Oil might one day be a distant memory as renewable energy is still making steady progress into the market and big oil companies are claiming their stake in the sector.

We also take a look at another question from the mailbag, but first we'll discuss the effects that would come from banks adjusting credit facilities for many companies that are already overstretched.

A full transcript follows the video.

 

Sean O'Reilly: Big oil is investing in renewable energy? On this energy edition of Industry Focus.

Greetings, Fools! I am Sean O'Reilly joining you here from Fool headquarters in Alexandria, Virginia. It is Thursday, Sept. 24, 2015, and here are the men, the myth, and the legends: Tyler Crowe and Taylor Muckerman. How's it going, guys?

Taylor Muckerman: It's tough to be all three.

Tyler Crowe: Yeah, is one of us the man, the other is the myth and the legend? Are they evenly distributed?

O'Reilly: I'm not going to hurt the other one's feelings by saying which one of you has all these characteristics. We've got lots to talk about today, a mailbag question, and renewable energy investments being made by big oil. First, I've been dying to talk about the possibility that the day of reckoning for oil producers is just around the bend.

Tyler, what do we mean when we say, "The day of reckoning is coming"? That sounds very scary.

Crowe: Yeah. Maybe a little hyperbolic when we use terms like that, but basically what's going to happen in the next couple of weeks is lenders to the oil and gas producers in the United States, and around the world, are going to reevaluate credit lines. Basically, how much these companies can borrow on a short-term financing deal based on their reserves, their production, and all those things.

One of the big determinants of that lending capacity is oil prices. With oil prices continuing to fall we could see a major cut in the amount of money these companies can borrow on those "credit facilities" and if those are cut lower than what companies have taken out on those credit facilities then we could see a cash crunch.

We actually saw it earlier in April with Breitburn Energy Partners (NASDAQ:BBEP). They had their credit facility cut lower than what was taken out on that credit facility and they immediately had to raise capital through equity issuances. In other words, to fill that funding gap.

O'Reilly: They had taken out and used the credit facility to essentially fund their capex, if I'm not mistaken. They had a $2 billion facility.

Crowe: A very large amount. I believe, at the time they were about 80% to 85% drawn on that borrowing capacity. When that was revised it immediately went down and they had to find a way to close that funding gap very quickly. The thing is, that's very possible in the next couple of weeks when the revisions are actually made.

O'Reilly: Taylor, from your vantage point, feel free to rope in Canadian names if you want. I don't think any of the listeners are particularly picky. How bad is that going to be? Obviously, we just talked about a really bad situation. How common is that?

Muckerman: I don't think there's too many companies out there that are going to see their credit lines drawn down below where they've already borrowed from. I don't think you're going to see companies having to go out and sell a ton of assets, but it could lead to some of that M&A that we've been expecting over the last year.

O'Reilly: It hasn't happened.

Muckerman: Yeah. There have been some big deals, but you haven't really seen any small companies go out there and be forced to sell a bunch of assets.

O'Reilly: You had Rosetta, you had the energy service names.

Muckerman: Halliburton acquiring and Schlumberger acquiring, but you haven't really seen a rash of smaller producers either go bankrupt or be forced to sell assets. I think that could happen because even if you aren't getting your credit facility cut below where you've drawn, you're still going to have a cash crunch if oil stays this low. A lot of these companies have been relying on being able to incrementally use that credit facility.

If it's dropped by 15% to 30% immediately, then they're going to be in trouble. I would be looking at companies that have drawn about 50% or less of their credit facility until you see this shake out a little bit. What worries me as well is that you're not going to see companies turn to the equity markets because their prices are so low.

O'Reilly: We saw a couple of them on P/Es. Linn and some had to issue shares at the worst possible time.

Muckerman: Against their own best interests, right? Asset sales might be the best for some companies and maybe you'll see that. Maybe not all-out, 100% acquisitions, but you could see some people selling off core assets.

O'Reilly: Tyler, before we went on air you were talking about how these bankers are going to be conservative because they're bankers.

Crowe: Yeah. They're bankers and when they look at these sorts of things -- these credit facilities and a lot of their lending capacities -- what they're going to do is look at this from not what the future production potential of the company is...

O'Reilly: They couldn't care less.

Crowe: They want to know that this is going to get paid off within a set amount of time. So they're going to look at current production rates, they're going to look at what is developed and producing and what the current amount of production can produce based on prices. A recent survey that was done, I believe, by Macquarie Group, in an article done by Bloomberg said at this coming time, they're going to do about $48 per barrel as their referenced benchmark.

O'Reilly: Where were they on this last year, Taylor?

Muckerman: $92 and some change.

Crowe: So we're looking at more than a cut in half on oil prices and that could lead to a pretty significant thing. I think there's a small silver lining out of this. Once we look at this credit facility at $48 -- I believe the last one they said on it was $77...

O'Reilly: A year ago.

Crowe: I believe that was actually the April revision. They do this every six months and in April it was about $77.

O'Reilly: They try to take the average price of the previous six months.

