We may not be the next Jon Stewart when it comes to skewering the media for a sloppy job, but we know a ridiculous news story about the energy world when we see one. So to pay homage to the departing leader in fake news, we've decided to take two articles to town for their sheer lunacy and show why you shouldn't take everything you read in the financial world as the gospel.
Also in this weeks episode of Industry Focus, we take a look at Apple's (AAPL +2.65%) big decision to purchase over $900 million worth of solar power for its facilities, and we send out our investing "love letters" to two companies that we think need a little love this Valentine's Day: Magellan Midstream Partners (MMP +0.00%) and EcoLab (ECL +2.07%).
A full transcript follows the video.
Tyler Crowe: Jon Stewart is leaving The Daily Show, so this is our very, very bad attempt at an audition for his spot. This is Industry Focus.
[INTRO]
Hey everyone. It's Thursday. It's time for the energy version of Industry Focus. I'm Tyler, this is Taylor.
Taylor Muckerman: It gets confusing!
Crowe: It does get confusing. Jon Stewart leaving The Daily Show.
Muckerman: I'm bummed.
Crowe: I'm pretty bummed out.
Muckerman: A lot of people out there are pretty happy about it, though, I'm sure.
Crowe: I'm sure, but you know what? They need a new host, so we're going to make a really lame attempt at being the next Jon Stewart.
Muckerman: We're going to see who's lamer?
Crowe: Yes. We both found some really, really horrible, horrible reporting coverage news headlines in the past year -- or actually in the past week, even. What did you see, just to show the sheer stupidity of the market, in that Jon Stewart sort of vein?
Muckerman: I think right now with oil prices doing what they're doing, everyone wants to make these ridiculous claims, get the headlines, get some clicks. One of them that I saw from Market Watch, titled "10 Cheap Energy Stocks that Could Soar Up to 202%" -- wildly specific.
I looked at these 10 stocks; most of them I had never even heard of before. All of them but one was trading at under $5 a share. Arguably, you probably lost a lot of market cap in the last few months, but that was StealthGas -- never heard of it -- trading at about $5.50.
Only one I could see was a long-term buy in my mind, and that's Clean Energy Fuels. All the other ones were small market cap companies that, yes they might pop in 2015 if oil does nothing but rebound from here, but if it falls back down into the $40s again, you could lose 50% or more rather than gain 202%.
This is just an analyst saying, "If they hit their forward-looking guidance EPS, this is where they should be trading at in 12 months." I'm not a 12-month investor. I'm not a pop-and-drop kind of guy, so that one just caught me off guard.
Crowe: Oh gee, so you mean if oil prices were to go up, doubling where they are today, then these companies could double. What a shock!
Muckerman: I know, I don't understand it! It's simple math, I guess.
Crowe: I found one almost on the exact opposite of what you were looking at; these things that are going to pop like crazy. One of the dumbest ones I saw was oil to go to $20 and it will be the end of OPEC.
Muckerman: Dun dun dun!
Crowe: These guys were saying that OPEC, the largest cartel of oil producers in the world -- they hold 40% of the world's reserves left, about 30% of production right now.
Basically what they're saying is that the small players like the Venezuelas, the Nigerias, they're mad at Saudi Arabia because Saudi Arabia is holding production and keeping prices down right now and they're going to say, "We're done. We're out. It doesn't make any sense for us to be here anymore."
But this doesn't make any sense whatsoever. It just seems like another one of those typical cases when we see oil price moves like this, of somebody just wanting to get their name out there on a thing.
Muckerman: Making outrageous claims.
Crowe: Headlining Yahoo! Finance to say, "Top Oil Analyst Says End of OPEC," or something like that. It just doesn't make any sense.
First off, OPEC can't really control prices in the first place. In the 55 years that OPEC has been an actual entity, 16 years we've seen oil price movements of more than 25%, so they're not really good at actually controlling the market in the way that they say it does.
The global oil market is so fragmented that nobody has really more than 10%-12% market share, and when there are that many players in the space nobody can really control it.
Muckerman: In terms of countries.
Crowe: In terms of countries, yes.
Then maybe you could argue that Saudi Arabia does because they do actually have the spare capacity, so they can play on the margins a little bit. But at the same time these countries -- the Venezuelas, the Nigerias, whatever -- they're just pure price takers. They only can take what they can get.
If they were to leave OPEC, they'd have absolutely no say in the matter whatsoever. At least if they stay in OPEC, they can be like, "Hey, Saudi Arabia, come on. Give us a break here, we need a little bit better price so we can actually get things going."
