Large Energy stocks - why not?

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TareNeko
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Re: Large Energy stocks - why not?

Post by TareNeko » Sat Dec 19, 2015 2:02 am

tedclu wrote:
TareNeko wrote:In short time, no one knows what will happen. In long term there is great risk that the oil dependency will go down. I think it's very risky to buy.
Oil dependency will go down, but by how much? I don't see any major structural changes with 20-30 years. 30+ years maybe.

You really should travel to India, China and other developing and see how much potential energy demand there are.
Perhaps. But I believe renewable energy will get cheaper faster than energy demands of India etc. Also, a steady demand won't drive stock prices up. There is no growth for oil. Obviously, this is my opinion.

Erwin
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Re: Large Energy stocks - why not?

Post by Erwin » Sat Dec 19, 2015 2:10 am

tedclu wrote:
TareNeko wrote:In short time, no one knows what will happen. In long term there is great risk that the oil dependency will go down. I think it's very risky to buy.
Oil dependency will go down, but by how much? I don't see any major structural changes with 20-30 years. 30+ years maybe.

You really should travel to India, China and other developing and see how much potential energy demand there are.

To the above, I would add that what matters is how long OPEC can hold out. And I am guessing not in the years.
In the end, it will come down to survival of the fittest. Countries which have higher break-even costs will be the ones who will blink first and thereby reduce their production levels. And when that happens, crude prices will go up.
So, investing (please do not use the word "play money") in the multinational oil companies via an ETF cannot be that risky.
Erwin

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just frank
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Re: Large Energy stocks - why not?

Post by just frank » Sat Dec 19, 2015 6:00 am

There is a lot of confusion out there regarding cost of production and 'break even' costs. The OPEC countries have VERY low costs of production, but 'need' a high price of oil to support their national budgets. The frackers have a HIGH cost of production, but supposedly just need to turn a profit. The oil majors are somewhere in between.

The difference is that there is a price range where the OPEC countries are still making $$ on every barrel they sell, they just wish it was more, but the frackers are losing money on every barrel they sell. Who will shut in production first?

Obviously the cost of well development is higher than the marginal cast of pumping it, and we have already seen new well development crash to very low levels. In OPEC countries the development cost is lower, and the Saudis are currently drilling like crazy. AS they said, they want Market Share. Every future barrel of market share they win will not being going into your energy ETF value.

I am talking about just the marginal cost to pump an already developed well asset in a North American Shale play. What is that cost to pump?

I would offer that no one really knows. If you read the ridiculous folks on CNBC:
When Oil was $100, this number was purported to be $80.
When Oil was $80, it became $60
When Oil was $60, it became $40
Now that Oil is $35, the latest number I have seen is $20.

Anyone really think the frackers can in 12 mos reduce this cost by 75% by 'belt tightening'? :?:

The Economist had a great analysis this past July that came in at $50 is the lifetime cost of development and production.

I would offer the following stat. Estimates of currently outstanding junk bonds associated with these frackers is $250-300B. We can estimate that their cumulative production in the last 5-6 years is 5B barrels (a linear ramp up to 5M bbl/day). This leads us to conclude that the frackers on average currently hold $50 in outstanding debt for every barrel they have produced to date!

And they are going to pay it off pumping oil that pays $35?

ControlContentment
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Re: Large Energy stocks - why not?

Post by ControlContentment » Sat Dec 19, 2015 7:37 am

I am playing Oil by taking the additional free cash flow from lower energy costs and investing in Vanguard Total World fund. I bet I end up ahead of all this "betting"

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Re: Large Energy stocks - why not?

Post by carolinaman » Sat Dec 19, 2015 7:57 am

I read an article recently that Russia was projecting oil to drop below $30 a barrel in 2016 (currently around $36) and negatively impact their oil dependent economy. Iran is now joining the oil exporters and the Saudis do not intend to reduce their production, creating a further glut of oil. I do not know how far this excess production will go, but it sounds like it will continue for quite some time. All of this will have a negative effect on oil and energy stocks, as well as other areas. Who knows if this has been priced into stock prices but I do not believe we are anywhere near a bottom and this may not be resolved for years. That is my guess and I would not touch the energy sector at this time.

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William Million
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Re: Large Energy stocks - why not?

Post by William Million » Sat Dec 19, 2015 8:32 am

XOM is reasonably priced with the nice dividend, but (on the occasions I consider an individual stock or sector ETF) I just don't buy long-term down-trending industries. Also, would never buy an airline stock. Why buy a long-term losing industry hoping for a short-term gain?

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Re: Large Energy stocks - why not?

Post by JonnyDVM » Sat Dec 19, 2015 9:06 am

I don't know a ton about energy but when a sector fund is down 40% for the year seems like a good time to buy. That's a pretty bloody oil slicked street no ? Plus energy provides a nice pivot from throwing money into the EM bottomless pit. 8-) Planning to buy a chunk with Roth monies next week.
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tedclu
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Re: Large Energy stocks - why not?

Post by tedclu » Sat Dec 19, 2015 9:34 am

I agree with you on the OPEC countries and their low marginal cost. But I have to disagree with you on the US frackers. In the current market, the frackers are not high cost, they are no where near some of the higher cost projects like the oil sands in Canada, where break even is at $70. Due to the change in technology, and drilling pressure used, us frackers have lower their cost, some of them can of the good ones can break even @40-50. The ones with low debt and management will survive the next 18 month with no issue, because they have stop drilling and cap the well. To bring the production back online they will only need a few weeks.

I don't disagree with the price of oil at the current or lower environment, We will see some more e&p bankruptcies, but the ones who survives will reward you well.

Lastly what do you think it will happen if in the long term OPEC countries can not balance their budget? We all know a lot of them are in a very unstable region of the world, lack of stability = high oil prices.
just frank wrote:There is a lot of confusion out there regarding cost of production and 'break even' costs. The OPEC countries have VERY low costs of production, but 'need' a high price of oil to support their national budgets. The frackers have a HIGH cost of production, but supposedly just need to turn a profit. The oil majors are somewhere in between.

The difference is that there is a price range where the OPEC countries are still making $$ on every barrel they sell, they just wish it was more, but the frackers are losing money on every barrel they sell. Who will shut in production first?

Obviously the cost of well development is higher than the marginal cast of pumping it, and we have already seen new well development crash to very low levels. In OPEC countries the development cost is lower, and the Saudis are currently drilling like crazy. AS they said, they want Market Share. Every future barrel of market share they win will not being going into your energy ETF value.

I am talking about just the marginal cost to pump an already developed well asset in a North American Shale play. What is that cost to pump?

I would offer that no one really knows. If you read the ridiculous folks on CNBC:
When Oil was $100, this number was purported to be $80.
When Oil was $80, it became $60
When Oil was $60, it became $40
Now that Oil is $35, the latest number I have seen is $20.

