liquefy it, and transport that long distance, there is still a lot of money to be made on that trade. And that's where that opportunity is with those two companies.
DiLallo: Tyler, one thing I'd like for you to describe is the way they're funding the business for Tellurian. That's the thing that different about Cheniere, for example.
Crowe: Right. The unique thing with Tellurian versus Cheniere, who basically took on debt and did a lot of other creative financial things, Tellurian is actually taking their customers and saying, "Instead of buying it on a contract, you're going to buy an equity stake in the business." It's an equity dilution, in a way. The customers are going to own some 40% of the facility. Don't quote me on that, I need to go back and actually look at it. And, by doing that, you're going to avoid a lot of the high debt levels that we saw with somebody like Cheniere.
Sciple: I want to call one thing out for investors and listeners. You talk about how cheap gas is in the United States, our natural gas supplies are unfathomably large. We have something in the realm -- you may have some stats on that, Tyler -- I want to say something like a hundred years' worth of natural gas supply between shale and our other production. Over the long-term, that's going to be a major exporting good for the United States, especially as LNG demand rises.
DiLallo: There's so much of it coming from places like the Marcellus and the Utica. We've been talking about the associated gas which is coming out the Permian. They're drilling for oil, but this gas is coming, and they're basically giving it away. Kinder Morgan is building two pipelines just to move all this to the Gulf Coast, because it's just so cheap. It's also coming up from the Bakken. There's pipelines that ONEOK is building. It's incredible, the amount of gas that we've gotten. They're trying to figure out how to use it.
Crowe: Even for us who cover this, it's still staggering to see the amount of money that's being invested in either export facilities for oil or gas, as well as the manufacturing, petrochemical and otherwise, that's going into the Gulf Coast over the past several years to take advantage of this cheap feedstock. To me, it seems unprecedented.
Hall: I haven't looked at it in a few months. The last I remember seeing, $180 billion had been committed to petrochemical manufacturing projects on the Gulf Coast. We both keep accidentally trying to say "golf course" when we're trying to say "Gulf Coast."
Crowe: Maybe we just want to get some golf in before we head out of town.
Hall: Could be. I think the interesting thing about that, again, it's tied to the fact that there's all this cheap gas. In terms of the economic boost to those areas, creates thousands and thousands of very, very high paying jobs. It's a really interesting thing that's happening.
Sciple: Yeah. For our listeners, LNG is a trend you're going to watch for 2019, but it's going to be something that plays out probably over the next decade. Definitely something to keep your eyes on.
Talking about energy sources for the next several decades, let's talk a little bit about renewables. Let's talk about solar. Solar is in the news right now for a couple of reasons. First off, there was a tariff put in place on solar panels by the United States earlier this year, as well as, later on this year, we're expecting that the government incentives and tax credits toward solar will begin starting to roll off the books. Currently, they're reimbursed a 30% tax credit based on your solar investment. With all these things going on, what are we looking at for solar over the next 18 months or so?
Hall: It's interesting. It's a really dynamic space. It's a global growth market. We're looking at probably multiple decades of growth across the renewables space as the technology gets better, as costs come down, energy storage costs come down. That's been the missing piece for wind and solar to be a real, permanent solution in terms of the baseload.
If you look at what's going on right now, last year, there was a massive increase in distributed solar around the world, primarily because China spent five times more than they did. Distributed solar is essentially anything that's a residential rooftop or a commercial, a private business that does solar vs. utility, which is, it's part of the grid, and they're selling that power. Distributed is basically, you're consuming it. You're buying the solar and then you're consuming it. This year in the U.S., we're probably going to finish the year down 17-18% in distributed solar vs. last year because of the 30% tariffs on solar panels imported into the United States. That was baked into the expectations for this year for the U.S.
On a global basis, somewhat unexpectedly, a couple of months ago, China essentially ended this incentive program they were doing. It's created this massive overcapacity that's shocked the market. The end result should be relatively good for consumers, because it's going to drive prices down because of the overcapacity, but it's created some uncertainty, in terms of panel makers, how things are going to go.
One that I like, I think it's interesting to look at right now, is SunPower (NASDAQ:SPWR). It's a big solar panel maker. They finally got the administration to give them an exemption from their panels being imported into the U.S. because of a little bit of a difference in their technology. They generally partner with small panel installers. Unlike SunRun and those guys, they sell through small independents. This immediately gives them a big cost advantage. I think there's a good opportunity for them to take a lot of market share in the U.S. residential section over the next year.
In terms of the bigger trends over the next year and a half or so, you think about wind, you think about battery storage. Battery storage technology is getting better. The costs are coming down as the manufacturing scale is growing. That scale is driving down the costs. Where we are in the cycle, because those are big utility-scale projects, I don't think there's a lot of huge upside for next year. We already know what's going to get spent. It's kind of a go-for-it year. There's going to be a lot of dynamic changes with the solar panel makers. But I think SunPower is the one that definitely has a lot of upside for the next year and a half or so.
Sciple: Sure. Tyler, we were talking about earlier, these renewables, solar in particular, among the energy markets, everything over the long-term looks like it's going to decline. We can speculate about how quickly the decline is, but this renewables space is something that is a secular growth trend. Do you want to pull that thread a little bit and talk to our listeners about that?
Crowe: It's one of the things that makes renewable investing so appealing, but yet so challenging at the same time. If you look at the long-term trends of renewable energy, it's hard not to have your eyeballs turn to money signs looking at the total addressable market that you have over the next 40, 50 years, if that's the investment horizon that you have. However, as Jason just articulated, there are so many things that are happening over these shorter-term cycles -- 18 months, one year -- between tariffs and all these other things that basically throw a roundhouse at the market. It's really hard to stay invested in it because it's so volatile.
