In this episode of Industry Focus: Energy, Nick Sciple chats with Motley Fool Canada analyst Iain Butler about what's going on in the Canadian market, particularly in the Energy sector. Iain suggests some energy and other stocks for your watchlist. The guys also discuss fuel cells, what has been the story so far, what the future holds, and much more.
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This video was recorded on March 19, 2020.
Nick Sciple: Welcome to Industry Focus, I'm Nick Sciple. We've got a great show today, breaking down Ballard Power and the fuel cell industry. Motley Fool Canada Chief Investment Adviser Iain Butler is my guest today. Iain, how's it going?
Iain Butler: As well as it can, Nick. It's an interesting time we live in, isn't it?
Sciple: Yeah, it's wild. I know when we were getting ready for the show, I sent you this stat that we've had more consecutive 4% up and down days than any time in the market since 1929. So, when you're citing stats from the Great Depression to put things in context, that really just goes to show we're kind of in uncharted waters here.
You know, you pay attention to the Canadian market very closely, that's not a market I pay a lot of attention to. How crazy has it been for you all over there, on the TSX?
Butler: It has been more crazy than in the U.S., actually, to be frank. We are a very resource heavy market, and resources have been absolutely killed. I mean, energy is sort of patient zero on this market downturn, and there's just some wild scenarios that I don't think anybody saw coming. I mean, it's been an industry that's been, sort of, it's been hated. I've called it the most hated sector in the entire global market for a couple of years now.
And frankly, there was a case for investing in it, but we did not see demand destruction and we did not see a response to demand destruction by the biggest oil producer stomping on the gas and flooding the market with supply. So, it's a true tsunami there, and there's a lot of bankruptcies priced in, frankly. The stocks have been just absolutely killed.
Sciple: Yeah, it's insane, right. You have, probably, the biggest supply shock in my lifetime for sure, when it comes to the coronavirus coming with probably the biggest demand shock in my lifetime as well with the Saudis announcing that they're going to really start pumping as much oil as they possibly can.
You mentioned how big the resource sector of the market is for oil over in Canada. Are there any companies that you see here that, "Hey, this might be a good value." I know a lot of folks are asking me, what are some oil stocks I can take a look at?
Butler: I think the thing to key on is the balance sheet for these companies, and that really applies across the market in these situations. I mean, we're talking about scenarios where revenue goes to zero for companies if they're closing the doors for a period of time. So, balance sheet strength is critical. In the energy space, one that comes to mind is a company called Pason Systems, net cash, it's a technology company, really, that plays in the energy sector. So, their products go in drilling rigs and produce information for the drilling companies. Heavy founder-led, heavy inside ownership, lots to like, it's just in a terrible, terrible industry. And on the production side, I wouldn't necessarily go to the production side, never have. They're generally terrible businesses, because they're just capital hungry beasts really. They need access to capital at all times; that's not there, so there's going to be trouble there.
There is a debt-free royalty company that owns land and people pay it to drill on that land, called PrairieSky that's somewhat attractive. But, again, if the Canadian industries got even more problems beyond the macro issues that are facing the world. We've got some political issues where we can't get our oil out of Canada and the U.S. doesn't need our oil anymore. So, to go with a royalty company, you got to believe that the Canadian industry is going to be strong for a year or at least find its legs at some point.
But I think that Pason Systems is probably the best idea I've gotten in that land.
Sciple: Yeah, politically we've heard a lot from President Trump and other folks about how we might want to use some government largesse, maybe, and maybe that's not the best word, but some government intervention to support the industry. Has that been discussed in Canada at all?
Butler: Oh, it's a hot-button item. The real issue here comes down to pipelines and building pipelines, and there's real territorial strife over, sort of, not-in-my-backyard type situations with the pipelines. And we need a pipeline built or several pipelines, really, to the coast to get our oil elsewhere. The only country that we really export our oil to is the U.S. And that's completely hindered our entire situation. So, yeah, it's a huge political issue here.
Sciple: Yeah, wild. You know, before we go on the back-half of the show; we're going to talk about Ballard Power and the fuel cell industry. Obviously, there have been sell-offs across the markets, so going away from energy, any other sectors that you think look particularly attractive right now?