Anyone really think the frackers can in 12 mos reduce this cost by 75% by 'belt tightening'? :?:

The Economist had a great analysis this past July that came in at $50 is the lifetime cost of development and production.

I would offer the following stat. Estimates of currently outstanding junk bonds associated with these frackers is $250-300B. We can estimate that their cumulative production in the last 5-6 years is 5B barrels (a linear ramp up to 5M bbl/day). This leads us to conclude that the frackers on average currently hold $50 in outstanding debt for every barrel they have produced to date!

And they are going to pay it off pumping oil that pays $35?

tedclu
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Re: Large Energy stocks - why not?

Post by tedclu » Sat Dec 19, 2015 9:49 am

TareNeko wrote:
tedclu wrote:
TareNeko wrote:In short time, no one knows what will happen. In long term there is great risk that the oil dependency will go down. I think it's very risky to buy.
Oil dependency will go down, but by how much? I don't see any major structural changes with 20-30 years. 30+ years maybe.

You really should travel to India, China and other developing and see how much potential energy demand there are.
Perhaps. But I believe renewable energy will get cheaper faster than energy demands of India etc. Also, a steady demand won't drive stock prices up. There is no growth for oil. Obviously, this is my opinion.
I believe the current oil market is inefficient the NAV of barrel oil should be about $65ish. the market always over correct on both the downside and upside. It will self correct again soon.

Also have you seen the balance sheet of some of the solar companies? They could go belly up before the e&ps.

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packer16
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Re: Large Energy stocks - why not?

Post by packer16 » Sat Dec 19, 2015 10:31 am

I have calculated the break-even price for many O&G firms and the actual capital cost has declined by 50% or more over the past two years. You have overall break-even (including capital costs) in the low to mid $40s. The fracs that are being drilled now generate 2x the oil ones drilled just 2 years ago produce. You are talking about multi-mile horizontal wells being fracked. The operating costs without drilling breakeven is in the low $30s to $40/bbl.

I think the Saudi's have underestimated the cost declines these producers can bring in and how fast the wells can be shut-in and brought back online.

Also, in terms of alternatives, from the data I have seen we are not there yet. I believe the costs you quote for solar and wind include government subsidy (coal (9c/kwH) and NG (6.6/kwH) are still cheaper with even a $20 carbon tax and no subsidy (wind & solar w peakers A 10c/kwH) assuming no additional changes to the grid) and the biggest issue is intermittancy. If with wind does not blow or the sun does not shine (clouds or night time) then you need baseload power from somewhere and it is coal, nuclear or gas. So, even if you had all the wind and solar you could produce you would still have to pay for coal, nuclear or coal for the down time. So in essence you are paying for 1.5 generating systems to provide the same electricity as today that is the primary reason solar and wind are not cheaper than fossil fuel today.

My understanding of the Paris accord is that it is voluntary and thus an agreement could be reached. I think the issue with the previous agreements were mandatory and binding and thus many would not agree.

As to write-downs, these are caused by changes in O&G prices not the Paris agreement. If O&G prices do down, the value of the reserves will go down with them. If they go up, the value of the reserves will go up also.

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nedsaid
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Re: Large Energy stocks - why not?

Post by nedsaid » Sat Dec 19, 2015 11:52 am

just frank wrote:Um, 188 countries just voted unanimously in Paris to significantly write down the value of the assets of all these fossil energy companies.

They didn't describe it that way, but that is what they did. A LOT of paper assets (estimates run ~$5T) just became worthless buried minerals.
There is no enforcement mechanism for the agreement nor any penalties that I am aware of. The accord was just a feel good exercise and the delegates got in some fine dining while they were in Paris. That is about it.

What else is going to fuel my car other than petroleum products? Electricity has to be generated somehow at some environmental cost. Putting food (ethanol) in my gas tank doesn't seem like a good solution either.

We also use oil for many other things than fuel: chemicals, plastics, asphalt and roofing products, etc.
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Re: Large Energy stocks - why not?

Post by keanwood » Sat Dec 19, 2015 12:15 pm

packer16 wrote:
Also, in terms of alternatives, from the data I have seen we are not there yet. I believe the costs you quote for solar and wind include government subsidy (coal (9c/kwH) and NG (6.6/kwH) are still cheaper with even a $20 carbon tax and no subsidy (wind & solar w peakers A 10c/kwH) assuming no additional changes to the grid) and the biggest issue is intermittancy. If with wind does not blow or the sun does not shine (clouds or night time) then you need baseload power from somewhere and it is coal, nuclear or gas. So, even if you had all the wind and solar you could produce you would still have to pay for coal, nuclear or coal for the down time. So in essence you are paying for 1.5 generating systems to provide the same electricity as today that is the primary reason solar and wind are not cheaper than fossil fuel today.

Packer
What data are you looking at that shows new coal, nuclear, or nat gas is cheeper than wind or solar? If you are looking at EIA data then you are being seriously mislead. Look up data from Lazard, CA Energy commission, OpenEI database or even google "solar PPA" or "Wind PPA". There is a reason that nat gas, solar and wind make up the vast majority of new capacity coming online.


nedsaid wrote:We also use oil for many other things than fuel: chemicals, plastics, asphalt and roofing products, etc.
You are absolutely right about that. That side of the oil business is rock solid. But I think (off the top of my head) that that is only 30% or so of the oil demand.

--Keanwood
Spend half of your money: for you may die, save half of your money: for you may live.

EarlyStart
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Re: Large Energy stocks - why not?

Post by EarlyStart » Sat Dec 19, 2015 1:37 pm

Image




They may not be as cheap as you think. I mean, seriously guys. "Blood in the street"? Look at valuations and read this thread. I've read and heard about a lot more people eager to dive in head first than I have people angry about their losses, disgusted, etc. It may or may not be a good time to buy, but if you think you're buying at peak pessimism and rock-bottom valuations you're losing your mind.
Last edited by EarlyStart on Sat Dec 19, 2015 3:54 pm, edited 1 time in total.

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packer16
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Re: Large Energy stocks - why not?

Post by packer16 » Sat Dec 19, 2015 3:08 pm

keanwood wrote:
packer16 wrote:
Also, in terms of alternatives, from the data I have seen we are not there yet. I believe the costs you quote for solar and wind include government subsidy (coal (9c/kwH) and NG (6.6/kwH) are still cheaper with even a $20 carbon tax and no subsidy (wind & solar w peakers A 10c/kwH) assuming no additional changes to the grid) and the biggest issue is intermittancy. If with wind does not blow or the sun does not shine (clouds or night time) then you need baseload power from somewhere and it is coal, nuclear or gas. So, even if you had all the wind and solar you could produce you would still have to pay for coal, nuclear or coal for the down time. So in essence you are paying for 1.5 generating systems to provide the same electricity as today that is the primary reason solar and wind are not cheaper than fossil fuel today.

