As cases of COVID-19 flare up, it slows our global recovery, hurting big oil. Growth investors should consider this other corner of the energy market instead
The coronavirus isn’t going away.
As of this past Saturday, cases are still increasing in 18 states.
Yesterday, nine states — Alabama, Arizona, Florida, Nevada, North Carolina, Oklahoma, Oregon, South Carolina and Texas — reported either new single-day highs, or set a seven-day record for new coronavirus case averages.
In New York, which has seen a dramatic reduction in cases, the threat of a resurgence looms as roughly 25,000 complaints have been filed against businesses (primarily in Manhattan and the Hamptons) for violating reopening protocol.
In response, Governor Cuomo threatened that if “the local governments aren’t monitoring, policing, doing the compliance, then yes, there is a very real possibility that we would roll back the reopenings in those areas.”
He’s not the only governor looking at new lockdowns, or at least a halt on the reopening-plans.
This past Friday in Oregon, Governor Kate Brown put a seven-day pause on advancing the state’s reopening after a rise in cases followed a loosening of restrictions. A similar pause just happened in Utah.
And even more localized, Miami’s Mayor Suarez announced the city won’t move into the next phase of reopening, saying “If we continue on this trajectory, we are going to be put in the position where we have to make tough choices.”
Looking around the globe, news from Beijing is that there’s a rash of new cases — 106 since June 12. While that doesn’t sound like much, consider that zero new cases had been reported in the city for more than 50 days. Parts of the city have now gone back under lockdown.
Meanwhile, we’ve already seen a second round of lockdowns in Hong Kong and Singapore.
Now, whether it’s new lockdowns abroad, or pauses on reopening here in the U.S., it points toward a slower global recovery.
And that throws cold water on hopes for a rapid, sustained recovery in oil prices.
Since an historic meltdown last month, oil futures have rallied back into upper-$30s — which is a massive percentage gain from when they were trading in the mid-teens. But even at these prices, many U.S. producers are facing bankruptcy.
Meanwhile, advancements in solar energy are hitting new milestones. For example, Q1 2020 marked the largest quarter ever for U.S. solar installations.
It’s a tale of one sector’s slow decline, juxtaposed against another sector’s inevitable ascendancy.
Today, let’s turn our attention toward energy.
***Oil back from the brink
To make sure we’re all on the same page, in early March, a disagreement between Saudi Arabia and Russia about oil production led the Saudis to flood the market with crude. Meanwhile, a world on lockdown due to the Coronavirus effectively kneecapped demand.
The combination of oversupply and under-demand resulted in the price of oil plummeting. By late-April, it had fallen roughly 75% in 2020.
And then, history was made …
In April, the May contract of West Texas Intermediate (WTI) oil dropped below zero for the first time ever. On April 20, the price of a barrel of WTI ended at negative $37.63.
Since then, OPEC+ has cut back oil production to help stabilize and increase global oil prices. And last week, the alliance reaffirmed it will keep output capped through 2022.
This has helped oil futures climb over the two months. As I write, they’re trading at almost $38 a barrel.
There’s also optimism based on a recent report from the International Energy Agency, forecasting that next year will see a record rebound in oil demand, helping to balance the market.
Of course, the report also notes “we should not underestimate the enormous uncertainties” the market still faces.
And the question for many U.S. shale producers is can they even make it to next year?
***Continued pain in U.S. shale
From the Houston Chronicle:
… in the U.S. the recovery in oil demand from the depths of the destruction seen in April is faltering.
Deliveries of all fuels from storage depots remain 20% below year-earlier levels on a four-week average basis. The pickup in gasoline demand, as some people returned to work but shunned public transport, has ground to a halt and remains down year-on-year by about 20%.
Jet fuel is still down by more than 60%, while the drop in distillate fuel oil demand is getting bigger, not smaller.
These persistent demand-headwinds mean WTI prices face a hard road as they try to climb into the $40s and beyond — and just as importantly — stay there.
Unfortunately, this likely means more U.S. bankruptcies.
According to a report by the Haynes Boone law firm, in April and May, 14 oil and gas companies in North America filed for bankruptcy. That compares to five filings for bankruptcy during the first three months of the year.
CNN reports that nearly 100 U.S. oil and gas producers could file for bankruptcy over the next year.
The reason why is simple — these prices are simply too low for many shale oil producers to cover their costs.
For context, according to a Dallas Federal Energy survey, the average breakeven oil price in the U.S. is in the $48 to $54 per barrel range. Again, as I write, oil futures are nearly $38 a barrel.
This price-level will enable some companies to keep their doors open a bit longer, but that’s it. After all, a Dallas Federal Reserve survey indicates that at $40 a barrel, only 15% of companies could survive for a year or less.