Crowe: Trailing average, yeah. It was $77 back then. It's now going to be $48, or at least many banks are going to use that as their benchmark. If you look at oil prices, a lot of people are saying that $48 is a pretty unsustainable price. You can use that as a gauge. If these companies are struggling that much at $48 and that's what banks are setting it at, you can see -- banks will say how much they can lend.

If you see how much they cut in relation to that price it will give you an idea of what kind of financial shape these companies are in, much more so than we've seen as of recent. Credit has been so cheap and the ability to finance has been so easy. Just going off what Taylor mentioned a minute ago, I did a screening earlier on S&P Capital IQ; there are about 50 companies in the oil, gas, and consumable fuels -- this isn't just producers, this is all of them -- that are more than 50% drawn on their credit facilities.

O'Reilly: They're most certainly sweating right now.

Crowe: A little bit.

O'Reilly: This is further confirmation of "The Banker's Rule," which is the 3-6-3 rule. You borrow at 3%, lend at 6%, and go to the golf course at 3:00.

Muckerman: Not a bad idea.

O'Reilly: Before we move on to our mailbag question of the day, I want to reiterate once again a very special offer to join The Motley Fool's Stock Advisor newsletter for all of our Industry Focus listeners. As a loyal IF listener you have access to a special discount on Stock Advisor that works out to $129 for a full two-year subscription. Just go to focus.fool.com to take advantage of that deal. Once again, that is focus.fool.com.

Moving on to our mailbag question of the day from a distant cousin of mine, once again, Aaron M. O'Malley. He writes...

Crowe: He's sent in a couple questions, but we're going to spread them out a bit.

Muckerman: We can't handle them all at once.

O'Reilly: Aaron, we love you. "With a yield of over 9.69%" -- we're saying close to double digits here on a yield -- "and potentially less volatility than a producer, do you think Plains All American Pipeline (NYSE:PAA) represents an attractive buying opportunity at current prices, and do you think the dividend is sustainable?"

Who wants to take a crack first?

Crowe: I'll start and I'll actually pitch this to Taylor in a minute, since Taylor is our Stock Advisor Canada guy. When I look at Plains All American it has a couple things going for it that are extremely good. Number one: It has a very diverse offering of logistics. Not only is it in the crude oil market, but it's in natural gas liquids, it's in natural gas, and it's not just a pipeline company.

It says "Plains All American," but they say they're a piping company.

O'Reilly: That was my question. Do they do storage? What else do they do?

Crowe: They also do storage, they do rail, they do logistics, terminaling as well; there's a lot of optionality within the Plains All American system, which bodes well for any company. If a company has the ability to move oil to different markets, depending on where a producer or refiner wants it, that optionality makes it a much more valuable system than a company that has one or two pipelines that can only go to a certain place.

The other thing that's really working in Plains' favor is the fact that it's one of four master limited partnerships that has a BBB+ investment grade rating from S&P Capital IQ.

O'Reilly: That seemed astronomically high, but you're OK with that?

Crowe: In terms of?

O'Reilly: In credit ratings, sorry.

Crowe: There are only a small handful of master limited partnerships that are actually investment-grade-rated.

O'Reilly: This is just because they technically pay out all their income as dividends?

Crowe: And in the commodity business it's a little more volatile and even though, as we've seen, for midstream companies it's kind of a toll-road thing. If you look at that, a BBB+ is the best. There's only four of them total in the entire country that have that high of a rating. There is some security in that. It has access to financing and the ratings agencies are looking at this and saying that it looks good.

I wouldn't say this is going to be a killer of Plains All American, but more like "could slow growth," but my one question would be in relation to its exposure to Canada. That's why I want to ask Taylor about this. Plains does have a pretty high exposure to Canada, especially in moving diluent -- which is a cheap... or a condensate to dilute bitumen and stuff like that -- and a high exposure to heavy oil.

Based on where prices are and looking at the dynamic of shale, could that shale, or oil sands industry really slow down what Plains is doing because of what we've seen with prices as of late?

Muckerman: Yeah, that's a big worry. If you think U.S. oil prices are bad, look at Canada. If you look at it on a Canadian dollar basis, it's right there with WTI, but when you translate it into dollars it's in the low $30s.

O'Reilly: Where's our currency trader?

Muckerman: So you're looking at about $31 a barrel for Western Canadian Select. It's more costly to produce, it's more costly to transport because you have to get the diluent up to the fields to then dilute it so it can actually flow through pipelines because it is so heavy. Otherwise, you use rail to transport it, but we've seen the oil by rail falling fairly significantly due to some disasters and the economics of oil not really supporting a higher cost of transport by rail anymore.

Outside of the biggest producers out there you could certainly see some pullback. I think you're already starting to see that up in Canada. Plains All American being exposed to that might be a short-term risk.

Crowe: The other thing that always concerns me about Canadian producers is their lack of market options.

Muckerman: Right. They get it to their East Coast refiners and the mid-country refiners, but that's really about it because you're not going to be selling heavy crude internationally. You have to refine it first.