Packer
What data are you looking at that shows new coal, nuclear, or nat gas is cheeper than wind or solar? If you are looking at EIA data then you are being seriously mislead. Look up data from Lazard, CA Energy commission, OpenEI database or even google "solar PPA" or "Wind PPA". There is a reason that nat gas, solar and wind make up the vast majority of new capacity coming online.


nedsaid wrote:We also use oil for many other things than fuel: chemicals, plastics, asphalt and roofing products, etc.
You are absolutely right about that. That side of the oil business is rock solid. But I think (off the top of my head) that that is only 30% or so of the oil demand.

--Keanwood

You are correct about new plants but you have to compare the existing plants for coal and nuclear because that is what wind and solar is displacing. If we were starting out from scratch solar/wind would make sense but there is already in place infrastructure they are replacing. A good part of the reason solar and wind are being built is the tax subsidies. Just look at the stock price reaction when the tax credits extension for these credits a few days ago. The data I am looking at is based upon industry sources.

I think there are some problem with these PPAs as they have terms that may change over time, like the price to sell the electricity back to the grid and the issue that the utility subsidizes the delivery cost of electricity with sales generation. If either the homeowner is charged a cost for the use of delivery system or the cost to sell electricity back to the grid, the economics can go south pretty quick. Now the political winds are in favor of these legislated initiatives but if things change many of the home may be stuck with "white elephant" projects attached to them. Today solar is small part of the infrastructure but as it grows and the cost of the delivery system gets spread over a smaller and less wealthy group of non-solar households, the winds may change.

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Re: Large Energy stocks - why not?

Post by sawhorse » Sat Dec 19, 2015 4:08 pm

just frank wrote:There is a lot of confusion out there regarding cost of production and 'break even' costs. The OPEC countries have VERY low costs of production, but 'need' a high price of oil to support their national budgets. The frackers have a HIGH cost of production, but supposedly just need to turn a profit. The oil majors are somewhere in between.
When you phrase it like this, it becomes crystal clear just how big an advantage the Gulf countries have.

This year - or maybe it was last year - Saudi Arabia issued government bonds for the first time in almost a decade. That's remarkable when you consider that almost every country in the world constantly issues bonds because they can't cover their expenses and pay down old debt without taking on new debt.

Saudi Arabia didn't even have to issue any bonds. They have an "emergency fund" of $700 billion and issued only around $5 billion in bonds. They could easily have covered that $5 billion with their emergency fund but felt it was better to take on some debt at the current low rates than to tap into the emergency fund.

Compare that to American companies that must issue bonds, often at higher interest rates, because they don't have those emergency funds.

The Saudi Arabian government also has large leeway to cut spending and raise revenue. They can cut social programs and other government spending. They can raise taxes. They can even generate tax revenue without economic ripple effects by taxing dual citizens who live in other countries - something the US does. Cutting spending and raising taxes may be unpopular with the people, but it's an authoritarian government, so they can't get voted out.
just frank wrote: I am talking about just the marginal cost to pump an already developed well asset in a North American Shale play. What is that cost to pump?

I would offer that no one really knows. If you read the ridiculous folks on CNBC:
That's a good point. I've heard wildly different numbers. It brings me back to the question of whether there is bluffing.

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nedsaid
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Re: Large Energy stocks - why not?

Post by nedsaid » Sat Dec 19, 2015 4:31 pm

The large energy stocks have traditionally been a good investment. Historically you do well if you buy these things when they are down as they are now. The problem is that sometimes it really is different this time and perhaps there has been a big change in the energy markets. Perhaps the horizontal drilling and fracking has set a permanent ceiling on oil prices. Maybe when oil hits let's say $75 a barrel that the frackers start producing like crazy again. This could send prices down a bit and it is possible that we may never see $100 a barrel oil again.

So will loading up on these stocks now be a good move for investors? I think so but nobody knows the future. You are taking a chance. Sometimes the world really does change.
A fool and his money are good for business.

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Re: Large Energy stocks - why not?

Post by Grt2bOutdoors » Sat Dec 19, 2015 4:45 pm

keanwood wrote:
packer16 wrote:
Also, in terms of alternatives, from the data I have seen we are not there yet. I believe the costs you quote for solar and wind include government subsidy (coal (9c/kwH) and NG (6.6/kwH) are still cheaper with even a $20 carbon tax and no subsidy (wind & solar w peakers A 10c/kwH) assuming no additional changes to the grid) and the biggest issue is intermittancy. If with wind does not blow or the sun does not shine (clouds or night time) then you need baseload power from somewhere and it is coal, nuclear or gas. So, even if you had all the wind and solar you could produce you would still have to pay for coal, nuclear or coal for the down time. So in essence you are paying for 1.5 generating systems to provide the same electricity as today that is the primary reason solar and wind are not cheaper than fossil fuel today.

Packer
What data are you looking at that shows new coal, nuclear, or nat gas is cheeper than wind or solar? If you are looking at EIA data then you are being seriously mislead. Look up data from Lazard, CA Energy commission, OpenEI database or even google "solar PPA" or "Wind PPA". There is a reason that nat gas, solar and wind make up the vast majority of new capacity coming online.
--Keanwood
Remove the tax credits for solar and wind, soon you'll see that new capacity coming online, go offline faster than you and I can say "goodbye".
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Re: Large Energy stocks - why not?

Post by randomguy » Sat Dec 19, 2015 5:06 pm

keanwood wrote:

nedsaid wrote:We also use oil for many other things than fuel: chemicals, plastics, asphalt and roofing products, etc.
You are absolutely right about that. That side of the oil business is rock solid. But I think (off the top of my head) that that is only 30% or so of the oil demand.

--Keanwood

http://abcnews.go.com/Business/PainAtTh ... 789&page=1

It is unclear how much of that break down is choice (i.e. the refinery makes diesel instead of gas) and how much is dictated by chemistry. I am not holding out much hope for electrical planes (not going to happen) or cargo ships (ok these are at least theorically possible if you want to stick nuclear reactors in them) any time soon. And while it is easy to see US gas consumption going down (we can afford another 3-4k/yr) how that balances out emerging markets demands is hard to say. And given we are talking about relatively small surpluses/shortages causing huge swings in prices, I am not sure how accurate anyone can be given the error margins in estimates.

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Re: Large Energy stocks - why not?

Post by Johno » Sat Dec 19, 2015 5:11 pm

just frank wrote:There is a lot of confusion out there regarding cost of production and 'break even' costs. The OPEC countries have VERY low costs of production, but 'need' a high price of oil to support their national budgets. The frackers have a HIGH cost of production, but supposedly just need to turn a profit. The oil majors are somewhere in between.