***Meanwhile, solar energy continues to gain traction
It’s not going to happen tomorrow, but make no mistake … the rise of electric and renewable energy has begun — big tech is making sure of that.
For example, Amazon will have 10,000 electric-delivery vehicles on the roads by 2022. And as early as 2024, 80% of Amazon will be operating on renewable energy.
Or look at Google …
This past fall, it announced it was investing $2 billion into new renewable energy projects. That’s a record corporate purchase.
Even Duke Energy, the nation’s largest utility, is getting in on the renewables/conservation game. It recently announced it will reach an interim target of 50% carbon emission reductions by 2030.
Of course, we don’t have to go all the way out to 2030 to see huge advances being made in green energy.
According to the U.S. Energy Information Administration (EIA), three-quarters of new U.S. generating capacity here in 2020 will be renewable.
Back in January, the EIA reported that wind and solar will make up 32 of the 42 gigawatts of new capacity additions that will start operation in 2020 — those are both record-breaking annual capacity numbers.
Part of this reason for this is that the cost of solar is going down at a far faster pace than even the experts predicted.
From angel investor and clean energy expert, Ramez Nann:
Solar has plunged in price faster than anyone — including me — predicted.
And modeling of that price decline leads me to forecast that solar will continue to drop in price faster than I’ve previously expected, and will ultimately reach prices lower than virtually anyone expects …
The price of electricity from utility-scale solar projects (the unsubsidized cost) has dropped by a factor of somewhere between 5 and 8 in the years from 2010 to 2020.
… solar has reached today’s prices literally decades ahead of when all but one of these forecasts expected. And even the most optimistic projection on this chart — my 2015 forecast — showed solar prices dropping at just about half the rate they’ve actually declined at over the past five years …
In fact, solar has reached prices today that are 30 to 40 years ahead of what the IEA forecast in its 2014 Solar Technology Roadmap.
***A tale of two investors
Let’s look at divergence in fates of the average oil investor versus the average solar investor.
To do so, we’ll take the Energy Select Sector SPDR Fund (XLE). It holds oil heavyweights including Exxon, Chevron, ConocoPhillips, Schlumberger, Occidental, and Valero to name a few.
For solar, we’ll consider the Invesco Solar ETF (TAN). It holds many of the solar sector’s top names, including Enphase, SolarEdge, First Solar, and SunPower.
As you can see below, over the last three years, while the XLE investor has lost nearly 30%, the TAN investor has gained more than 95%.
But these ETFs smooth out some returns that paint an even more dramatic picture.
Specifically, over the last three years market veteran and oil heavyweight Exxon has lost 34%, and solar leader Enphase has soared over 5,500%.
(Our own Louis Navellier holds Enphase in his Breakthrough Stocks portfolio. It’s up 178% since he recommended it last fall. Click here to subscribe to Louis’ newsletter and learn the name of Louis’ other favorite solar play.)
(NOTE: As we go to press, there’s news today that a short-seller has accused Enphase of questionable accounting practices. Enphase is selling off hard on the news.
While this accusation would be significant if true, as of now, it’s just speculation. And looking broader at the industry, this in no way impacts the overall growth story of solar going forward.
We’ll continue to keep you updated as this story unfolds.)
***To be clear, oil isn’t going away anytime soon … but that doesn’t mean you want oil stocks as a pillar of your portfolio
Demand for oil is not about to vanish. The report from the International Energy Agency is testament to that.
Plus, if renewables were on the verge of replacing fossil fuels, there would be more evidence of that transition — but we’re not there yet.
Case in point, look at Royal Dutch Shell. It plans to spend just $2 to $3 billion annually on renewable energy through 2025, out of a total budget of $30 billion per year. On average, oil and gas companies are spending only about 1% of their budget on renewables.
The reason is simple — they’ve been making money from their fossil-fuel operations (for now, at least).
But for energy investors looking for major growth, this isn’t a difficult choice.
Option A, you have smaller U.S. shale oil producers staring at bankruptcy, such as Whiting Petroleum, which was at one time the largest oil producer in North Dakota’s Bakken Shale.
Option B, you have the multinational oil majors, like Exxon, BP, and Chevron, which aren’t likely to do much more than trade sideways or offer single-digit growth for investors (keep in mind, Exxon, BP, Chevron, and Royal Dutch Shell are all hovering around zero or negative 3-year returns).
Option C, pivot the energy corner of your portfolio toward top-quality solar investments, which are likely to see massive growth this decade.
Which approach sounds best to you?
Have a good evening,
Jeff Remsburg
