Читать книгу The Energy World is Flat - Lacalle Daniel - Страница 16

One of the main traps for investors in the energy markets is to follow consensus.

The energy world is driven by extremely optimistic assumptions of demand growth, and downward revisions of estimates tend to be shrugged off as “noise” always looking at the elusive long-term perspective. This “growth mirage” that we will discuss later is best exemplified by the average adjustment in demand growth from the IEA and OPEC.

According to my analysis, every year demand growth estimates are revised down an average of 15–20 % from the January estimates. Since 1998, only one year, 2012, has seen meaningful upward revisions from initial estimates.

My experience in the past years as an analyst and a portfolio manager has taught me to use forward guidance from companies and agencies with extreme caution. This has helped me to avoid the constant stream of profit warnings and to keep a moderated view about the supply–demand picture, which has proven to be right. We have not seen a supply shock or a demand boost. This philosophy of not just thinking “outside the box” but also understanding that the compilation of data made to support forward guidance is tainted by diplomacy.

Governments are always optimistic about GDP, and always overestimate the correlation between GDP and energy demand. A correlation that has been broken since 1998, where strong economic growth does not necessarily imply industrial and energy demand rising. The best way to add value and make money is precisely to question and understand the intricacies of forward-looking guidance, put under scrutiny the details, and always know that it will be better to err on the side of caution, rather than let ourselves be guided by consensus. As an investor one must know that none of the companies' executives, analysts at agencies or brokers will suffer professionally from providing optimistic guidance. It will always be justifiable with “unexpected one-off” events. The same happens with doomsday predictions, as we have already seen with peak oil.

The assumption of ever-rising prices due to supposed depletion and alleged energy shocks has been what we call in the financial world “a widow maker” as an investment strategy.

The strategic premium results in overcapacity

During the early 2000s, the telecom industry continued to push the boundaries with the new 3G technology. But governments controlled the licenses, and were determined to maximize the amount of money they could raise from them. To keep the competitive pressure, they offered fewer licenses than the number of operators likely to bid. A similar auction had been applied in the United States and had to be re-run when the winners defaulted on their bids. Yet, and despite the potential harm to the telecoms future competitiveness, the European governments proceeded with the blind auction and sealed bids.

Telecoms were in a difficult position. If they lost the auction, they felt they would miss out on the next technological phase of the business. Many assigned a strategic premium and made high bids, often financed via debt. The result was staggering. The UK auctions raised £22.5 billion. The German auctions raised around £30 billion. To put this in perspective, this was 10 times more per megahertz than the television companies were charging at the time for national broadcasting.11

A similar dynamic where majors are investing “not to miss out” is also taking place across the energy markets.

Investments “to be there” throughout a possible game-changing environment are typical of the energy industry. It's called “position rent”. The economic decision to devote large amounts of money in energy investments comes not only from the possibility of generating solid returns on an equity investment, but also from the opportunity that technology gives to higher asset value and strategic position of the company in a country. Out of the hundreds of billions of capital investments made every year in energy around 5 % to 10 %, looking at the plans of the large integrated companies, will likely be in “strategic opportunities” or “security of supply” where returns are unclear, but companies feel the need to be involved. These figures are higher when we look at national companies of the calibre of Gazprom or PetroChina. A very significant amount that unwillingly helps the flattening process.

Certainly, these strategic decisions can play an important role in the future competitiveness and solvency of these companies. Whether in a real estate boom, or internet boom, or energy boom, paying too much to stay ahead may well be the kiss of death. The corporate graveyard is full of companies that paid too much at the top.

The “strategic premium” and “geopolitical risk positioning” are eroding peak demand pricing with incremental supply, both from new capacity and new technologies. The erosion of peak pricing has been instrumental in improving the economic outlook of countries, because it reduces the shocks and undesired effects of uncertain and volatile pricing.

Another important consideration is the “venture capital” approach, supporting new technologies via the deployment of “risk capital” through a diversified portfolio.

During the dotcom revolution, it was clear that many new technologies and start-ups would not make it. But the mindset was that “we just need one winner”. It was impossible to “guess” who the winner would be, so investors were diversifying and spreading their bets, reaching to a much larger number of projects.

In the transportation world, several technologies are looking to break the crude oil monopoly. In addition to the more widely known and accepted compressed natural gas (CNG), LNG (for trucks, trains, and ships), electric car vehicles (ECVs), and hybrid vehicles (HVs), during the 2013 Motor Show in Tokyo, Toyota shocked the transportation world wih the announcement of the commercial launch of a fuel cell vehicle (FCV).

Yet, there are powerful forces that can delay change.

In 2009, my analysis “against the box” indicated that the expectations from the EU and US governments for electric vehicle sales were totally unrealistic and simply impossible. Five years later, the electric vehicle has turned out to be a much smaller alternative than these governments had anticipated. But, ironically, the penetration of the electric car was not “killed” by the oil companies or energy lobbies, as many people think. The list of “murder suspects” for the delay in electric cars is quite long, and includes those governments who were seemingly trying to promote the electric car industry in the first place.