The difference is that there is a price range where the OPEC countries are still making $$ on every barrel they sell, they just wish it was more, but the frackers are losing money on every barrel they sell. Who will shut in production first?
But besides confusion there's also actually different relevant prices depending what you mean by 'break even'. You gave the example of break even price for OPEC countries on the basis of stand alone economics of oil production v funding govt budgets with oil revenue. But also even when you look at the oil economics alone, there's (at least) two distinct prices. One is the all in cost, including return on capital invested upfront. That's the price below which you would not undertake development of new oil wells or fields, assuming you knew exactly what those capital costs were and what the future oil price would be. The second is a simpler more concrete price: the price at which revenue from the oil is less than the current cost of operating existing fields. The latter is way lower than the former. To take a concrete example a recent WSJ article quoted analyst's estimate the Eni's new Goliat field in the Norwegian arctic will need $95/bbl to break even as an investment, in part due to cost overruns. Eni doesn't agree, but in any case there's no way Goliat is going to he shut down with prices at $35. They are 'losing with every bbl' but only counting large sunk costs. The actual lifting cost, as it's called, is still likely well below the current price. But launching another such project at the moment is a different equation.

These two concepts still get have fuzzy boundaries though. Because for example a company may have already sunk the cost to discover the oil or buy leases, but not have put other investments in yet, then the 'all in' insofar as they can still control it is lower, since they aren't getting the exploration or lease money back just because they don't proceed. Then a lot of US tight oil has pretty low capital costs to add a well (as opposed to finding a new field), but the wells also deplete faster than usual, so there's a gray area because 'operating' might be thought of as including drilling new wells in known fields. Or IOW if they just lift oil from existing wells, production will decline more rapidly as compared to large shallow high pressure fields in places in the Mideast.

Anyway the basic problem is that it's impossible to simplify accurately to a 'price where US frakkers shut down', just like the duality between low Saudi all in oil costs and the fact they need revenue for other purposes. True SA had essentially no debt till recently...OTOH the budget deficit is now running at over *20%* of GDP. Then a lot of global production is neither of those but each with its own complexities. The supply response to price is actually very complicated, especially if you also set the hurdle of having to be right about it in a given period of time.

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Re: Large Energy stocks - why not?

Post by Slick8503 » Sat Dec 19, 2015 5:25 pm

Government subsidies are the reason Solar and Wind resources are being built. If you think that solar is cheaper(without subsidies) on a $'s/MW basis than a Combined Cycle nat gas plant at sub $2 nat gas, you are very mistaken.

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Re: Large Energy stocks - why not?

Post by Grt2bOutdoors » Sat Dec 19, 2015 5:50 pm

Slick8503 wrote:Government subsidies are the reason Solar and Wind resources are being built. If you think that solar is cheaper(without subsidies) on a $'s/MW basis than a Combined Cycle nat gas plant at sub $2 nat gas, you are very mistaken.
Exactly!!!
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Re: Large Energy stocks - why not?

Post by TimeRunner » Sat Dec 19, 2015 5:54 pm

You'll be pleased to know then that the latest Congressional budget agreement renews multi-billion dollar federal government subsidies for wind and solar power. So there's that revenue to the industry for at least five years. 8-)
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Re: Large Energy stocks - why not?

Post by keanwood » Sat Dec 19, 2015 6:08 pm

Grt2bOutdoors wrote: Remove the tax credits for solar and wind, soon you'll see that new capacity coming online, go offline faster than you and I can say "goodbye".

That makes no sense. They (basically) have no operating costs. They don't go offline unless they break. Un-subsidized utility scale solar is in the $50-60/MWh range. Wind is even cheaper. Show me where, in the USA, is there new nat gas, coal or nuclear coming online for under $50/MWh.



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Re: Large Energy stocks - why not?

Post by just frank » Sat Dec 19, 2015 6:08 pm

keanwood wrote:
nedsaid wrote:We also use oil for many other things than fuel: chemicals, plastics, asphalt and roofing products, etc.
You are absolutely right about that. That side of the oil business is rock solid. But I think (off the top of my head) that that is only 30% or so of the oil demand.

--Keanwood
Asphalt is a pretty big fraction (that varies with the crude stock, some is mostly asphalt), but also rather low value.

Fertilizers use nat gas for process heat and hydrogen production, but that's it.

Other chemicals (such as plastics) from petroleum are <10% of global production, IIRC. And many of those can be made from bio-feedstocks instead, if needed. In practice the amount of petroleum usage associated with chemical production is negligible and substitutable from a climate perspective.

Aviation, BTW, uses 5% of petroleum. Also a non-issue re future production and climate.

Bottom line: Petroleum will be needed and used for many decades if not longer. That said, most of its current uses (light transport) are substitutable, and if that substitution brings demand below what conventional production worldwide can produce (as implied by the Paris agreement) then there will be no frackers and no Canadian oil sands, and perhaps very little North American production at all. The oil majors will then be nat gas companies.

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Re: Large Energy stocks - why not?

Post by just frank » Sat Dec 19, 2015 6:12 pm

Slick8503 wrote:Government subsidies are the reason Solar and Wind resources are being built. If you think that solar is cheaper(without subsidies) on a $'s/MW basis than a Combined Cycle nat gas plant at sub $2 nat gas, you are very mistaken.
Nat gas is only at $2 because it is not being used in volume for power production. It is currently trading with (cheap) coal. When gas has a big glut and drops far enough, the elec utilities ramp down coal, burn up the glut, the price recovers and they switch back to coal.

But in North America there is not enough gas to replace the coal we are currently using.

There IS enough wind and solar resource. :D

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Re: Large Energy stocks - why not?

Post by randomguy » Sat Dec 19, 2015 9:51 pm

just frank wrote:
There IS enough wind and solar resource. :D
Problem is that neither of them is reliable. Until we get better storage systems you can't count on them for more than about 10-15% of your electrical network production without causing reliability issues. Now storage isn't unsolveable (i.e. better batteries, hydrogen fuel cells, water pumping,...) but it is an added cost on top of the production. Most of the time it doesn't matter since the percentage of wind/solar is still low but you do run into crazy situations like in Texas where occasionally the wind farms sell electricity at negative dollars (i.e. they pay you to use it. They make it up with federal tax credits). Solar can run into similiar issues when demand and generation are not aligned exactly. Obviously all this stuff is very fluid. When every house has a couple 60 kw battery (either in the car or in storage unit) the math will change. How it all ends up is anyones guess.

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Re: Large Energy stocks - why not?

Post by sawhorse » Sat Dec 19, 2015 11:24 pm

randomguy wrote:Problem is that neither of them is reliable. Until we get better storage systems you can't count on them for more than about 10-15% of your electrical network production without causing reliability issues. Now storage isn't unsolveable (i.e. better batteries, hydrogen fuel cells, water pumping,...) but it is an added cost on top of the production. Most of the time it doesn't matter since the percentage of wind/solar is still low but you do run into crazy situations like in Texas where occasionally the wind farms sell electricity at negative dollars (i.e. they pay you to use it. They make it up with federal tax credits). Solar can run into similiar issues when demand and generation are not aligned exactly. Obviously all this stuff is very fluid. When every house has a couple 60 kw battery (either in the car or in storage unit) the math will change. How it all ends up is anyones guess.
The mention of solar power, and potential technological advances in storage, is interesting in the context of a discussion including Saudi Arabia and the other Gulf countries in OPEC.

