Has Peak Oil Arrived?
Solar Shares: Growth Stocks at Value Prices
On July 4, Saudi Arabia’s King Abdullah attended a cabinet meeting and then responded to a Zawya Dow Jones Newswires reporter’s question about what transpired: “I told them that I have ordered a halt to all oil explorations so part of this wealth is left for our sons and successors, God willing.”
The rest of the newswire item goes on to quote from unnamed Saudi oil sources that the king didn’t mean a halt to exploration, but that he simply wanted the country to be more judicious in its exploration. Other sources chimed in that Saudi Arabia is committed to its role of ensuring the world has enough oil to meet its needs. In other words, everyone was spinning the king’s statement.
When I covered the oil market as a beat reporter for Dow Jones in the late 1990s and into the start of the last decade, the delicate dance of OPEC and Saudi Arabia regarding the image of oil availability became clear to me.
The cartel wants strong oil prices, obviously, but not too strong lest high prices encourage consuming nations to pursue alternative energies, as they did during the oil shocks of the 1970s. It also wants to assure consuming nations that there is no need to worry about the supply of oil for the foreseeable future, since the fear of running out of cheap oil could force people to turn to alternatives before the cartel are able to sell all the oil they can at a good price.
To my mind, hinting at any other condition, as King Abdullah’s order does, strikes me as a significant departure from the narrative of reasonably priced, easily available, limitless oil the Saudis have used to make themselves very, very rich. The departure from the successful script OPEC has followed is a remarkable signal of change to me, one that to my mind indicates peak oil is here – there is only so much oil left, and the Saudis want to sell it when the oil crunch becomes apparent again.
Peak oil is the theory that at some point, the world will have used more oil than there is recoverable in the ground, causing big problems for both the cost of oil and long-term energy stability. I didn’t put much credence in peak oil until a curious discussion I had at a conference in Thailand in 2006 with a high-level Brunei government official who expounded at length on the importance of getting the country’s economy diversified away from oil in the following years although, as he took pains to assure me, there was no problem with oil supplies at all.
Why pursue the more labor intensive and weaker return-on-investment of eco-tourism, for instance, when oil has made your country the wealthiest on the planet? Unless, of course, the oil is running out.
I’m not the only one who thinks peak oil is here, or at least just around the corner. Just last Sunday, Lloyd’s Insurance and the Royal Institute of International Affairs warned the British government the world is headed straight into the peak oil crunch once the economy recovers and with it, demand. By 2013, oil could easily be over $200 a barrel, they warn.
The International Energy Agency, noting that the world needs to find the equivalent of four Saudi Arabias in the next 20 years to even hope to sustain current oil demand, has all but said peak oil is upon us (and, anonymously to the press, some individual analysts at the IEA have said so). As I have noted in prior columns, discoveries of vast new oil deposits are unlikely: Since 1968, the world has been using more oil annually than it has been discovering.
Even setting aside peak oil—and my gut here could be wrong, I admit—there is enough upward pressure on prices to indicate that right now is probably the lowest priced gasoline we’ll see from now on. Why?
Consider this: About 10 years ago, OPEC sources indicated Saudi Arabia needed to sell a barrel of oil at $18 to break even. Two years ago, data from ratings agency Fitch (which cares because it evaluates sovereign debt) estimated Saudi Arabia’s breakeven had risen to $26. In January, Fitch pegged breakeven for the country at $68 a barrel. If it costs more to produce oil, it clearly is harder to get. And Saudi Arabia is the primary low-cost oil producer on the planet.
OPEC members like Venezuela and Iran are estimated to need oil over $95 to break even on their costs. Other OPEC members are even dropping out: Indonesia abandoned the organization in 2008 because it can no longer export oil—it needs to import it to meet its own growing domestic demand. Our only respite from skyrocketing oil prices right now appears to be the slumping global economy, which has eased demand downward so we (and most of the government and most business leaders) don’t see the problem at the gas pump or in utility bills. But we will, soon.
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So how does an investor act on the belief that peak oil is imminent? The temptation could be to buy oil stocks, but that overlooks one crucial characteristic of the stock market: It is forward looking and puts a premium on the price of stocks in expectation of future growth. And if the market believes there isn’t much of a future for oil companies in the business they are best at—even if prices are currently high—then why should their shares enjoy large price to earnings multiples? They won’t.
The way to play the coming energy crunch is to invest in the companies that have the products that will replace oil in the energy network. As Editor of Cabot Green Investor, I see dozens if not hundreds of promising technologies and advances that will not only alleviate the stresses of peak oil but also improve our environment and the quality of our air and seas. Today, I want to discuss the opportunity I see in one specific sector of Green: solar.
If you follow the market closely, you likely recall the fantastic year solar stocks had in 2007: Nearly every solar-related stock posted triple-digit gains that year, with the best performers, First Solar (FSLR) and Ascent Solar (ASTI), posting eye-popping 750% gains. The downside is the whole sector has suffered from a significant hangover since then as profit taking and then the 2008 financial crisis forced shares lower.
Even industry leaders have plunged, like silicon wafer provider MEMC Electronic Materials, which has fallen to around $10 from a 2007 high of $90, and First Solar, which held up well through much of 2008 until it too succumbed to the bear market. It has fallen 50% from 2008’s peak. But as we see in nearly every market and sector sell-down, the bears have overdone it. Solar are now priced at bargain-basement value-stock levels, in some cases their companies valued like businesses in decline rather than great growth companies of the future.
A simple screen of the leading solar panel and wafer stocks trading on US exchanges shows solar stocks are trading at the lowest multiples they ever have. The price to current fiscal year earnings for the 12 leading solar stocks is 11. Right now the S&P 500 is trading at a price-to-earnings of 20. In fact, the basket of leading solar stocks is trading at a lower valuation than the utilities sector (which has a P/E of 13), conglomerates (18), basic materials (20) and every other sector of the market through financials (P/E of 99).
That makes sense if you expect, say Con Ed, Duke Energy, Calpine and every other regulated utility to grow faster than solar revenues, but they won’t. At best, utilities could likely grow close to 10% a year, but will likely end up growing closer to 6 to 8% annually. Solar, meanwhile is projected to triple by 2019, to a $99 billion industry, according to Clean Edge, an alternative energy researcher.
Even with the market’s volatility of late, Cabot Green Investors have started accumulating some solar here to take what we see as an unusual period of low prices in shares in such a fast-growth sector. If there truly is an oil price crunch, I’d expect that growth rate to expand even faster as the West and the developing world flock to alternative energies.
All the best,
For Cabot Wealth Advisory
Editor’s Note: It’s not just some time down the line that we’ll see Green stocks take off--some are leading the market’s rebound right now. This year Cabot Green Investor locked in big profits on Maxwell Technologies (47%), American Superconductor (40%) and Telvent (29%), among others. Currently, the portfolio is led by Chipotle Mexican Grill, which we recommended to Cabot Green Investor subscribers in March, buying in at 114. It’s now above 140 and still looks great. In fact, since we started Cabot Green Investor in 2008, we’ve outpaced the WilderHill Clean Energy Index by 59 percentage points! Join now to start seeing the profits of the future … today!