Start with the bailouts of the car companies. The industry was deemed “too big to fail” in the United States and Congress worked out a $25 billion loan and by December 2008 the US government became the majority shareholder of General Motors.

In this environment, it is not surprising that the subsidies from EU and US governments to buy a new “conventional combustion engine car” (and help reduce the brutal inventory of unsold vehicles) exceeded by six to one the amount devoted for the development of electric cars. Anecdotally, 2010 turned out to be the year of highest sales of SUVs since 2006,12 as the government subsidies strongly incentivized the absorption of inventory and accelerated the renewal of the fleet, reducing significantly the potential for electric cars for years.

There are other important factors that have slowed down the development of electric cars, which we will discuss in more detail in Chapter 14. One of them is pricing. An electric car, which seeks to replace a combustion engine vehicle, cannot succeed if it sells at an average of 50 % higher than the alternative. This concept of promoting expensive alternatives does not make for a realistic economy. Alternatives will only exist if they are more attractive, cheaper, and efficient. Another factor is taxation. The EU collects €250 billion a year in taxes from petrol and diesel (taxes on petrol range between 40 % and 65 %).13 So, if the electric vehicle took a significant percentage of market share, governments may be forced to “transfer” the gasoline/diesel tax to the power sector. In fact, subsidies to power, including renewables, but also coal and gas, have resulted in a higher average cost of electricity across the EU.

Overcapacity eventually reprices assets and the cost of services

Following an extremely volatile period, the dotcom bubble finally burst in 2001. Equity valuations had collapsed across the board. Many companies went bankrupt. Others were not worth much more than the cash they had raised from investors. There were many winners too, who took advantage of the situation and expanded through acquisitions. Among them was Apple, who in 2000 acquired SoundJam MP and its team of developers. Apple simplified the user interface, added the ability to burn CDs, removed its recording feature and skin support, and renamed it iTunes. In October 2001, Apple launched the first iPod as “one thousand songs in your pocket”.

But for internet and broadband, competition and overcapacity made them available at a fraction of what had been anticipated. Bad news for the telecoms industry. Good news for consumers.

The future of the energy world is highly uncertain, but it is not unthinkable (in fact it is our base case) that the large development of “parallel” infrastructure will lead to a similar situation.

Commodity assets and prices are driven by marginal economics. Large imbalances between supply and demand can result in sharp swings in valuations, as producers know well.

The current energy revolution is relevant. Previous oil crises were largely “just about oil”. This time it is not only oil supply and demand forces competing against each other. This time we have new dimensions as natural gas, renewables, and other fuels become real threats to crude oil's relevance. With more options available, the impact of price spikes and peak pricing is eroded, preventing economic shocks. As such, despite constant global conflicts, the “oil burden” (the amount of money devoted by OECD countries to pay for imported oil) has not surpassed the “tipping point” of 5.5 % of GDP.14

New technologies displace older and more expensive ones

The internet revolution was a game changer. It opened a whole universe of new opportunities that (for most people) were unimaginable, even at the peak of the market in 2001.

The success of the internet, Apple, and Facebook has left a long list of direct and indirect casualties across industries. Look at Blackberry or Nokia for example, once upon a time leaders in their sector, today at risk of disappearing. Or look at music-buying patterns. CD shops are history. Or think about the impact on the advertising industry, increasingly dominated by companies like Google and Facebook. Many newspapers are struggling as their advertising revenues via digital are a fraction of the print. Who would have said that 10 years ago?

The needs of the consumers are being addressed but they are being served and consolidated with superior and new technologies. The old and expensive technologies are dead (even if they don't know it yet).

New technologies increase competition and create deflationary forces

Thanks to the development and overcapacity in broadband, wireless, and applications like FaceTime or Skype, I am now able to have a live high-definition videoconference (voice and image) with someone across the Atlantic pretty much “for free”. Yet, a telephone call (voice only) would cost me an arm and a leg. “This must go down in history as a major inconsistency”, I keep thinking to myself. “I can eat and smell a cake, cheaper than just smelling it. This is crazy. Something has to give”, and it does not take a genius to figure out who the losers in this battle will be.

In the energy world, the “shale revolution” has already had a major impact in North America across many industries. And the implications do not stop there. They are global and are already feeding through the energy system, flattening the world.

Look for example at US coal. The surge in US natural gas production and cheap prices resulted in a significant displacement of coal demand. Power generation used more natural gas and less coal. The displacement of coal did not only result in lower prices within the United States, but also made more and cheaper coal available for export. Producers outside of North America felt the impact too. In March 2010, in search for new markets and responding to strong incentives and regional premiums, Colombia shipped a cargo of coal over 10,000 miles, all the way to China.15 Some of the switching is very “price sensitive”, and may flip back into coal as and when the economics make sense. But in the long run, the availability of more environmentally friendly natural gas (as a rule of thumb, coal pollutes three times more than natural gas for a given unit of energy produced) may result in the retirement of coal-fired power plants. The impact is therefore more global and more permanent than what the large majority believes today.

