Getting Juiced About Energy

Energy fuels the world, but it doesn’t always fuel the stock market.

And many are the long-only investors who have felt the pain as oil prices swooned more than 50% between last June and last month, resulting in numerous oil-related stocks across the value chain getting smacked.

The markets have been spooked by tales of global oversupply caused in large part by fracking technologies that literally cracked open U.S. oil (and gas) production, coupled with reports of U.S. crude-oil stockpiles at eight-decade highs and accompanying fears we’re running out of storage space for all of the black gold being siphoned from the ground.  

Falling oil prices have thrilled consumers at the gas pump but have roiled the financial markets. For investors, the question is whether this is just a hiccup in a naturally cyclical industry or, given this country’s growing proficiency as a hydrocarbon producer and its newfound role as a major force among global suppliers, the dynamics have changed to the point where the oil industry will gag on oversupply for the foreseeable future.

The energy sector is too important to ignore, and the recent tumult can be seen either as a buying opportunity in the oil patch, a chance to look at other types of energy-related companies as viable long-term investments, or both.

Kenneth Waltzer, managing director at KCS Wealth Advisory in West Los Angeles, Calif., sees the drop in oil prices as temporary and a chance to invest in good energy-related companies at bargain prices. “We favor well-capitalized companies and those with significant reserves that can be taken over by the majors,” he says.

Among the possible takeover candidates, Waltzer cited Apache. This oil and gas exploration and production outfit is an example of a company whose stock was hammered. But it has proven reserves, and that could make it an attractive target, especially among those major oil companies that would rather cost-effectively seek new sources of crude than try to extract new reserves in expensive, hard-to-drill areas.

Among the oil majors, Waltzer likes Royal Dutch Shell for its favorable balance sheet, which the Anglo-Dutch giant is using to bid $70 billion for BG in a move to dominate the market for liquefied natural gas. He also notes that refining and marketing companies such as Valero Energy have done well because their refining margins increased as the price of raw crude plummeted.

Waltzer also sees opportunities in the renewable energy space, and two of his top picks are solar company First Solar and Gamesa, a Spanish wind energy company whose operations include making the inner workings of windmills for energy generation. “That company went through very hard times when many of the government subsidies for wind energy disappeared, but over the long term it’s a place to go in wind because regardless of which windmill you use you have to have the insides,” he says.

Investment manager Nick Kaiser at Saturna Capital says his firm has reduced its holdings in oil and coal companies. “We don’t see rising dividends in Big Oil; we see cutting dividends,” he offers. “We see natural gas taking market share [from coal] because it’s more friendly to the environment, relatively speaking, and that’s probably where the biggest short-term opportunities are in the big three of coal, oil and gas.”

Kaiser is director and chief investment officer at Saturna, which last month launched both a sustainable equity and a sustainable bond mutual fund under the Saturna banner. It also manages the Sextant, Idaho and Amana mutual funds. “We’re long-term investors looking for long-term plays that will make sense,” he says, adding that his firm looks at sustainable energy sources as a way to consistently make money over the long haul.

To Kaiser, sustainable energy can include nuclear, which, despite setbacks in recent years in Germany and Japan, could be bolstered going forward as China builds more nuclear power plants to combat its air pollution problem. As part of the sustainable energy theme, Kaiser says his firm isn’t keen on renewable energy sectors that are reliant on government subsidies.

“Energy sources that require subsidies might not be sustainable, so you have to look at the government picture,” he says. “Hydro, nuclear, solar and wind do work. Parts of the U.S. have wind power that works without subsidies.”

Subsidies
Colm O’Connor, co-portfolio manager of the cleantech-focused Calvert Global Energy Solutions Fund, says renewable energy sources in the U.S. grew by 140 million megawatts per hour, or a 40% growth rate, from 2008 through 2013. “But that comprises a small part of overall energy consumption, so it’s growing from a small base.”

O’Connor says he expects demand for renewable energy in the U.S. to remain strong both this year and next, though the picture beyond that could be murky because solar investment tax credit (ITC) subsidies are due to expire at the end of 2016.

The ITC is a 30% federal tax credit for solar installations for both residential and commercial properties. If the current program isn’t extended, starting in 2017 the commercial credit will drop to 10% and the residential credit will be totally eliminated.

Even so, O’Connor believes the solar industry’s maturation makes it more viable than ever. “Because of price declines due to technology improvements, the industry is less reliant on subsidies and there’s a much more healthy demand picture,” he says. “Solar panel makers are profitable because their costs have declined faster than falling panel prices. I wouldn’t say solar is mainstream, but it’s certainly part of the existing energy mix. People will say it relies on subsidies, and while they’re important for solar, subsidies are important for every form of energy generation.”