Butler: Maybe not sector-specific, but in an environment like this -- this is a stock-pickers market, right?! We need to be wary that we're going to probably be wrong in the short-term, because this situation doesn't look like it's going to rectify itself anytime soon. But that said, a company like Brookfield Asset Management (NYSE:BAM), which perhaps you're familiar with, certainly well-known throughout the U.S., is about as rock solid as it gets and there's just a tidal wave of money flowing into real assets, especially where interest rates are now. Like, the environment really caters to a company like that. So, that's one I would point to for sure.
And industries or companies where demand is inelastic for their services is another place that I would point people. And there's a small company by the name of Andlauer Healthcare, which really has a critical logistic system for healthcare products across Canada, dominant position; almost monopolistic. So, that's another one that I would point people to.
Sciple: Yeah. I can echo you on Brookfield Asset Management, you know I didn't know we were going to talk about it on this show. That's actually a stock I've been buying quite recently. You look at this company, it just sold-off significantly, but the assets that they hold, just really important, infrastructure, you know, power infrastructure. This is the stuff that you really can't turn off in these times. Any idea why it sold-off so much, because this seems to me like the company you would want to go into in these conditions?
Butler: The best I can say is that, the mother company, Brookfield Asset Management has a significant stake in Brookfield Properties, which is the office and retail REIT, and it's really been beaten up. I think the world believes that nobody is ever going to go to a mall again, nobody is ever going to go to an office again. Wrong. I think the world is wrong on that front. [laughs]
So, it was actually a recent recommendation for us at, sort of, at the CA$20 mark. It's gone down pretty significantly even from there. That was at about half net asset value, so it's well below 50% net asset value, so it's really cheap, big yield, but there's a lot of, sort of, the market doesn't think it's relevant anymore. So, that's all I can point to for the mother company.
Sciple: Yeah. Just wacko, you know, I personally have been buying it. I think it's a good value here, but we shall see. Okay, Iain, so on the back-half of the show we're going to talk about Ballard Power and the fuel cell industry. We got a question from Vince and he said, "Hello, Nick, and the Fool gang, I'm a new stock investor, entered the market in the summer of 2019 and I'm a member of several services at Fool Canada. I've been a daily podcast listener via Spotify, on Industry Focus, MarketFoolery, Motley Fool Money and Rule Breaker Investing while on my daily commute to-and-from work, as it takes a long one hour each way in Vancouver, British Columbia, Canada. The hydrogen fuel sector has been super active in the past three months, but relatively flat for several years previous, even some decades previous. I would love to hear your thoughts on the overall sector for 2020 and beyond. One stock, in particular, is Ballard Power, as an analyst from Fool Canada mentioned it in passing conversation in a recent Hidden Gems podcast that was covering other stocks in their dashboard."
Well, that unnamed Fool Canada analyst would be Mr. Iain Butler. Iain, just the high-level thoughts on the fuel cell industry right now and just maybe why it's been on such a run recently?
Butler: So, admittedly, I don't have a great handle on the fuel cell industry, but we did do some background and found it interesting that fuel cells have actually been around since 1839. So, it's been an industry that's around. I classify it, however, as one that certainly sounds wonderful and I think it tends to catch a bit from here-and-there every time renewable energy flares up as a hot trendy topic. But from a business angle, it really has not been a great place to be as an investor. Like I say, it catches fire from time-to-time.
And I mean, Ballard is a company that -- if you've been around the Canadian market for any amount of time, it soared, sort of, in the late 90s and then came crashing right down, and I think a similar scenario might be taking hold here. It certainly had a hot year last year; it's pulled back significantly with the rest of the market. It's a company that's never produced a profit, so revenues are essentially where they were back in the late 90s. I call these, sort of, whimsical situations that it's really more of a marketing company than an actual business, it needs outside capital, so they can tell a story that tends to bring that outside capital in from time-to-time, they get a little run, and away they go.
Sciple: Yeah, it seems Ballard and the fuel cell industry kind of got buoyed up on that wave when Tesla started surging late last year, there was a big, huge run-up across the entire, kind of, renewable, clean energy space in which Ballard was really carried along. And often when we talk about fuel cells, we're talking about it as kind of the other side of the coin to EVs, and they actually, kind of, are similar in some ways when you look at a battery, they both they have a cathode, an anode and an electrolyte in the middle. Well, a fuel cell basically has the same setup.
