Energy Investing: 5 Bold Predictions for 2015

As we look out into what 2015 might bright we're making bold calls on bankruptcies, oil prices, dividends, and nuclear power.

Motley Fool Staff
Motley Fool Staff
Jan 4, 2015 at 12:00PM
Energy, Materials, and Utilities

Source: Anadarko Petroleum

The energy industry is changing. Oil prices, which were once thought to be cemented above $100 per barrel, fell dramatically in 2014. Meanwhile, new energy technologies are on the cusp of revolutionizing the industry. With so much change investors need to keep an eye on what's next. Here's what we see happening in the year ahead. 

Maxx Chatsko: Hitachi and General Electric Company (NYSE:GE) have maintained a high level of momentum in 2014 for their advanced nuclear reactor design -- and I think investors will begin to acknowledge the existence of the Generation IV PRISM reactor and consider its potential to become a multi-billion revenue stream for the company. I know that seems ridiculous given the diversification and size of General Electric, but the timing is right and progress has been undeniable. 

On a macro level, global economies are beginning to act on climate change by committing to emission reduction targets; beginning with the two biggest offenders in the United States and China. Translation: the chances for reaching a global deal at the U.N. meeting in Paris in 2015 just increased exponentially. In other words, the time is now for nuclear energy. Smaller reactor designs, the consumption of nuclear wastes for power generation, and novel processes promise to make future nuclear projects substantially more economical. Meanwhile, dangling the low-carbon carrot in front of world leaders may be too good to pass up.

On a micro level, General Electric is moving full-steam ahead to commercialize PRISM. A research agreement with the U.S. Department of Energy is expected to successfully conclude next year, while a new DOE project will update the design's safety assessment -- a key step toward global commercialization. The company also signed a MOU with a major Spanish energy generator to help push the United Kingdom to utilize the advanced design, which could power the U.K. for 100 years using the nation's plutonium stockpiles 

Look for additional macro and micro announcements to impact shares in 2015.

Matt DiLallo: I think that there is a growing risk that an energy company could go bankrupt before the end of 2015 if oil prices don't improve. Oil and gas companies piled on an unbelievable amount of debt to pursue shale drilling over the past few years. More concerning, energy companies took full advantage of the open doors of the high-yield bond market to fuel growth. In fact, energy companies have been the fastest growing segment of this market and now account for 18% of all high-yield bonds, which is up from just 9% in 2009.

Analysts are starting to predict a massive default wave over the next few years if oil prices stay below $65 per barrel for an extended period of time. Upwards of 40% of all of these high yield bonds could default in a worst case scenario. So, if oil prices don't improve by the middle of 2015 I'd expect we'd see the first cracks to form before the end of next year with at least one overleveraged small E&P company going belly up before the end of the year.

To avoid this risk, investors should steer clear of debt laden drilling companies and stick with low-cost producers with rock solid balance sheets. These companies will not only survive the downturn, but thrive whenever oil prices head higher.

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Tyler Crowe: I made the prediction last year that a major coal company would go bankrupt. While you may debate whether or not James River Coal was a major company in the space or not, 2014 was an extremely rough year for coal.

Well, it doesn't look like it's going to get much better for coal companies in 2015, either. Natural gas prices are still in that "low enough to make utilities to think hard about converting to gas" range, and renewable electricity sources are becoming more economical by the day. Not only has this led to no new coal capacity coming online in the US this year, but coal prices are still low to the point that many production centers across the nation are unprofitable. On top of it all, many several-decade-old coal power plants are about to reach retirement age, and the chances that they get replaced with new coal facilities look even less likely.

So I'm going to make the same prediction as I did last year, another major coal company in the US will go bankrupt. Those conditions above, combined with several bloated balance sheets and lack of either earnings or free cash flow, make for a rather rough market yet again that will prove increasingly difficult to overcome. 

Asit Sharma: 2015 will be a year in which we see yieldcos come into the mainstream of energy investing. A yieldco is a publicly traded company which arises as a spin-off from a parent energy company. In most cases, the yieldco is formed to hold operating assets with long-term, contractual revenue streams, and dividends are paid to investors from these fairly predictable cash flows.

The yieldco structure is particularly attractive to investors in the renewable energy sector, as it provides a means to participate in the sector with theoretically lower risk. Large scale renewable projects with stretched time frames and uncertain payoffs remain within parent companies. Completed projects in which output is committed to utility companies form the basis for investors' yieldco dividend checks.

Notable yieldcos include NRG Yield, (NYSE:CWEN) and Brookfield Renewable Energy Partners LP (NYSE:BEP). NRG Yield provides an example of some of the risk involved in yieldco investing: since a mid-2013 IPO, the stock is up nearly 72%, due to the rising popularity of the yieldco structure. This has driven NYLD's dividend yield down to 3.3%, creating a potential quandary for new investors: the yield is not overly attractive at present, and in addition, there may be downside price risk if one buys into the company today.

I believe that as more parent companies spin-off attractive assets into yieldcos, supply will catch up to investor demand, leading to more stable stock prices with higher yields relative to parent companies. In either case, expect to see more yieldco IPOs in 2015: so far, investors can't seem to get enough.

Travis Hoium: My bold prediction for 2015 is that the price of oil will end the year below $70 per barrel. This flies in the face of predictions of a recovery in oil but I think the energy industry is entering a new paradigm of lower demand and OPEC will be forced to keep production high to maintain market share.

This opinion is affected heavily by the demand trends you can see in the chart below. The developed world is using less oil than a decade ago and the trend looks to continue long-term.

US Oil Consumption Chart

US Oil Consumption data by YCharts

Declining demand is driven by a number of factors that show no sign of changing. Efficiency of vehicles is improving and CAFÉ standards in the U.S. will push fleet efficiency to 54.5 miles per gallon by 2025. We're getting more out of each gallon of gas and that's bad for demand.  

Alternative fuels are also gaining popularity, namely electric vehicles. Tesla Motors (NASDAQ:TSLA) alone is targeting production of around 500,000 vehicles by 2020 and when combined with competitors could be 3-5 million of an 82 million vehicle auto market as of last year. This will lead to incrementally lower demand for oil.

But the biggest change may come from China and India, who have driven global oil demand growth over the past decade. Both are putting major efforts behind moving to locally produced energy and renewable energy. Neither country wants to be dependent on oil imports for economic growth and that will help keep oil demand growth muted.

All of these dynamics put OPEC in a tough position. Oil is priced based on the marginal barrel -- meaning the last barrel produced affects the price of all other barrels -- and OPEC could push prices higher if they reduce production. But reducing production into a slowly shrinking market could mean giving up revenue today to own larger share in a smaller market tomorrow. That's why I think OPEC will be forced to keep production where it's at and it'll take over a year to see production from marginal producers fall enough to affect prices. The result, I think, will be a continuation of low oil prices.