Saudi Arabia burns through oil at one of the highest rates in the world. They generate their electricity from oil rather than coal or natural gas. It's an inefficient, environmentally harmful, and wasteful process. For the rest of the world it's not cost efficient, but for Saudi Arabia, it saves money.

High oil consumption within the country has an opportunity cost. For every barrel they use on themselves, they lose the profits they could have gotten selling it to another country.

Luckily for Saudi Arabia, they not only have the cheapest and easiest access to oil energy; they also have some of the world's best access to the sun's rays. Saudi Arabia has already initiated ambitious solar projects, and if they stay committed, they will be the first country whose electricity comes almost entirely from solar power.

That has a few implications. First, they'll be able to increase their revenue on oil because they won't incur the opportunity cost of burning oil for electricity. Second, if solar technology advances enough that solar power becomes easily stored and transportable, Saudi Arabia could become a market maker for solar power as well. I don't see the technology advancing that fast that the latter is realistic in the next few decades, and it would require technology that would work only under extreme sun intensity and would not work at all below the threshold. But I wouldn't be surprised if there are engineers there working on it.
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Re: Large Energy stocks - why not?

Post by sawhorse » Sun Dec 20, 2015 12:46 am

Putin said that $50 a barrel in 2016 is too optimistic.

http://reut.rs/1Yk3TR1

The most realistic savior for the oil companies over the next few years is domestic legislation. As zotty said, a lot of people are losing their jobs. Oil companies require extensive physical capital, so if a company goes bankrupt and abandons its projects, that's loads of money down the drain. You can't just set up an oil company the way you can a software company.

It's impossible to predict how the US government will act. The oil industry has political clout, but there are industries, such as transportation, that will lobby against legislation that leads to higher oil prices.

It's likewise impossible to predict how other governments will act. But I wouldn't bet against Putin on this one. His prediction is much more informed than that of any investment analyst or Boglehead.

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Re: Large Energy stocks - why not?

Post by carolinaman » Sun Dec 20, 2015 7:40 am

Johno wrote:
just frank wrote:There is a lot of confusion out there regarding cost of production and 'break even' costs. The OPEC countries have VERY low costs of production, but 'need' a high price of oil to support their national budgets. The frackers have a HIGH cost of production, but supposedly just need to turn a profit. The oil majors are somewhere in between.

The difference is that there is a price range where the OPEC countries are still making $$ on every barrel they sell, they just wish it was more, but the frackers are losing money on every barrel they sell. Who will shut in production first?
But besides confusion there's also actually different relevant prices depending what you mean by 'break even'. You gave the example of break even price for OPEC countries on the basis of stand alone economics of oil production v funding govt budgets with oil revenue. But also even when you look at the oil economics alone, there's (at least) two distinct prices. One is the all in cost, including return on capital invested upfront. That's the price below which you would not undertake development of new oil wells or fields, assuming you knew exactly what those capital costs were and what the future oil price would be. The second is a simpler more concrete price: the price at which revenue from the oil is less than the current cost of operating existing fields. The latter is way lower than the former. To take a concrete example a recent WSJ article quoted analyst's estimate the Eni's new Goliat field in the Norwegian arctic will need $95/bbl to break even as an investment, in part due to cost overruns. Eni doesn't agree, but in any case there's no way Goliat is going to he shut down with prices at $35. They are 'losing with every bbl' but only counting large sunk costs. The actual lifting cost, as it's called, is still likely well below the current price. But launching another such project at the moment is a different equation.

These two concepts still get have fuzzy boundaries though. Because for example a company may have already sunk the cost to discover the oil or buy leases, but not have put other investments in yet, then the 'all in' insofar as they can still control it is lower, since they aren't getting the exploration or lease money back just because they don't proceed. Then a lot of US tight oil has pretty low capital costs to add a well (as opposed to finding a new field), but the wells also deplete faster than usual, so there's a gray area because 'operating' might be thought of as including drilling new wells in known fields. Or IOW if they just lift oil from existing wells, production will decline more rapidly as compared to large shallow high pressure fields in places in the Mideast.

Anyway the basic problem is that it's impossible to simplify accurately to a 'price where US frakkers shut down', just like the duality between low Saudi all in oil costs and the fact they need revenue for other purposes. True SA had essentially no debt till recently...OTOH the budget deficit is now running at over *20%* of GDP. Then a lot of global production is neither of those but each with its own complexities. The supply response to price is actually very complicated, especially if you also set the hurdle of having to be right about it in a given period of time.
You and others present some very good explanations for oil economics: breakeven points, when to produce, when to drill new wells, etc. These explanations are based on rationality by oil producers. However, we may be in a situation where rationale actions are secondary to economic warfare and religious ideology. The Saudis seem to be driving the price down to inflict economic harm on their enemies, especially the Iranians. Now Iran is becoming a major oil exporter. Both Iran and SA seem determined to maintain full oil production which will drive oil prices even lower. I am not sure how this will wind up but we should not assume that all of the oil producers will all act in a rationale manner.

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Re: Large Energy stocks - why not?

Post by Slick8503 » Sun Dec 20, 2015 7:49 am

keanwood wrote:
Grt2bOutdoors wrote: Remove the tax credits for solar and wind, soon you'll see that new capacity coming online, go offline faster than you and I can say "goodbye".

That makes no sense. They (basically) have no operating costs. They don't go offline unless they break. Un-subsidized utility scale solar is in the $50-60/MWh range. Wind is even cheaper. Show me where, in the USA, is there new nat gas, coal or nuclear coming online for under $50/MWh.



--Keanwood
Your comparison is not apples to apples. Solar is not continuous output. Solar's availability is not close to gas or coal. You are getting WAY more generated MW's for your money with a new gas plant vs solar or wind. Gas/Coal capacity factors run 70-90%, and solar is what? 30% on average? Probably less, depending on location.
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Re: Large Energy stocks - why not?

Post by Ron Swanson » Sun Dec 20, 2015 8:54 am

That makes no sense. They (basically) have no operating costs. They don't go offline unless they break. Un-subsidized utility scale solar is in the $50-60/MWh range. Wind is even cheaper. Show me where, in the USA, is there new nat gas, coal or nuclear coming online for under $50/MWh.

--Keanwood
I work in a natural gas combined cycle power plant (I'm there right now actually). We generally bid into the market in the $40-$50/MWh range, and this is in New England where natural gas is expensive. We've been online just about every day this year. A new wave of natural gas fired powered plants are being built now in New England. They will be even cheaper than us as they will be more efficient, and more than likely require less maintenance and operating personnel.

