While I completely agree with your comment that peak oil is not anywhere in the near future, have you seen Doomberg’s recent comments regarding the idea that there is far more available oil at reasonable prices than currently considered? Very compelling argument and potentially detrimental to share prices of the sector
I have never agree with the perma bear or perma bull arguments. I agree with Doomberg that the idea that oil will ONLY be more expensive at some point going forward is likely inaccurate. But so is the idea that you never go through cost escalation and ONLY and ALWAYS have cheap oil. It is cyclical!
It seems to me that the explosion of PE backed midstream followed PE upstream as a means of diversifying risk. As the upstream industry consolidates into a few mega companies, they have the financial firepower to build out their own midstream. Could we be near the end of PE midstream investments?
It's a great question NTX Oilman. I'd say that building out midstream does hand-in-hand with large-scale development for the dominant players. Much harder and less practical for smaller companies. I think your question is answered a bit by this week's post of "when will see new capital formation throughout traditional energy"? I think it will come back, but if the answer is it won't, then I'd agree there won't be a future P/E wave in midstream. That said, I do expect a new capital formation cycle.
The passage that strikes me is "For countries that are short (i.e., do not have) oil and gas resources, we see a strong motivation to diversify into new energies areas and limit dependence on imported oil and natural gas. It is not "energy transition due to climate concerns" that we think will motivate the development of new energies; it is instead the traditional drivers of ensuring energy abundance, affordability, and geopolitical security that will drive individual countries to develop and implement a broad array of energy sources and technologies beyond traditional oil, natural gas, and coal." The is the most hopeful (actually the only really hopeful) outlook I have read on the Energy Transition. If we wait for the 7-9 billion people on earth to start worrying about climate change . . . well welcome to Venus. Selling the Energy Transition as the surest road to energy abundance, affordability, and security looks like a much better strategy.
Robert, great to hear from you. I appreciate your observation on my comment. To me, it is the #1 reason there will be growth in "new energies". It is clearly the case with China EVs as an example. Coal fired EVs are better (for China) than OPEC or shale-fired ICE vehicles...especially when you are already at 12 million b/d of oil imports yet oil consumption is only at about 4 bbl per person (US, Canada at 20, Europe 10).
Great summary Arjun. 12 billion market cap DINO (HF Sinclair) is a good example of counter cyclical investment. HollyFrontier used the funds from suspending the dividend after 2020 to buy a refinery that supplies Seattle from Shell for a fraction of replacement cost and then bought the Sinclair brand, refineries and pipelines. The dividend was resumed in 2022 and the company is following the buyback playbook of the Big 3 refiners. Since the Holding family that previously owned Sinclair is a ready seller of stock, DINO has been able to buy back huge amounts of stock without spiking the stock price... yet. They also purchased the rest of the midstream HEP they didn't own helping to reduce the cyclicality of earnings and simplify analysis of the company. DINO trades for a lower P/S ratio (0.35) than the Big-3 yet should probably trade for a higher P/S ratio now that midstream, Sinclair retail, and lubricants (Sonneborn) are a significant share of revenue.
To your point about renewables, they have converted two Wyoming Refineries to Renewable Diesel. Previously it has been hard to source cheap enough inputs to generate profits on Renewable Diesel. The recent announcement that the Bingham Copper mine near Salt Lake City will use Sinclair's Renewable Diesel should help provide a local buyer of Renewable Diesel so it doesn't have to be sent via train to California or BC.
This is an excellent summary which gives the reader much to ponder and research. In a piece like this, I seem to latch on to a given phrase/concept. To wit:
"however, the best areas for un-subsidized profitability are not yet clear to us"
As an investor, it's hard to avoid an attraction to sectors or companies which seem to be the recipient of boatloads of government giveaways. In that regard, do you have any opinion on an entity such as NPWR? Anyone claiming "Clean, Reliable, Low-Cost Energy" (front and center on the website) would seem to fit the bill as a worthy recipient. But does CCUS survive and thrive without a helping hand? Seems I've already read of huge push back from environmentalists regarding the process given the words "natural gas".
