There may not be a family more synonymous with the oil industry than the Rockefellers. Family oligarch John D. Rockefeller made his fortune building an oil empire in Standard Oil, and the remnants of that massive company remain in ExxonMobil (XOM 1.15%) today.
It's that history in oil that makes the announcement that the Rockefellers are sellers of the fossil fuel industry so surprising. Rockefeller Brothers Fund is the most visible of institutions getting out of dirty fossil fuels, and in total, there's a commitment by at least 180 institutions and 653 individuals with $50 billion in assets to sell coal, tar sands, and oil assets, a figure that supporters hope to triple by December.
But there's more than just political pressure and environmental concerns that should drive the divestment of fossil fuel stocks. There are diminishing investment prospects in the old guard of energy, and it's being replaced by nearly limitless potential in new, clean, and renewable energy, which the Rockefellers themselves have their eyes on.
Investors are starting to rethink investments in industries like shale drilling. Source: Wikimedia.
Divesting from fossil fuels one step at a time
The Rockefeller Brothers Fund says it is "immediately divesting from coal and tar sand, the most carbon intensive fuels." From there, they intend to put money to work in renewable energy like wind and solar, where there's an incredible growth opportunity due to the improved cost effectiveness of these resources.
The Rockefellers and others are considering moving money from oil to solar plants like this one built by SunPower. Source: SunPower.
In that respect, this is just as much about making money as it is about changing the world. Rockefeller Brothers Fund trustee Steven Rockefeller said, "We see this as having both a moral and economic dimension."
While the Rockefellers selling oil is notable in the media, it isn't likely to change the way oil companies do business overnight. But it could be the canary in the coal mine for investors.
What this means for oil & gas companies
For a company like ExxonMobil, even $10 billion or $20 billion in outflows won't be noticeable to operations. The company has a $395 billion market cap and makes $30 billion-$40 billion per year in profit, so there's no rush to make changes for a handful of investors.
But the sudden move away from fossil fuels by investors, especially the dirtiest variety, will begin to impact how they look at the future. Demand for oil has been waning in the developed world over the past decade, and even big oil is cutting back spending on new wells to preserve what profits they have.
In fact, if you look at the fossil fuel industry as a whole, the investment prospects are getting increasingly dim.
The canary in the coalmine
What should be most troubling for fossil fuel investors is the growing decline in fossil fuel usage. As you can see below, oil and coal usage in the developed world has declined over the past decade, and alternatives are gaining momentum by the day.
US Oil Consumption data by YCharts.
The decline in demand comes at a time when drilling costs are soaring. Reserves in traditional wells have been drying up for decades, which has led the industry to push into unconventional oil plays like shale and ultra-deepwater drilling. The result of the higher costs has been a big decline in return on equity for the world's biggest oil companies.
XOM Return on Equity (TTM) data by YCharts.
Pressure on returns won't likely subside as renewable energy sources like wind and solar become cost effective when compared to fossil fuels. Unlike fossil fuels, where costs are rising, the cost to generate power from wind and solar is falling 5%-15% each year. The numbers are simply on renewable energy's side, and the Rockefellers can see the writing on the wall.
Where the Rockefellers could invest in renewables
The Rockefellers and others divesting from fossil fuels haven't said how they're going to invest in renewable energy, but instead of buying solar or wind manufacturers, I'd expect them to buy companies that own power-producing projects.
Yieldcos have become a popular investment vehicle, and there are a number the Rockefellers could consider -- as should you
Terraform Power (TERP) is a spinoff of SunEdison and owns solar assets around the country that generate electricity and sell it to the utility for a set price. The company is one of only a few pure solar plays in the yieldco segment, and its relationship with SunEdison ensures a pipeline of projects for years to come.
NRG Energy (CWEN 1.29%) was the first true yieldco on the market, and it owns wind, solar, and even some aging fossil fuel assets that allow it to capture tax benefits for new renewable projects. Long term, it will use funds from its power plants to pay a dividend and buy new renewable energy assets.
The third company to look at is Brookfield Renewable Energy Partners (BEP 0.92%), owner of primarily hydropower assets and a growing renewable energy producer. It has a 2 GW pipeline of projects and has the track record and balance sheet to grow its presence in renewable energy.