Hall: There's one ETF that's kind of the vehicle if you want to invest in solar. Over the past three or four years, it's been a terrible investment. It's underperformed the market by like 100%. It's lost money for investors. You really have to understand the industry and know where to invest, or have a high risk tolerance, at least.
Crowe: Right. You're going to go through these phases of oversupply, undersupply. It's going to happen incredibly quickly. It's certainly an industry, at least in my view, where you have to avoid the new cycle, because you will very easily get caught up in probably entering a very bad point and make it difficult for you to stay invested in it after six months later when everything seems to drop so quickly.
DiLallo: That's why I like a company like Brookfield Renewable (NYSE:BEP). They have a total long-term mindset. They're in it to make money, looking at it from the economics of the project. They buy projects they know are going to make money. They do it on investment in great credit. They've got a very sustainable business. They've been at it with hydro for years and years. Now, they're getting into solar and wind. I really like how they're going about it. They see it as a $10 trillion market as we replace oil and natural gas with renewables over the years. If you look at it from the big picture and go with companies that know how to make money in the space, like a Brookfield, I think that's a good way to go about it.
Hall: Yeah. In terms of the kind of investor you are, if you're interested in investing in solar and wind and renewables in general, but you want to get a good solid return, you have a relatively low risk tolerance, the yieldcos are the way to go. I agree with you on pretty much any of the guys that are associated with Brookfield Asset Management (NYSE:BAM). You've got Brookfield Renewables. Now you have TerraForm Power. You get a solid yield. The interesting thing is, if you look at what they've done, they've made a big move into this space only very recently as the economics have gotten to the point where you're looking at cost parity with fossil fuels. I think that tells you all you need to know about how you make money.
DiLallo: They're really looking at it from the economic standpoint. They said it's slowly shifted away from the taxes being the sole driver to the economics being the sole driver. That appeals to them. They're able to look at projects and say, "We can make a 10% return on this. This is a good investment." I like the way they're going about it.
Sciple: One more thing, quickly, just to make sure investors understand everything we're talking about here -- can you talk about the yieldco distinction versus other operators in the space, how those different things break out for investors?
Hall: I can give a brief overview. Anybody that follows my writing, keep your eyes out in the next few weeks. There's going to be a maybe 4,000-word article that breaks this down with a lot more detail.
Essentially, you have manufacturers, you have companies that focus on the solar modules and solar cells. You have companies that manufacture the individual components, like the power converters, power inverters, that sort of thing. Then, you have installers. In the U.S., companies like SunRun, Vivint Solar, that actually put the panels on your roof, they do the commercial installs. They have different ways that they can monetize that, just selling the equipment to you, and then they service, so they have some potential for revenue streams.
Then, you have the power producers, the yieldcos. These are the companies that invest in or acquire the more utility-scale projects. They make a living selling power. They're more like a utility. As an investor, the way to think about it is, if you're looking for income and a stable investment, look on the yieldco side of things. All of the others, there could be some value opportunity. You have to understand how to value these businesses. That can get a little complex.
The other sectors, you have to have a higher tolerance for risk and accept the fact that you may invest in a company that might look great and then could struggle. But there's tremendous upside for the companies that have the right technology. So, that's how it's broken out.
Sciple: Awesome! Going away, we've talked about these big trends for 2019. I'm going to put you guys on the spot here. For next year in the energy space, if each one of you had to pick a favorite stock for 2019, hit me with it.
Crowe: I'll go first because I've actually already mentioned it. I am illogically bullish on Tellurian. It's the LNG exporter. At the beginning of next year, 2019, they're going to get the regulatory final approval -- if they obtain it, it'll be right around January. If they do that, then they can make their final investment decision within the next three months. If that happens, and you start to see progress on the development, it's going to be one of those major catalysts for the company that gives them the green light to realize what they want to do.
DiLallo: I know they say insanity is saying the same thing over and over again, but I'm going with Kinder Morgan.
Crowe: [laughs] I knew it!
DiLallo: It's just so cheap! They've done everything that you could possibly ask them to do. They've gotten rid of the risky project in Canada. They've cut their debt well below what investors worried about. They're getting a credit rating upgrade. They're getting new projects, good projects. They're buying back stock. At some point, I think the market has to realize that Kinder Morgan's not the same Kinder Morgan.
Hall: I hope you're right.
DiLallo: [laughs] Me, too.
Hall: I'm going to go with two because I like to talk more than everybody else. These are both going to be renewables. On the lower risk, capturing the income but still having some good upside, I'm going to say TerraForm Power. It's a great yield. Over the past year, after Brookfield Asset Management became its sponsor and majority shareholder, it's a completely different management team. They're focused on the economics, like Matt was saying. I think it's a great dividend growth investment. I think it's probably going to beat the market for the long term. I like where they're positioned right now.
If you're looking for a stock with great upside over the next year, but you're willing to take on that risk, I'm going to go with SunPower.
Sciple: Very nice. That's a very diverse set of picks. Hopefully it'll give our investors something to keep track of over the next year. Thank you guys so much for coming on! We'll have to do it again sometime when everybody's in town.
Crowe: Thanks for having us!
Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass. For Jason Hall, Tyler Crowe and Matt DiLallo, I'm Nick Sciple. Thanks for listening and Fool on!