In today’s Exponential Investor…

  • It’s hard to say which oil companies will survive
  • It’s harder to say which green energy companies will dominate
  • What factors can we look at instead, for a 50-year energy portfolio? 

How will the energy system look in 2070?

If you had to pick one stock for 50 years from the energy sector, would you:

Can you be confident about that? What characteristics should we be looking at if we’re trying to decide which stocks to hold for 50 years in the energy sector?

Here, finding a company we are confident will exist in 50 years is the primary challenge, as the energy sector is going through a complex, once-in-a-century transition.

I think I’ve found a pretty reasonable answer (or two!) though.

A lot of responses to the one stock for 50 years question I previously asked went for Shell or BP. Both have been around for long enough to suggest they know how to adapt and survive, but will that be enough?

The obvious question which is now quite polarising is this: will oil companies even exist in 2070?

That’s why it’s so difficult finding one stock for 50 years in this sector.

It is, however, a great place to look for long-term investors. Energy is a constant necessity, a vital input to all life and human activity. What’s more, we can confidently say that demand for energy will grow, as populations grow and economies develop.

But how will it be produced, distributed and used? This is where things get incredibly murky.

We know what the best ten oil majors to invest in are, if it’s dividends you want – it’s fairly straightforward. However, they are likely to change a great deal over the next 50 years and so it’s hard to say which will survive or what they will look like.

Visibility is low.

With new energy stocks, either technologies or renewable power generators, while we have perhaps more visibility on their role in the energy system of the future, we have much less of an idea who will ultimately win out, to become the leading companies in the future.

Visibility is, again, low.

On oil’s near-term outlook, our own Beyond Oil guest, Rob West, has modelled oil demand and due to all the supply cuts and slashed capex in 2020, sees the market being 1-2 million barrels per day undersupplied within the next few years.

Source: Thunder Said Energy

And oil companies are offering seriously attractive dividends right now, so they could be a great place to look with a time horizon of a few years, if oil prices do indeed spike.

However, 50 years is a different matter.

Transitioning into new businesses is famously hard for incumbents. For example, oil majors have assets (oil reserves) predicated on three decades of returns.

Another brilliant Beyond Oil guest, Mark Lewis, has written extensively about this issue. He was the first to describe the problem of “stranded assets”, which is now a vogue concept.

The point is that large portions of current oil assets may not realise their full lifetime value as the owners have anticipating.

We saw this in action when BP wrote off £14 billion of assets from its balance sheet. This was a huge moment.

Also, we don’t yet know how the oil price dynamic will play out in the long term.

Lewis has written that solar and wind are becoming so cheap that oil will need to drift towards $10 per barrel (currently $40) in order to be competitive, especially once electric vehicles replace much of its demand.

The thing is, as demand falls, oil companies will need much higher prices in order to turn a profit.

Which force will prove more powerful is very hard to say, but there are likely to be causalities for those who align themselves with the wrong reality.

The situation is no clearer for the new energy companies on the block.

We can be very confident about the use of solar and wind in the future of the energy system, but there are hundreds of companies emerging to compete for that market. Picking a winner is tough. Also, the problem of lower margins persists here: can we expect the same 5% dividends as energy income investors are used to expecting? Possibly not.

What’s more, many solar and wind companies predicate their existence on agreed power prices decades into the future. This is great, but we still can’t be certain. These prices are agreed because once a plant is built, the energy is almost free. The panels and turbines simply collect the free resource of solar and wind. So governments and large corporates have agreed to buy their power for fixed, often inflation-adjusted prices.

The inflation adjustment is phenomenal, as inflation protection could be crucial at some point in the next 50 years (quite possibly very soon!).

But the key risk here is counterparty risk. In troubled times, when there is so much wind and solar on offer (we will likely overbuild to ensure we always have enough, especially in the post-corona Green Arms Race), can we be confident that everyone will honour their power purchase agreements.

These companies have not been around long enough for us to say so with certainty. And perhaps a breakthrough in nuclear or geothermal energy will allow us to have clean, reliable power 24/7 without having to rely on intermittent renewables.

Essentially, picking between oil and renewables looks like a challenge. Big Oil is big but getting smaller. The new companies are small but getting bigger.

It’s hard to pick the survivors from Big Oil, and hard to pick the winners from renewables.

We need to do better.

The theme coming out of this debate for me is, above all, that we must be looking for companies whose culture and philosophy are powerful enough to override generational trends. Companies which are resilient, which can adapt, which are not tethered to one product, one trend, or one outcome.

Peugeot went from making salt and pepper shakers, to bicycles, to munitions, and then great cars (before transitioning to famously rubbish cars, as per the Top Gear sketch).

Unilever will slowly plod on, selling people the supermarket brands they desire in slightly greater numbers each year. The brands may change, but it’ll still be Unilever selling them.

So within the energy sector, we should be looking for companies that can adapt. That aren’t tied to one product or another. And the answer for me is probably in (yawn) utilities.

Gosh what a boring answer.

But think of it this way.

I’ve outlined why it’s hard to pick from oil majors or renewable disruptors.

Whereas utilities will be the go-between for decades. Sitting between producers and consumers, they will calmy distribute both electricity, and dividends.

They are slightly more agnostic to the technology, source, or political virtue of the power they produce. If their customers are satisfied, then all is well with them.

A couple of major renewable utilities are NextEra in the US and Encavis in Europe.

NextEra was founded in 1984, so has some history behind it, but has done so incredibly well that it’s now the largest utility in the US by market cap, and has a dividend yield of 0.5% as a result.

Source: Koyfin

Encavis, founded in 2006, has also done brilliantly, and has a slightly more promising yield of 1.5% for our game. Both are explicitly tethered to renewables, and that’s the prime reason for their decade of incredible success. 

You might also look at Enbridge, a gas pipeline company in the US. It’s branched out into wind and solar quite a bit over the last decade, and natural gas can be expected to play a very significant role in the energy system to come.

If hydrogen takes off as many expect, then it would have a role to play in that too. Founded just after WW2, it boasts a dividend yield of 8.4% and is a favourite of Canadian investors. It could be a great option for our game.

Equinor has rebranded away from fossil fuels but is still involved. However, it is pioneering something remarkable, which is oil produced with very low emissions per barrel.

The industry average is 20 tonnes of CO2 emitted per barrel, while Equinor is doing it at well under 1 tonne per barrel at its Johan Sverdrup Field in the North Sea. It’s achieved this by piping renewable electricity in from shore to power its offshore rigs.

Such oil is much better for the environment, and allows us to meet growing demand while still reducing emissions. With a yield of over 6%, perhaps this could be an option for our game.

Finally, I’d say something like Enel S.p.A. could be a reasonable option for our game too.

Around since 1962, it’s a multinational champion as well as a national champion in Italy (25% govt owned), is involved with gas, power generation and distribution, plus its share price has been rewarded in recent years for pushing more towards renewables.

Having been around for almost 60 years, it has survived extreme inflation, plenty of major oil/energy shocks, and the great financial crisis. It’s balanced, durable, and politically supported.

It might not be the greenest or most exciting choice, but it just might make it to 2070.

Well that’s all done with that game for now. I’ve presumably made a fool of myself and every company we’ve mentioned this week won’t make it.

Luckily, by the time 2070 comes, people will probably not come hunting for me.

Best wishes,

Kit Winder
Editor, UK Uncensored