Here is an interesting article about Cape Wind. A proposed wind farm in New England that seems to be all but dead. Notice that the contracted price for their power was 18.7 cents per kWh (thats $187/MWh, more than triple what we get in the market!). They weren't going to get that much for power because everyone felt generous that day. The contracted price was so high because wind is very expensive to develop and maintain.

https://www.bostonglobe.com/magazine/20 ... story.html

There is a TON of potential for renewable energy in the US. But what is good for the environment is not necessarily good for everyone's wallets.

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Re: Large Energy stocks - why not?

Post by selftalk » Sun Dec 20, 2015 9:32 am

Dear mpt follower if you are not at your financial goal level yet then why are you wasting time and/or gambling your "opportunity money" when common sense indicates as per this website to keep investing in a broad index fund to get you where you want to go. If you do gamble and lose which is highly probable you`ve lost precious time you need for compounding to get to your goal.

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Re: Large Energy stocks - why not?

Post by Slick8503 » Sun Dec 20, 2015 9:47 am

Ron Swanson wrote:
That makes no sense. They (basically) have no operating costs. They don't go offline unless they break. Un-subsidized utility scale solar is in the $50-60/MWh range. Wind is even cheaper. Show me where, in the USA, is there new nat gas, coal or nuclear coming online for under $50/MWh.

--Keanwood
I work in a natural gas combined cycle power plant (I'm there right now actually). We generally bid into the market in the $40-$50/MWh range, and this is in New England where natural gas is expensive. We've been online just about every day this year. A new wave of natural gas fired powered plants are being built now in New England. They will be even cheaper than us as they will be more efficient, and more than likely require less maintenance and operating personnel.

Here is an interesting article about Cape Wind. A proposed wind farm in New England that seems to be all but dead. Notice that the contracted price for their power was 18.7 cents per kWh (thats $187/MWh, more than triple what we get in the market!). They weren't going to get that much for power because everyone felt generous that day. The contracted price was so high because wind is very expensive to develop and maintain.

https://www.bostonglobe.com/magazine/20 ... story.html

There is a TON of potential for renewable energy in the US. But what is good for the environment is not necessarily good for everyone's wallets.
Awesome datapoint Ron Swanson! Being in the Midwest our CC's dispatch closer to the 30 dollar range. I know local to me a new 800 MW CC facility went online this year with a cost of ~550 million.

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Re: Large Energy stocks - why not?

Post by Valuethinker » Sun Dec 20, 2015 11:25 am

Ron Swanson wrote:
That makes no sense. They (basically) have no operating costs. They don't go offline unless they break. Un-subsidized utility scale solar is in the $50-60/MWh range. Wind is even cheaper. Show me where, in the USA, is there new nat gas, coal or nuclear coming online for under $50/MWh.

--Keanwood


Here is an interesting article about Cape Wind. A proposed wind farm in New England that seems to be all but dead. Notice that the contracted price for their power was 18.7 cents per kWh (thats $187/MWh, more than triple what we get in the market!). They weren't going to get that much for power because everyone felt generous that day. The contracted price was so high because wind is very expensive to develop and maintain.
You are comparing Apples with Oranges.

Cape Wind is offshore wind. That's expensive power-- we are in the early stages of offshore wind as a technology. That would be like comparing natural gas stations now with wind power of 25 years ago.

There is a TON of potential for renewable energy in the US. But what is good for the environment is not necessarily good for everyone's wallets.
Yes and onshore wind is cheap. The US happens to have *even cheaper* gas. Not every country is in that position (in fact no other large country outside of the Middle East has that cheap gas (if we don't include the subsidized price the Russians and Ukrainians charge, at significant loss to quasi state gas companies).

Against new coal and new nuclear, on US economics, renewables do stack up.

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Re: Large Energy stocks - why not?

Post by Valuethinker » Sun Dec 20, 2015 11:27 am

Slick8503 wrote:
Ron Swanson wrote:
There is a TON of potential for renewable energy in the US. But what is good for the environment is not necessarily good for everyone's wallets.
Awesome datapoint Ron Swanson! Being in the Midwest our CC's dispatch closer to the 30 dollar range. I know local to me a new 800 MW CC facility went online this year with a cost of ~550 million.
Combined Cycle is a lot more expensive outside the USA. The low capital costs pertain (and that's its main advantage) but the fuel costs are anywhere from 50-300% higher, roughly. (thinking $2.50/ MM BTU in the US, and 43.50-8.50 in international markets, even given the low oil price (many international gas contracts are tied to the oil price).

The virtue of CC is the low capital costs, but relatively high fuel costs. Almost the direct mirror of renewables. What's striking is how far the capital costs of the latter have fallen in the last 20 years. And in truth the 2 are complementary (higher running cost for high demand/ peak pricing periods vs. very low running costs).
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Re: Large Energy stocks - why not?

Post by packer16 » Sun Dec 20, 2015 11:38 am

But comparing to new coal and nuclear to new renewables plus nat gas peakers is only applicable to new infrastructure investment which what we are seeing new investment today. I think the real competition to renewables in NG. With the low NG price in NA it will take awhile for NG prices to rise to make renewables competitive without the subsidies.

I also think the NG technology in the US is only starting to be applied worldwide, so you may see NG price declines in other parts of the world soon.

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Re: Large Energy stocks - why not?

Post by divotmaker » Sun Dec 20, 2015 12:07 pm

Along the lines of this debate, I have more or less followed a slice and dice version of the Scott Burns "10 speed" portfolio over time. I continue to struggle with whether this slice and dice approach is worth it in the real world. I consider simplifying to a 3 fund approach, but with all the factor debates discussed by Swedroe and others, I consider this small and value tilt may remain valid, if one retains the discipline to follow and maintain.

However...for this discussion.... I wonder if the premise of including a 10% tilt toward energy by tilting 10% to VDE/VGENX, which may have made sense in the 80's/90's when Burns and others, constructed this approach, still makes sense?

Is this a paradigm shift that should require revision of this classic slice and dice portfolio approach? I does seem that the energy landscape, due to a combination of timing and technology, will evolve beyond dominance by fossil fuels and the big energy stocks of VDE.

Of course I suppose those very companies will evolve as well. If so then I guess the question is why is energy worth a 10% tilt over food, or infrastructure or some other factor not based on equity pricing like "small" or "value"?

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Re: Large Energy stocks - why not?

Post by finite_difference » Sun Dec 20, 2015 2:46 pm

I see very little future for coal. Even though the US gets 1/3 of its energy from coal production, I think (and hope) coal will continue to shrink. It's just too dirty. And it's why China is so polluted right now. As I understand it there's currently no way to make coal clean, barring some huge technological breakthrough.

I would like to see nuclear get developed more, but unfortunately it doesn't look like the political environment will allow it. Nuclear has the potential to be extremely green, but unfortunately the environmentalists don't seem to understand that argument.