It was one of those things, I read it and I go, "Why are you even writing this?"
Muckerman: Yes, you've got to circle back to Saudi Arabia's spare capacity. If some countries decided to leave, all Saudi Arabia has to do is say, "All right, it's a vendetta. We're going to produce to the hilt, and then really see who the long-term player here is in the oil game."
Venezuela and Iraq and Nigeria, they'd get priced right out of the market. They don't have the treasury capacity, the reserves in currency, to last as long as Saudi Arabia does, and they can't produce it as cheaply.
Crowe: Yes. It just didn't make any sense. My brain hurt when I read this thing!
Muckerman: I'll listen to Apollo Global, whose energy head said that the worst is yet to come for oil because OPEC could keep things the way they are for so long. They have the reserves, they have financial reserves. This could go on for a couple more years.
I'll take the head of a private equity firm that's deeply involved in oil, rather than a singular analyst talking about $20 oil and the end of OPEC.
Crowe: So, the oil market's going to do exactly as it's done for the past 10-20 years.
Muckerman: Up and down until infinity. That's right.
Crowe: Continue to do it for as long as we know it, forever. But moving on, going away from ridiculous ...
Muckerman: A little cleaner than oil.
Crowe: Cleaner than oil and a little bit cheerier news, I guess not so ridiculous. We saw Apple (AAPL +2.65%) do a huge solar buy this week, doing an $850 million power purchasing agreement from First Solar (FSLR 0.63%), who is building a utility-scale platform in California.
Why don't you break that down for us a little bit? Why are these sorts of things happening right now?
Muckerman: I think Apple just dropped some money on the ground and forgot to pick it back up, and First Solar was walking directly behind them!
It's some spare change for Apple, but I think it's a big boost for the solar industry; $850 million is a big project anywhere, much less for a singular company to contract this out, so a nice little boost for First Solar on the corporate side. They were struggling around the world for new utility-sized business so here Apple is, coming out, being innovative.
Just a few days before this, MillerCoors announced that they were going to build a facility in California, through SolarCity (SCTY +0.00%), hoping to save about 600 million gallons of water that they traditionally use for nuclear facilities and fossil fuel facilities, to produce as much power as this solar panel facility is going to produce.
They're talking about 10,000 solar panels and 3.2 megawatts of energy, so if you drink something from MillerCoors, there's a decent chance in the next few years that it's come from a solar-powered plant, because they say it's going to be enough energy to brew 7 million cases a year.
Crowe: All right. Coors.
Muckerman: MillerCoors, yes.
Crowe: The sustainable banquet beer.
Muckerman: That's right! I tweeted about this and I got an interesting reply from @SolarSecretsTPA. They were saying it could be a bit of a bitter brew, since taxpayers could be held liable for 30% of this total bill.
They also tweeted a similar tweet about the Apple deal, "U aren't gonna claim the 30% tax credit on this $850M PR stunt, are you?"
Crowe: I'm not going to... that sounds a little ridiculous.
Muckerman: I agree.
Crowe: The one thing that I actually kind of like about this whole thing -- and it's not just a commentary on the market, but more just investors in general -- $900 million for solar is nothing to shake a stick at. This is a really big deal.
What was funny was the company itself, the actual stock price, in the day didn't really move anywhere past 3-4%. What I liked about that is it just seemed encouraging that the market is maturing. You can sign a billion-dollar deal and nobody's going to absolutely lose their minds and run around, "Oh my god!"
Muckerman: A year ago, this could have been 15-20%.
Crowe: It almost feels like we're growing up. We've moved on. We've graduated. Solar is a legitimate, real market force that people aren't taking as this anecdotal, "Hey, this is cool. It's gaining momentum." This is a billion-dollar deal and it barely moved the needle for the company.
Muckerman: Yes, I agree. Speaking of clean energy, I was going to mention this in my headlines; Vestas Wind Systems paying its first dividend since 2003. It turned a profit this year for the first time since 2010.
While it's cool that wind is making a profit, I'm a little discouraged -- if I was a shareholder here -- wondering, "Why the heck are you paying a dividend, just now making a profit? Why don't you pump the brakes a little bit? See if you can turn a profit for another year or so, maybe even another quarter or so ...
Crowe: Yes, maybe getting a little over excited.
Muckerman: "... before you pump a dividend out. Why don't you still worry about getting to scale, lowering of costs, efficiencies ..."