Definitely a company to monitor. I haven't done a deep dive on it, but know the execs and find it interesting. CCUS undoubtedly needs massive gov't support. Not sure how it scales without assuming gov't providing tax credits. You can always force companies to do CCUS which becomes a tax on consumers...it is taxing consumers that gov't has tried to avoid in the decarbonization efforts.
Does it really make sense to say developing countries will implement unconventional energy (wind, solar) to reduce reliance on foreign imports if the panels/windmills really only have a,say, 15 year life? (And then they have to import replacements?). China maybe being the exception?
As you note, you can already see it in China. Growing renewables and EVs faster than any other region by a good margin. India undoubtedly will attempt the same. And you can see the motivation in smaller countries like Malaysia and others in SE Asia as well. All of the above.
Was it you (I'm at the age I can't remember who said what sometimes!) who said that China and India are adding domestic coal (and nukes in China) at a rapid clip, so as to have secure domestic energy; and, they are then also pushing EVs so that they run on domestically sourced electricity; all the above reducing dependence on foreign imports. of oil. And, to the extent they have a stable baseload they can add (some) unconventionals (I refuse to call them Renewable, or Clean or Green), likely for international political reasons as much as anything else, without destabilizing their grid.
China's two sources of vulnerability are imports of energy and food. The above strategy addresses the energy part.
Thanks, Arjun. I have recently been poking around in the academic literature on Energy Return on Invested energy. The implication appears to me that any poor country who wants to maximize the rate of increase of wealth should, if they can, be burning coal to make power.
Coal has certainly been the path to progress for most countries/regions historically. Though not sure if that was true of S. Korea which I am going to look into. Clearly was the case for US, Europe, and Japan.
While I completely agree with your comment that peak oil is not anywhere in the near future, have you seen Doomberg’s recent comments regarding the idea that there is far more available oil at reasonable prices than currently considered? Very compelling argument and potentially detrimental to share prices of the sector
I have never agree with the perma bear or perma bull arguments. I agree with Doomberg that the idea that oil will ONLY be more expensive at some point going forward is likely inaccurate. But so is the idea that you never go through cost escalation and ONLY and ALWAYS have cheap oil. It is cyclical!
It seems to me that the explosion of PE backed midstream followed PE upstream as a means of diversifying risk. As the upstream industry consolidates into a few mega companies, they have the financial firepower to build out their own midstream. Could we be near the end of PE midstream investments?
It's a great question NTX Oilman. I'd say that building out midstream does hand-in-hand with large-scale development for the dominant players. Much harder and less practical for smaller companies. I think your question is answered a bit by this week's post of "when will see new capital formation throughout traditional energy"? I think it will come back, but if the answer is it won't, then I'd agree there won't be a future P/E wave in midstream. That said, I do expect a new capital formation cycle.
The passage that strikes me is "For countries that are short (i.e., do not have) oil and gas resources, we see a strong motivation to diversify into new energies areas and limit dependence on imported oil and natural gas. It is not "energy transition due to climate concerns" that we think will motivate the development of new energies; it is instead the traditional drivers of ensuring energy abundance, affordability, and geopolitical security that will drive individual countries to develop and implement a broad array of energy sources and technologies beyond traditional oil, natural gas, and coal." The is the most hopeful (actually the only really hopeful) outlook I have read on the Energy Transition. If we wait for the 7-9 billion people on earth to start worrying about climate change . . . well welcome to Venus. Selling the Energy Transition as the surest road to energy abundance, affordability, and security looks like a much better strategy.
Robert, great to hear from you. I appreciate your observation on my comment. To me, it is the #1 reason there will be growth in "new energies". It is clearly the case with China EVs as an example. Coal fired EVs are better (for China) than OPEC or shale-fired ICE vehicles...especially when you are already at 12 million b/d of oil imports yet oil consumption is only at about 4 bbl per person (US, Canada at 20, Europe 10).