O'Reilly: Cool. Moving on to our final and third segment: renewable energy investments by big oil. French oil giant Total (NYSE:TOT) recently announced that going forward they will be investing $500 million annually in biofuels and solar. Guys, is this some kind of -- remember when BP was branding themselves as "Beyond Petroleum"? Is this a ploy, or are they serious about this? What do you think?

Muckerman: I think they're serious. In 2011 they bought a majority stake in SunPower (NASDAQ:SPWR), the solar company here in the U.S. There's a long-term investor at Total somewhere because they wouldn't be doing it if they weren't looking out over a decade.

O'Reilly: They're actually thinking beyond petroleum.

Muckerman: Exactly. They're actually one of the companies that tried to do this and stuck to their guns. Exxon (NYSE:XOM) was big into the biofuels game a few years ago, completely sold out of it. As you mentioned, BP returned back to petroleum over the last few years and you haven't really seen any other major oil companies take a nosedive into renewable energy. Nosedive in a good way, in my mind.

$500 million for this company isn't the biggest bet in the world, especially when you consider the billions they paid for SunPower. I think it's a positive step and they're not dumb to the future. I think that oil is on its way out in the next 30 years -- not fully.

O'Reilly: Right. We still need it for plastics.

Muckerman: There's a changing of the guard for sure, in terms of long-term growth.

Crowe: There was one thing I wanted to mention that they're doing that's really smart. One of the things that Total has suffered from for quite a while has been its refinery operations, especially in Europe. Especially related to union...

O'Reilly: They had a bunch of oil and they couldn't get it refined?

Crowe: No. They had unproductive refineries. They weren't turning out the returns they were looking for and because of French labor laws and resistance from unions they've had a hard time shutting those down and they've had to run them at lower than expected, or desired, returns. One of the things they mentioned that they're going to do with this renewable investment is converting a couple of those refineries that have no produced well for them on a petroleum basis, and they're going to convert them to biofuels.

It's one of those things where...

O'Reilly: Making the best of a bad situation.

Crowe: Exactly. The headliner is $500 million in annual renewable energy investments, but sometimes it's investments like that looking way smarter than just the headline of alternative energy.

O'Reilly: It's taking care of costs. You were talking about how Exxon dipped their toe in the biofuels pool. Correct me if I'm wrong, when they pulled out, it seemed to me like they tried it, found it wasn't working, or wasn't within their circle of confidence and they were just going to be really good at making money doing what they do and just pay out a bunch of money in dividends. Is Total making the opposite decision? Is this black and white? Is there a little bit of gray?

Muckerman: Look at Exxon compared to Total. The size difference there...

O'Reilly: It's massive, yeah.

Muckerman: Total is still a big company, but it doesn't take as much to move the needle with them as it would in Exxon. Exxon would have had to have completely blown biofuels out of the water to make any money, or to at least make money from their perspective. It's like Apple not having any idea what to do.

O'Reilly: The watch doesn't matter.

Muckerman: Yeah. The watch doesn't move the needle so even if they moved into electric cars they would have to take over the whole automotive market to really...

O'Reilly: Isn't it funny that they have to get into cars in order to make more money?

Muckerman: Meaningful money. They can make money doing more things with technology, but to move the stock investor needle then you've got to plan big. Exxon just didn't see a big enough bet with biofuels. You're going to see some companies grow pretty significantly with renewables.

O'Reilly: But they're getting smaller.

Muckerman: On a meaningful basis for them.

O'Reilly: What were you going to say, Tyler?

Crowe: The other thing you have to take into account is a lot of investments that these companies made were the first "mover" investments. BP had a huge wind investment a couple years ago and they sold out during the Deepwater Horizon trying to raise some cash. If you look at it, that was 15 years ago. If you look at the efficiencies that we've gained in wind, in solar; it looks much smarter than it did 15 years ago.

Muckerman: It's taken a while.

Crowe: Yeah. It's taken a while. Maybe investing today, returns will look a lot better than the returns that ExxonMobil or BP were getting on those renewables about 15 years ago. To be fair, this is $500 million a year and Total's total capital budget is $24 billion.

Muckerman: Even there it's...

O'Reilly: Sigh, sigh.

Crowe: So let's keep this in context here, people.

Muckerman: Yeah. $500 million is a lot to us.

O'Reilly: It is, yeah. There's a size difference there like we were saying. Cool. Thank you both for your thoughts. I will see you next week. If you are a loyal listener and have questions or comments, we would love to hear from you. Just email us at IndustryFocus@Fool.com. Again, that's IndustryFocus@Fool.com.

As always, people on this program may have interests in the stocks that they talk about, and the Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear on this program. For Tyler Crowe and Taylor Muckerman, I'm Sean O'Reilly. Thanks for listening, and Fool on!

Taylor Muckerman owns shares of Halliburton. Tyler Crowe owns shares of Apple, ExxonMobil, and Linn Energy, LLC. The Motley Fool owns and recommends Apple and Halliburton. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends BreitBurn Energy Partners and Total (ADR). 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.