I don't see that dividend lasting too long. I haven't dived in personally, so I can't say that with 100% confidence, but it would worry me a little bit if a company turns a profit for the first time in five years and then issues a dividend.
Crowe: Yes. Things that we don't necessarily like, to things that we love
Muckerman: Valentine's Day!
Crowe: It is going to be Valentine's Day this weekend. With it being Valentine's Day, we thought we'd have a fun little game here.
Muckerman: All right.
Crowe: We're going to write love letters to our favorite companies, or maybe even a company that we really like, that hasn't seen a lot of love lately or anything like that. What company do you want to send a love letter out to right now?
Muckerman: This company isn't 100% tied to the energy sector, but about a quarter of its business is, and that's Ecolab (ECL +2.07%). They own Nalco and Champion, which produce fluids for the production side of things.
They're not out there in the exploration field, so while that's where a lot of the capex is going to be curtailed, supposedly -- a lot of the announcements are talking about people not going out and looking for new oil -- but the wells that are already drilled are going to continue to produce.
The CEO was talking about, the stock sold off around 15-20%, not nearly as bad as some of the oil companies, but 70% of its business can benefit from low oil prices, so I'm looking at this company.
It's pretty liquid, about $1.7 million worth of shares traded on an average basis, but I think that it sold off unreasonably, so I think it could see a nice bump.
Crowe: It needs a little bit of love.
Muckerman: Yes, I think so.
Crowe: I almost feel like we should turn the lights down a little bit on this one.
Muckerman: We should have brought some candles.
Crowe: Can we do that a little bit?
Muckerman: Maybe we should light some candles.
Crowe: The one that I've been looking at, I don't feel ...
Muckerman: There it is!
Crowe: Look at that, nice and dark. Oh ...
Muckerman: That didn't take long at all.
Crowe: That's a little much. That gets kind of creepy, actually!
The one I want to point out is Magellan Midstream Partners (MMP +0.00%). It doesn't get a whole lot of love from shareholders.
Muckerman: It's overshadowed by Kinder Morgan, Spectra, those kinds of guys.
Crowe: Yes, you can get the big players out there that do way, way more business than these guys, so they kind of get shuffled under the rug. A little bit misunderstood.
People might say that they're boring. They transport crude oil and petroleum products. About 85% of their revenue comes off fee-based contracts, rather than (speculating developers).
Muckerman: Got to love the tollbooth model.
Crowe: Tollbooth model. They posted record net income in distributable cash flow in this past quarter, and for the entire year; plenty to cover its distributions, with a little left over to pay for some of those projects.
Some investors may have given it a hard time recently. Shares have done absolutely nothing over this past 6-9 months or so, as oil prices have plunged, and their guidance looked a little slower than expected.
But then again, over these past 6-9 months, inventories -- the amount of oil and refined products -- that are being stored at Magellan's terminals is at record highs.
The company's management basically is taking it a little conservative, saying, "We're not going to see record amounts of oil in our inventories, or at least we're not planning on it, so we're just going to keep this at a little bit lower level. It doesn't look as good, but guess what? There's still that possibility for it."
Muckerman: There's something to be said for a conservative nature in the business world.
Crowe: Exactly. For the past 5-6 years, they have always maintained a distribution coverage ratio of 1.4 or greater, plenty of room to grow the dividend while at the same time leaving a little extra room to pay for those projects that they've got coming on, with some left over cash flow.
Then one of the nice things about it is, as you would say for a woman, it's a free spirit. It's not tied down by one of those general partners where they have to give up half their assets or half their cash flow in the form of an incentive distribution right, meaning that they have a little bit more flexibility to do what they want with that dividend.
Or if they want to say, "Maybe we're not going to grow it as much this year because we want to throw a bunch more money into new projects and grow," giving it that little bit more flexibility. I really love what they're doing. I think between the tollbooth model and the opportunities that are out there for them, it's hard not to love that company.
Muckerman: Yes, we're at record storage levels right now.
Crowe: Exactly.
Muckerman: Not too shabby.
Crowe: That is all that we have for this week for you guys. Taylor, thanks so much for joining us.
Muckerman: Yes. Good luck on The Daily Show!
Crowe: Well, I think we've pretty much absolutely failed that interview, but you know what? There's still a shot, right? Still a shot.
Muckerman: Hopefully.
Crowe: Until next week, I'm Tyler, this is Taylor. See ya!