I think oil will have a long future. All our cars depend on it. However it's possible that electric cars will take over but still that won't happen for several decades I think. But I don't understand how oil subsidies work. There are a lot of foreign factors. So the Saudis can increase production at a loss of $10 billion per year, but they can't support that indefinitely.

Natural gas seems clean and a great way to heat your home, so although prices are depressed I would bet that has a long future too.

Fracking and tar sands I don't know much about. Frakking seems OKish but is still controversial and it seems like tar sands are pretty dirty -- if so tar sands may not be such a good bet.

If I had the money I'd bet 5-10% on oil and natural gas right now. Not on coal though.
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Re: Large Energy stocks - why not?

Post by hoops777 » Sun Dec 20, 2015 3:26 pm

I think on this forum no matter how much any sector is down,you will basically get the same response.
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Re: Large Energy stocks - why not?

Post by Grt2bOutdoors » Sun Dec 20, 2015 4:46 pm

finite_difference wrote:I see very little future for coal. Even though the US gets 1/3 of its energy from coal production, I think (and hope) coal will continue to shrink. It's just too dirty. And it's why China is so polluted right now. As I understand it there's currently no way to make coal clean, barring some huge technological breakthrough.

I would like to see nuclear get developed more, but unfortunately it doesn't look like the political environment will allow it. Nuclear has the potential to be extremely green, but unfortunately the environmentalists don't seem to understand that argument.

I think oil will have a long future. All our cars depend on it. However it's possible that electric cars will take over but still that won't happen for several decades I think. But I don't understand how oil subsidies work. There are a lot of foreign factors. So the Saudis can increase production at a loss of $10 billion per year, but they can't support that indefinitely.

Natural gas seems clean and a great way to heat your home, so although prices are depressed I would bet that has a long future too.

Fracking and tar sands I don't know much about. Frakking seems OKish but is still controversial and it seems like tar sands are pretty dirty -- if so tar sands may not be such a good bet.

If I had the money I'd bet 5-10% on oil and natural gas right now. Not on coal though.
Yes, extremely dirty, that's why large capacity dual-fuel base-load plants near my home continue to receive tons and tons of new coal each month via rail with no difficulty at all. The other fuel is NG and they aren't burning it at all. They have spent money on upgrading the plant with the necessary scrubbers to make the emissions in compliance with new regulations. Lately, I've seen more investments being worked on this and other plants. Coal is not going away, just ask India and China, if you don't believe me.
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Re: Large Energy stocks - why not?

Post by Valuethinker » Sun Dec 20, 2015 4:49 pm

randomguy wrote:
just frank wrote:
There IS enough wind and solar resource. :D
Problem is that neither of them is reliable. Until we get better storage systems you can't count on them for more than about 10-15% of your electrical network production without causing reliability issues. Now storage isn't unsolveable (i.e. better batteries, hydrogen fuel cells, water pumping,...) but it is an added cost on top of the production. Most of the time it doesn't matter since the percentage of wind/solar is still low but you do run into crazy situations like in Texas where occasionally the wind farms sell electricity at negative dollars (i.e. they pay you to use it. They make it up with federal tax credits). Solar can run into similiar issues when demand and generation are not aligned exactly. Obviously all this stuff is very fluid. When every house has a couple 60 kw battery (either in the car or in storage unit) the math will change. How it all ends up is anyones guess.
There are countries above 10-15% of electricity from those renewable sources: such as Germany.

Nuclear power stations can also get into the negative pool price problem (so, at least in theory, can hydro electric-- if there's more water than they can safely dam).

Note that Texas is not a particularly good example of anything:

- ERCOT (Electricity Reliability Council of Texas -ie Texas grid) is deliberately isolated from neighbouring grids (by design). So under/ oversupply of electricity becomes a particular issue

One of the issues for wind is that it drops in heatwaves (big low pressure zones). BUT 1). offshore wind does not necessarily and 2). of course solar tends to do well in those times.

Re energy storage there are a lot of angles: compressed air, cryogenic gases, heat storage, Concentrated Solar Power (which can store the solar heat overnight), flywheels etc. On a US-scale there's a lot of scope for pumped storage, as well as a HVDC thus linking areas with different weather patterns (and different sunsets).

And there's demand side management-- which has huge potential. The periods of peak demand are small relative to the 8760 hours in a year.

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Re: Large Energy stocks - why not?

Post by Valuethinker » Sun Dec 20, 2015 4:56 pm

Grt2bOutdoors wrote: Yes, extremely dirty, that's why large capacity dual-fuel base-load plants near my home continue to receive tons and tons of new coal each month via rail with no difficulty at all. The other fuel is NG and they aren't burning it at all. They have spent money on upgrading the plant with the necessary scrubbers to make the emissions in compliance with new regulations. Lately, I've seen more investments being worked on this and other plants. Coal is not going away, just ask India and China, if you don't believe me.
Overall US coal demand is way down. This may not be a permanent thing (eg if electricity demand growth recovers after several years of nearly no growth) but it is way down. And no utility is going to take a big financial risk on new coal fired power stations-- there's too many risks in that for that capital cost given the low capital costs of gas fired generation and the low gas prices.

China and India are interesting. China, coal demand may have peaked. They are building power stations they don't currently need, and eventually that will mean some of the older, dirtier stations are going to be shut-- ie more efficient coal plants replace existing low efficiency ones. And the scale of their air pollution problem means they have to do *something*: they have recognized it as a political issue which threatens the rule of the CP of China. Given it will be harder to clean up all those industrial polluters, power generation is the low hanging fruit (along with vehicle emissions). Cut the coal, cut the particulates and SO2.

India? Coal of India is struggling to raise output. They may import more. On the other hand Modi is going big for renewables, and there are very ambitious nuclear plans. To finance expansions in output they will need to get people to pay for electricity, and that's politically difficult. Solar caters to a more distributed model, and that's what a lot of companies/ subregions are looking towards given the general chaos at the utility level. India also has a very bad air pollution problem (many of its cities are worse than China) and that will, in time, force cleaner uses of fuels.

We may have passed an inflection point on coal-- at least coal without CCS. We of course won't know for decades, but some big things have just happened.

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Re: Large Energy stocks - why not?

Post by Valuethinker » Sun Dec 20, 2015 5:03 pm

sawhorse wrote:Putin said that $50 a barrel in 2016 is too optimistic.

http://reut.rs/1Yk3TR1

The most realistic savior for the oil companies over the next few years is domestic legislation. As zotty said, a lot of people are losing their jobs. Oil companies require extensive physical capital, so if a company goes bankrupt and abandons its projects, that's loads of money down the drain. You can't just set up an oil company the way you can a software company.
I am not sure what domestic legislation could do? Crude oil exports have just been permitted (they already existed to Canada in fact, apparently). And refined product exports are large.