The difference is that a battery contains all those chemicals inside its cell, whereas a fuel cell will have hydrogen and oxygen that are coming in from the outside. So, you can refuel it kind of like a car or like you would with a gas-powered vehicle. So, that gives fuel cells an advantage when it comes to refueling time, they're also much lighter, which really opens up the application for fuel cells vis-a-vis EVs is, they're really great for heavy trucks that sort of thing, where you need utilization on a really high level.
And that's really where folks are seeing some potential demand. I know Ballard has talked up they've had some increasing orders with buses and things of the like. How should we think about that opportunity as the fuel cell industry, going forward?
Butler: I think you hit on it, and that's why this cannot be or has not been a more widely spread product or offering; there's no infrastructure for it. We can drive around the corner and fill up our cars with gas, there's infrastructure for it. The same thing does not exist for electric vehicles, the same thing does not exist for fuel cell vehicles. So, it's one where there's closed-loop, if it's a garbage truck or a city bus or something like that, it works; not necessarily for the more widely spread automobile industry.
Sciple: Right. And that is one of those things, when you look at this industry, it's the involvement of the government that is particularly important to help build out that infrastructure. And China has been one of these markets that has been very early on the adoption curve for both EVs and these types of fuel cell vehicles, because they've made really significant investments in that part of the market. It's worth noting, however, that those subsidies came to an end at the end of 2019, so now we're kind of in a situation where the market needs to be propelled on its own.
When you look at that dependence on government support to build out the thesis for the company, how do you think about that as an investor?
Butler: No. [laughs] It's not, I wouldn't. I think a company has got to be able to stand on its own merits to be an attractive opportunity. I think if you're reliant on the kindness of others -- and this goes, really, for reliance on the financial markets as well, if you're relying on the financial markets for survival, and we can tie this right back to oil and gas companies; they need the capital markets. So, the kindness of strangers is great if it's there, it's not always there. And when it's not there and you need it, that's a bad time. So, I steer clear of those scenarios.
Sciple: Right. So, it sounds like we're saying that this big run up, it is not a signal of an inflection point for this industry at this point in time, at least based on our current assessment. However, there are some applications going into the future where you could see some limited applications for long-haul trucking, that sort of thing, where the weight of batteries is prohibitive, where you need fast refueling, but again, that's dependent on some outside investment in that infrastructure.
So, sounds like, high-level, this fuel cell companies, just given the conditions in place -- another thing worth mentioning as well, in context of Ballard, is that you've got major companies; Hyundai, Toyota, Nikola Motor which is planning to come public via SPAC this year, they're all involved in this fuel cell/EV long-haul trucking space, but many of them are developing their own competing fuel cell technology. So, we can't assume that the existing producers are going to claim that market as it grows. But we should expect, I think, over time the role of fuel cells in long-haul trucking to grow, however, I don't know how you can pick winners right now, is the real concern.
Butler: Totally. And I think the other issue with this business is, it's very, sort of, contract-based. So, maybe they'll get an order for 25 fuel cells or whatever the number, that goes away, they've got to refill that somehow. So, they've got to continually keep impressing people with their product. And like you say, there's competition in the market. It differs so much from, sort of, a more subscription-based model, where you're sort of embedded within the organization and people are paying you on the regular. This is essentially a widget maker, a very fancy widget maker, but a widget maker nonetheless, and that's a tough business model to operate under as well.
Sciple: Right. So, as we've kind of painted the picture, this is an industry I wouldn't be excited to super-rush into now. However, when you look at this theme, Iain, of kind of continued growth in renewable, cleaner energy, we mentioned Brookfield earlier, but any companies that jump out to you as, these will be the companies I would be looking to deploy my capital toward, if I want to play into this clean energy theme.
Butler: There are angles. I'm, admittedly, somewhat of a skeptic on the renewable energy field. I think that the costs get thrown around a lot. Solar panels have come down in cost significantly, for instance; the physical product. However, they're intermittent. So, to build out and rely on solar power, you need underneath that, the traditional power sources; call it natural gas or whatever. So, it's really a system on top of a system, and that really skews the cost equation significantly.
So, I think it's there and we're going to continue moving in that direction. Again, though, I don't get overly excited like some of the sort of market masses out there.