Great summary Arjun. 12 billion market cap DINO (HF Sinclair) is a good example of counter cyclical investment. HollyFrontier used the funds from suspending the dividend after 2020 to buy a refinery that supplies Seattle from Shell for a fraction of replacement cost and then bought the Sinclair brand, refineries and pipelines. The dividend was resumed in 2022 and the company is following the buyback playbook of the Big 3 refiners. Since the Holding family that previously owned Sinclair is a ready seller of stock, DINO has been able to buy back huge amounts of stock without spiking the stock price... yet. They also purchased the rest of the midstream HEP they didn't own helping to reduce the cyclicality of earnings and simplify analysis of the company. DINO trades for a lower P/S ratio (0.35) than the Big-3 yet should probably trade for a higher P/S ratio now that midstream, Sinclair retail, and lubricants (Sonneborn) are a significant share of revenue.
To your point about renewables, they have converted two Wyoming Refineries to Renewable Diesel. Previously it has been hard to source cheap enough inputs to generate profits on Renewable Diesel. The recent announcement that the Bingham Copper mine near Salt Lake City will use Sinclair's Renewable Diesel should help provide a local buyer of Renewable Diesel so it doesn't have to be sent via train to California or BC.
I go back a long way with the predecessor companies to DINO. Definitely an interesting one.
Great Comments! Recently listened to a " Doomberg " podcast with Adam Taggart, Thoughtful Money,
He says that we as a world are swimming in oil and gas now, and will be for the forseeable future.
(Geopolitical issues could cause issues with higher spikes). Just wondered if you have listened and if you have any thoughts.
last year he mostly had an opposite view.
Thank you Janet!
This is an excellent summary which gives the reader much to ponder and research. In a piece like this, I seem to latch on to a given phrase/concept. To wit:
"however, the best areas for un-subsidized profitability are not yet clear to us"
As an investor, it's hard to avoid an attraction to sectors or companies which seem to be the recipient of boatloads of government giveaways. In that regard, do you have any opinion on an entity such as NPWR? Anyone claiming "Clean, Reliable, Low-Cost Energy" (front and center on the website) would seem to fit the bill as a worthy recipient. But does CCUS survive and thrive without a helping hand? Seems I've already read of huge push back from environmentalists regarding the process given the words "natural gas".
Any thoughts?
Definitely a company to monitor. I haven't done a deep dive on it, but know the execs and find it interesting. CCUS undoubtedly needs massive gov't support. Not sure how it scales without assuming gov't providing tax credits. You can always force companies to do CCUS which becomes a tax on consumers...it is taxing consumers that gov't has tried to avoid in the decarbonization efforts.
Thanks much for your thoughts
Always value your Saturday morning posts. Great information again today.
much appreciate as always Martin.
Arjun,
Thanks, as always.
Does it really make sense to say developing countries will implement unconventional energy (wind, solar) to reduce reliance on foreign imports if the panels/windmills really only have a,say, 15 year life? (And then they have to import replacements?). China maybe being the exception?
As you note, you can already see it in China. Growing renewables and EVs faster than any other region by a good margin. India undoubtedly will attempt the same. And you can see the motivation in smaller countries like Malaysia and others in SE Asia as well. All of the above.
Was it you (I'm at the age I can't remember who said what sometimes!) who said that China and India are adding domestic coal (and nukes in China) at a rapid clip, so as to have secure domestic energy; and, they are then also pushing EVs so that they run on domestically sourced electricity; all the above reducing dependence on foreign imports. of oil. And, to the extent they have a stable baseload they can add (some) unconventionals (I refuse to call them Renewable, or Clean or Green), likely for international political reasons as much as anything else, without destabilizing their grid.
China's two sources of vulnerability are imports of energy and food. The above strategy addresses the energy part.
Yes, I have made comments to that effect, though others have as well.
Thanks, Arjun. I have recently been poking around in the academic literature on Energy Return on Invested energy. The implication appears to me that any poor country who wants to maximize the rate of increase of wealth should, if they can, be burning coal to make power.
Coal has certainly been the path to progress for most countries/regions historically. Though not sure if that was true of S. Korea which I am going to look into. Clearly was the case for US, Europe, and Japan.