Another example is the renaissance in the fertilizers and petrochemical industries in North America. A version of what is being called as “re-shoring” (the reversal of “offshoring”), as industries return to North America.

Perhaps most importantly, over the medium and longer term, the energy revolution has the potential to change the transportation industry and challenge crude oil's monopoly. Cheaper electricity and natural gas provide a strong incentive to switch away from oil. This process is already happening and faster than many people think. And, just like coal, the impact will be more global and more permanent than what the large majority believes today.

Yet another example is how solar has impacted the electricity market and taken over peak capacity in countries like Germany. See Chapter 14 for more details.

The effect of these forces and competition ultimately results in winners and losers. And along the process, perhaps the major beneficiary of the flatter energy world is the consumer. Just like the internet revolution.

The bubble accelerated the impact of the revolution

As discussed before, the bubble played an important role in the development of new technologies, the overcapacity, and the availability at cheap prices. But bubbles are complex processes. When do they accelerate, when do they peak, what triggers the burst?

“We are fine. We do not need to be bailed out”16 said the Finance Minister of Portugal in 2009. And it may have well been true, when, at that time, Portuguese credit spreads were at 2 % and they could finance themselves. Under those market conditions, Portugal was solvent.

But not everyone believed it, and investors in Portuguese debt started demanding higher and higher returns for the risk they were taking. Downgrades by rating agencies such as Standard & Poor's, Moody's, and Fitch compounded the problem. The cost of borrowing increased, and servicing the debt started to become a problem. Portugal was still solvent, but the pricing dynamics were quickly deteriorating the “fundamentals” of the country. The process started to accelerate into a “vicious cycle” that fed on itself. Higher credit spreads resulted in higher servicing costs, which in turn would push credit spreads higher, until, eventually, the yield of the 10-year bond reached 8 %, a level regarded by many as the “tipping point” when a country's finances become unsustainable. The price of the bonds collapsed as the yield exploded above 15 % within just a few weeks.17 Prices had impacted fundamentals. Portugal was no longer solvent.

“We have agreed to a bailout package”, said the same Finance Minister. Was he lying a few months before when he said the country did not need a bailout? Well, not necessarily. Portugal was solvent, but vulnerable to higher rates and refinancing needs. Should the price path had been different, Portugal might have not needed to be rescued. But the reality was different.

And the “domino effect” that had “knocked out” Iceland, Greece, Ireland, and then Portugal, repeated itself once again and brought Spain and Italy to the brink of collapse. It took decisive action by Mario Draghi, President of the European Central Bank (ECB) to support the euro “by all means possible” and the introduction of the LTRO (Long Term Repurchase Obligation) programme to contain the negative spiral.

Once under control, the process reversed and through a virtuous cycle, the 10-year Spanish bond, having been at 7.5 % in the summer of 2012, reached historical low levels in December 2014. Enough to swing a government from solvency to insolvency.

These reflexive relationships also exist in the energy markets.

The “quiet revolution” in North America, the Fukushima nuclear crisis, ongoing geopolitical tensions in North Africa and the Middle East, and monetary easing have all contributed to the large price divergences that act as the catalyst for change and impact fundamentals.

Look at the super-spike in oil prices in 2007. In previous times when oil prices have risen dramatically, panic takes over. Even if the disruptions are expected to be short-lived, the mindset impacts governments, consumers, and of course, the media. People dust off Hubbert's peak oil theories (even if they have been debunked many times over) and subsidies and incentives are provided to guarantee the security of supply. To respond to the situation, the investment machine takes over. In Europe, between 2007 and 2010 around 3 % of the Eurozone GDP was devoted to large infrastructure and energy projects based on “security of supply”. In parallel, oil-producing countries devoted another 2 % of their GDP to new sources of generation.18 Combined, the expansion results in overcapacity and excess power generation to meet expected growth and needs until well over 2020.

How much capacity will be built this time? Where? How fast? The answers will shape the future of energy prices, not only from a cyclical point of view, but also on a more structural and permanent basis. Just like the 1970s resulted in the displacement of crude oil from power generation forever.

Timing: there is no such thing as a crystal ball

In the early stages of the subprime crisis in North America, as Alan Greenspan and others were dismissing the potential impact of the crisis, I came across a very interesting poll that asked mutual and hedge fund managers “Which inning are we in?”, a baseball analogy in reference to “are we closer to the beginning, middle, or end, of the crisis?” The answers were very polarized. Some believed we were at the eighth inning (closer to the end), while many others thought we were at the second inning (closer to the beginning).

Yet, the crisis went on to unfold into one of the global recessions in modern history, much further than many had anticipated, showing how market participants and industry experts can disagree on basic issues as “which inning are we in?” With the benefit of 20/20 hindsight, everyone today is familiar with the magnitude and main reasons for the crisis. But back then it was not so obvious.