Sciple: Yeah, I think we've talked about this on the show in the past, they call it the duck curve. If you look at the curve of power demand, at the top of the day is when you really have the maximum production of solar, as you would expect at noon, and then as the sun goes down, the production kind of curves down just as demand for power increases at the end of the day when folks come home -- to your point as why we need things like plants for natural gas or stationary storage to hold that solar that we've produced during the day.
There's never going to be a magic bullet that solves our energy problem when it comes to renewables. I mean, even if you want to look at wind, right, the wind doesn't always blow, that sort of thing. So, it's really kind of a mosaic of power sources that we're going to need to keep our production going.
Butler: Probably the answer is, whoever comes up with the magic battery that's able to store that power that's required to, sort of, get you through the night, that's potentially the answer. And I might actually ask you, do you know of any companies along that line that are sort of well down that path?
Sciple: Well, so NextEra Energy is a company that's obviously a big renewable producer. I think they've gotten more into the storage area. Everybody likes to jump to Tesla when they think about the battery storage part of the business. However, I think what's really driving the bus for Tesla is going to be the auto part of the business and it's going to be for a long time. You talk about, they say that they are cell constrained on the auto side of the business that limits how much cells you really have available for stationary storage.
When I think of a pure play in that area, nothing really jumps out, but again, I think NextEra Energy is a company involved there. There's a few others. And another thing I would think about as well when you talk about batteries, these are kind of commodity products at the end of the day, right. So, nothing gets me incredibly excited there, but I think companies that have stationary storage as part of their overall portfolio, I think, are a little bit more attractive in my opinion.
We led off the show, Iain, talking about the volatility in the market, how we really haven't seen things like this in my lifetime, maybe not even my parents' lifetime. In your personal portfolio, how are you investing, how are you navigating this volatility, how are you investing?
Butler: Slowly. I wouldn't call it lucky enough, but I mean, risk management is always part of the equation when it comes to managing a portfolio. So, I've got a decent cash position on hand. I am investing incrementally in some of the companies that I continue to admire, and have been beaten up maybe disproportionately. And adding some companies that I've sort of drooled over for years, yet, the valuation case hasn't been there, so.
And I think that's maybe a great way to think about these situations is like, go to quality, because quality is seldom on sale and these are the opportunities to really take advantage of getting some of the higher quality companies that now have a valuation case that doesn't exist, necessarily, most of the time.
Sciple: Yeah, absolutely, that's what I've been doing now. If I read a list to you of the company's I've been buying, which I'm not going to do right now on the show, just because of our trading rules and that sort of thing, you will have heard of almost every single one of these companies. To Iain's point, these are companies that really never go on sale. Take that opportunity now.
One thing I do struggle with -- and you mentioned slowly buying, Iain -- is, you know, once I get this cash, I push this cash into my account, it's really hard for me to hold it back and be super-methodical. Do you have any tricks you use to keep yourself disciplined because I'm sure a lot of our listeners are having those types of struggles as well.
Butler: Well, I keep thinking back to the financial crisis. And the lesson I took away from that was, I was fully invested at the time and I could do nothing with what was happening out there. So, that was a huge lesson embedded that will stick with me forever. So, to have liquidity, to be able to take advantage; I mean, this is going to be a multi-quarter at least situation. Even if we cure the virus tomorrow-- the economic impact that is going to roll over several quarters, and in a market that's driven, sort of, by analyst estimates -- who the heck can estimate earnings over the next quarter, two quarter, three quarters? So, I think we're in for some strife here regardless of how the virus plays out. So, I think liquidity is a great thing to have.
Sciple: Yeah. More important than ever to think long-term. To your point, Iain, of these blue-chip companies. On the backend, I think they're probably going to stick around. I think now is not the time to be speculating on the new flavor of the month. But we shall see. You know, [laughs] if things continue, we'll have a lot more volatility to talk about and a lot more comparisons to historical bear markets to go to.
Butler: Indeed. And I mean, that's another thing too, like, stats on bear markets, they are months long, they're not weeks long. So, really feel no pressure to dump that money all in one shot.
Sciple: Yeah, very important to think long-term, have a plan, stick to it. Iain, thanks so much for hopping on the show, kind of, sharing your thoughts with us. And hope to have you on again soon.
Butler: Awesome. Great to be here.
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 the stocks discussed, so don't buy or sell anything based solely on what you hear.
Thanks to Austin Morgan for his work behind the glass. For Iain Butler, I'm Nick Sciple. Thanks for listening and Fool on!