Mar 26, 2023·edited Mar 26, 2023Liked by Arjun Murti
Hi Arjun and group,
I was re-watching Super Spiked episode 21 King Coal
(https://youtu.be/OmsfT98PDmE) and at 12:25 minute mark you show a chart comparing the market cap of coal companies and O&G companies as a percentage of the S&P 500. What immediately jumps out is that the coal companies market cap is remarkably stable, whereas the O&G companies have big fluctuations.
Question: I wonder if coal share prices are more stable than O&G share prices as well as now having lower P/E ratios? If so, that is very interesting (higher earnings and lower volatility?).
A couple of comments ask if there are any major commodities other than whale oil that have gone out of use. The most relevant example I can think of are the ~100 chemicals that fall under the category of ozone depleting substances. Relevant because these chemicals were a real risk to the human population globally and because nations around the world came together to phase them out.
Relatedly I don’t think there’s anything wrong with calling coal dirty. If ever there was a dirty mass source of energy it’s coal — the deadliest form of energy by far.
Yes, the idea of an energy “transition” is not supported by historical experience. Almost every new source of energy is additive to the previous dominant energy form, and the absolute consumption of the legacy energy source does not decrease.
I have a bit of experience in this area, something for everyone to consider. Pardon the length of the comment, I just had a huge coffee:
As Arjun says, the coal sector (in the US) is barely looked at, it's a niche area because of historically poor returns and social issues. This means that:
1. Hardly anyone thinks about metallurgical coal, we almost always talk about thermal coal. Met coal is more profitable and its production is tied to the production constraints for thermal, even though they are completely different (i.e. coal mines are unpopular in general, even though they may be producing met coal). Big supply constraints, but obviously steel production isn't going away anytime soon.
2. Given the sheer number and longevity of thermal coal plants globally, clean coal technologies (probably in combination with carbon offsets) will be critical to the energy transition because it is much quicker and more efficient to reduce emissions at the source+offset remaining for existing infrastructure than to build new infrastructure. Clean coal technologies are demonized and overlooked, which is a big blind spot for analysts and a key reason they will be around a lot longer than most people realize.
3. The big two US producers are committed to buybacks and dividends with their excess free cash flow, it's basically an even more extreme version of the US E&P situation - politically constrained supply, strong (global/seaborne) demand, management committed to returning cash to shareholders. Insanely low P/E ratios, virtually no mainstream interest or analyst coverage.
4. As Arjun said: the fact that globally we're still burning thermal coal, which is the one technology we actually do have ultra-low carbon replacements for, should be an object lesson in how long these transitions take.
5. Final point, consider whether ANY important commodity has actually ever been replaced and gone out of production. I can only think of 'rock oil' replacing whale oil. Can anyone think of another one? Point: once a commodity is being used and produced it virtually never goes out of use and production.
Arjun. followed you for years at GS . Really appreciate this substack, as given the decimation of the sector in the 2010's, there just aren't many intelligent voices left on Wall St. remaining. Given Energy's importance to the world and clear mismanagement of the transition to this point by the West, its great you are spending the time to educate. We can only hope some leasers hit the "subscribe" button.
The technology around natural gas usage has the potential to change. NETPower (Rice Acquisition Corp. II) is developing a technology to burn natural gas for power generation with significantly less pollution by separating nitrogen from oxygen prior to the combustion and capturing the CO2 output.
Hi Arjun and group,
I was re-watching Super Spiked episode 21 King Coal
(https://youtu.be/OmsfT98PDmE) and at 12:25 minute mark you show a chart comparing the market cap of coal companies and O&G companies as a percentage of the S&P 500. What immediately jumps out is that the coal companies market cap is remarkably stable, whereas the O&G companies have big fluctuations.
Question: I wonder if coal share prices are more stable than O&G share prices as well as now having lower P/E ratios? If so, that is very interesting (higher earnings and lower volatility?).
Great article Arjun
Great article and thanks for your humility. Rare trait.
A couple of comments ask if there are any major commodities other than whale oil that have gone out of use. The most relevant example I can think of are the ~100 chemicals that fall under the category of ozone depleting substances. Relevant because these chemicals were a real risk to the human population globally and because nations around the world came together to phase them out.
Relatedly I don’t think there’s anything wrong with calling coal dirty. If ever there was a dirty mass source of energy it’s coal — the deadliest form of energy by far.
https://ourworldindata.org/grapher/death-rates-from-energy-production-per-twh
Yes, the idea of an energy “transition” is not supported by historical experience. Almost every new source of energy is additive to the previous dominant energy form, and the absolute consumption of the legacy energy source does not decrease.
Excellent as always.
I have a bit of experience in this area, something for everyone to consider. Pardon the length of the comment, I just had a huge coffee:
As Arjun says, the coal sector (in the US) is barely looked at, it's a niche area because of historically poor returns and social issues. This means that:
1. Hardly anyone thinks about metallurgical coal, we almost always talk about thermal coal. Met coal is more profitable and its production is tied to the production constraints for thermal, even though they are completely different (i.e. coal mines are unpopular in general, even though they may be producing met coal). Big supply constraints, but obviously steel production isn't going away anytime soon.
2. Given the sheer number and longevity of thermal coal plants globally, clean coal technologies (probably in combination with carbon offsets) will be critical to the energy transition because it is much quicker and more efficient to reduce emissions at the source+offset remaining for existing infrastructure than to build new infrastructure. Clean coal technologies are demonized and overlooked, which is a big blind spot for analysts and a key reason they will be around a lot longer than most people realize.
3. The big two US producers are committed to buybacks and dividends with their excess free cash flow, it's basically an even more extreme version of the US E&P situation - politically constrained supply, strong (global/seaborne) demand, management committed to returning cash to shareholders. Insanely low P/E ratios, virtually no mainstream interest or analyst coverage.
4. As Arjun said: the fact that globally we're still burning thermal coal, which is the one technology we actually do have ultra-low carbon replacements for, should be an object lesson in how long these transitions take.
5. Final point, consider whether ANY important commodity has actually ever been replaced and gone out of production. I can only think of 'rock oil' replacing whale oil. Can anyone think of another one? Point: once a commodity is being used and produced it virtually never goes out of use and production.
Arjun. followed you for years at GS . Really appreciate this substack, as given the decimation of the sector in the 2010's, there just aren't many intelligent voices left on Wall St. remaining. Given Energy's importance to the world and clear mismanagement of the transition to this point by the West, its great you are spending the time to educate. We can only hope some leasers hit the "subscribe" button.
The technology around natural gas usage has the potential to change. NETPower (Rice Acquisition Corp. II) is developing a technology to burn natural gas for power generation with significantly less pollution by separating nitrogen from oxygen prior to the combustion and capturing the CO2 output.