The year 2014 has turned out to be one heck of a year in the energy space -- but not in a good way. As oil production in the U.S. has climbed, the rest of the world has shot par with its own production, and demand for oil has slightly waned from slowing economies around the world. We have seen the price of oil drop like a stone, and it has taken the prospects of many energy stocks down with it.
While these recent events have certainly been on our minds as we look into 2015 to get answers, there are some other questions that have really been tugging at our sleeves. So we asked four of our energy analysts what question they would like to see answered in 2015.
The company pivoted its commercialization strategy from focusing on high volumes of commodity oils to lower volumes of high-margin oils that will help it stem losses in the near term. While the company has three specific high-margin product portfolios -- Algenist cosmetics, Encapso lubricants for oil and gas drilling, and AlgaVia food ingredients -- investors are curious if there's enough demand for them that will enable the company to reach profitable operations. There also appear to be technical problems at its largest manufacturing facility, which will now be delayed at least 18 months.
Assuming technical hurdles can be addressed, there are two key areas to focus on: capital discipline and market development. It's obvious that management will need to reel in expenses despite expecting to end 2014 with more than $200 million in cash. Hopefully, the war chest won't lure management away from making tough decisions, such as reducing head count.
While Algenist is growing handsomely on autopilot, investors will be eagerly awaiting announcements concerning Encapso and AlgaVia sales. We've heard of the great advantages of both product portfolios, but there simply hasn't been much demand from customers. In fact, meaningful AlgaVia sales have yet to materialize.
Solazyme is attempting to build a bridge with high-margin niche products to the high-growth future originally envisioned; but if it cannot penetrate markets with enough product volumes to reach profitability and/or reduce production costs, then the bridge may never be constructed.
Jason Hall: The obvious one is, "When will oil prices start climbing again?" But I'm not going to ask that -- there's actually another question that I think investors in U.S. producers need to be concerned about.
There are around 1,900 drilling rigs operating in the U.S., and 75% of them are drilling for oil right now. Back in 2008 and 2009, the numbers swung dramatically in the other direction, with about 1,500 rigs shifting to natural gas as the technical capability for horizontal drilling and hydraulic fracturing unlocked huge domestic gas reserves.
In short, domestic producers, in a huge land-grab effort to establish market share positions, sent natural gas to below $2 at wholesale -- the equivalent of $15 per barrel crude oil. Cheap oil isn't great for many U.S. producers, but it's doing a lot of good for the global economy, which needs a boost right now. On the other hand, natural gas is profitable for producers at current prices.
Matt DiLallo: I'd love to know if oil prices will finally stabilize next year. We've seen prices in an absolute free fall, which has created a lot of additional volatility in the market seeing how no one knows how far prices could drop.
Because of that, stabilization is almost as important as price because energy companies can at least make plans for lower oil prices. It's nearly impossible, however, to plan for a future where oil prices could be anywhere from, say, $10 on the low-end to back above $100.
Stabilization gives the industry something to adjust to in order to continue operating. For example, if oil prices stabilize at a lower price, we would likely see service companies cut their prices just to stay alive. This would actually push down the break-even points of drilling new wells that everyone worries about today. So, while it's not an ideal situation, just having oil prices stabilize lower would at least make it possible for oil companies to have some certainly about how much money they can make. It will take a lot of adjustment, but it can be done.
However, if oil prices are bouncing around irrationally all year, it will make it very tough for the industry to operate, as the uncertainty alone could create more problems than lower oil prices. That volatility could cause banks to freeze lending to the energy sector, or it could cause service companies to hold their ground on prices -- all of which would cause a bigger mess than the one created from simply having lower oil prices.
Further, as an investor, I can make better investment choices if there was more certainty in the marketplace. But, at the present moment, I feel like my hands are tied until I see where oil prices will finally stabilize.
Tyler Crowe: I can totally understand why many of the energy companies we talk about on a regular basis have been rocked by the major drop in oil prices. Most of their prospects are tied to the price of oil, and the health of the oil and gas drilling industry. That being said, several other companies have seen share prices tumble despite the fact that their business models barely correlate with the price of oil. I keep asking myself, "How long is it going to take before people start to realize that the market is acting completely irrational?"
A great example of this complete irrationality is what has happened to shares of Cheniere Energy (NYSEMKT:LNG) -- you know, the company that plans to export LNG through two facilities in the Gulf coast. In the past three months, shares of this company have tumbled close to 20%. Yet, the company's business model is built so that it has very little exposure to natural gas prices, and pretty much no exposure to the price of oil.
Someone might make the argument that, because the rest of the world prices its natural gas based on a price indexed to oil, cheap oil abroad will lead to cheaper natural gas. However, most of Cheniere's first facility is contracted on a take-or-pay basis, and we are years away before the second one becomes part of the conversation. Completely irrational price movements like this have me wondering when the market will catch on to its bizarre behavior... and how much I can buy before it finally realizes its folly.
Jason Hall owns shares of Ultra Petroleum. Matt DiLallo has the following options: long January 2016 $25 calls on Ultra Petroleum. Maxx Chatsko has no position in any stocks mentioned. Tyler Crowe has no position in any stocks mentioned.
The Motley Fool recommends Ultra Petroleum. The Motley Fool owns shares of Solazyme. 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.