If the creditors seize control of oil companies, they will continue to produce with the assets, although exploration may fall. So whilst low oil prices threaten fracking, they won't stop it.
It's impossible to predict how the US government will act. The oil industry has political clout, but there are industries, such as transportation, that will lobby against legislation that leads to higher oil prices.
I cannot believe that the US will (as it did in the 1930s and then up to 1973) again have a strong domestic lobby in favour of *higher* oil prices-- those were about keeping prices at $3 not $2 (in then dollars). They didn't bail out the oil industry in the late 80s, nor in 1998, and they won't do so again now.

Since gasoline is one of the most visible domestic prices, I cannot believe the political system would act to *raise* that price to the benefit of *oil companies*,
It's likewise impossible to predict how other governments will act. But I wouldn't bet against Putin on this one. His prediction is much more informed than that of any investment analyst or Boglehead.
I think he's looking at supply and demand and also record high inventories. Also, so far, a very mild winter (marginal to the oil situation, but it does hit heating oil demand in US NE and a few other countries).

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Re: Large Energy stocks - why not?

Post by Dandy » Sun Dec 20, 2015 5:26 pm

Bottom fishing can be fun and expensive. If this is a small amount of fun money - no real problem. The psych risk is that if it is successful you will think more highly of your investment skills when it is mostly luck and you will allocate more than fun money. 3% sounds good - does it reflect dividend cuts that surely will be implemented in not done already? or is it mostly due to the energy stock drop. Be careful if you think you might be getting 3% dividends.

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Re: Large Energy stocks - why not?

Post by rustymutt » Sun Dec 20, 2015 5:53 pm

sport wrote:Do you know something that the market has not included in the current prices?
He's intelligent, and has a hunch. I was that way once, but lost my a$$. However that said, I do own some of those large oil companies inside my ETFs.
I'm amazed at the wealth of Knowledge others gather, and share over a lifetime of learning. The mind is truly unique. It's nice when we use it!

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Re: Large Energy stocks - why not?

Post by sawhorse » Sun Dec 20, 2015 11:50 pm

I have really enjoyed this thread and have learned more than I expected, and I've found it more interesting than I previously thought.
carolinaman wrote:You and others present some very good explanations for oil economics: breakeven points, when to produce, when to drill new wells, etc. These explanations are based on rationality by oil producers. However, we may be in a situation where rationale actions are secondary to economic warfare and religious ideology.
Economic warfare is a good way to put it. I think the three countries that have the cheapest oil production (Kuwait, Saudi Arabia, UAE) want to drive out not only the US companies but also fellow OPEC members like Venezuela. There is a coalition of OPEC countries begging the Gulf countries to decrease production. It's like an economic civil war within OPEC.
finite_difference wrote:I see very little future for coal. Even though the US gets 1/3 of its energy from coal production, I think (and hope) coal will continue to shrink. It's just too dirty. And it's why China is so polluted right now. As I understand it there's currently no way to make coal clean, barring some huge technological breakthrough.

I would like to see nuclear get developed more, but unfortunately it doesn't look like the political environment will allow it. Nuclear has the potential to be extremely green, but unfortunately the environmentalists don't seem to understand that argument.

I think oil will have a long future. All our cars depend on it. However it's possible that electric cars will take over but still that won't happen for several decades I think. But I don't understand how oil subsidies work. There are a lot of foreign factors. So the Saudis can increase production at a loss of $10 billion per year, but they can't support that indefinitely.

Natural gas seems clean and a great way to heat your home, so although prices are depressed I would bet that has a long future too.

Fracking and tar sands I don't know much about. Frakking seems OKish but is still controversial and it seems like tar sands are pretty dirty -- if so tar sands may not be such a good bet.

If I had the money I'd bet 5-10% on oil and natural gas right now. Not on coal though.
I think it's unlikely that coal will rise in the United States, but the question is, will it actually fall, or will it merely stagnate?

I disagree that nuclear energy is being stalled by environmentalists. Rather, the risks of nuclear energy are too great. No one wants a nuclear plant near them. No company can afford the liability of a Chernobyl or Fukushima. No insurers would issue a policy for those companies.

Nuclear energy is great almost all the time, but when bad things happen, they are REALLY bad, and they stay bad for decades. Even if you're not interested in Chernobyl, it's worth reading this excerpt on a book about Chernobyl for the quality of the writing. The writer is Svetlana Alexievich, a journalist who won the Nobel Prize for Literature in 2015.

http://www.theguardian.com/environment/ ... gy.ukraine
Grt2bOutdoors wrote:Coal is not going away, just ask India and China, if you don't believe me.
In China, coal is going away, literally. Their reserves can't keep up with usage. Due to geology, coal in China isn't as easily accessible as it is in the United States. In the United States, most coal mining is of the strip/surface type. In China, underground mining dominates. Underground mining costs more and requires large amounts of water which coincidentally is sparse in coal-laden areas.

China is investing more in solar equipment than any other country because they know that coal will soon reach the point in which marginal production costs increase as they're forced to drill deeper.

Don't know about India.
Slick8503 wrote:Your comparison is not apples to apples. Solar is not continuous output. Solar's availability is not close to gas or coal. You are getting WAY more generated MW's for your money with a new gas plant vs solar or wind. Gas/Coal capacity factors run 70-90%, and solar is what? 30% on average? Probably less, depending on location.
It'll be interesting to see how solar technology develops. Certainly efficiency will improve over time.

There is a geological vs. economic mismatch. The countries most invested in solar power aren't those that can harness it best, and the countries that can harness it the best aren't invested in it. The climate of several sub-Saharan African nations is ideal for solar power, but those countries can least afford the initial infrastructure costs. The Gulf countries are also very suited for solar power, but oil is so cheap that there's no pressing need to use solar. So you get overcast high latitude countries like Britain leading the push. It's almost comical when you think about it.

Ultimately, the focus must shift from finding new sources of energy, however "clean" they may be, to reducing energy consumption. People have been saying that for decades, and there have been improvements such as more efficient cars, but it seems that the improvements never outpace the increases in usage.

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Re: Large Energy stocks - why not?

Post by just frank » Mon Dec 21, 2015 6:03 am

sawhorse wrote: There is a geological vs. economic mismatch. The countries most invested in solar power aren't those that can harness it best, and the countries that can harness it the best aren't invested in it. The climate of several sub-Saharan African nations is ideal for solar power, but those countries can least afford the initial infrastructure costs. The Gulf countries are also very suited for solar power, but oil is so cheap that there's no pressing need to use solar. So you get overcast high latitude countries like Britain leading the push. It's almost comical when you think about it.
This situation you describe was true enough when solar was expensive, but is becoming much less true now. At least the Brits are leading the way on offshore wind (in the sense of paying for the cost-reducing learning curve).

--California is both rich and has a lot of sunlight, and is rapidly growing its deployed solar...closing in on 5% of electrical grid energy delivered (not 5% of capacity), and doubling every 2 years. That should continue indefinitely now that the the fed solar rebate has recently been extended.

--The Gulf states are investing hugely in solar, because it offsets (as discussed upthread) their domestic oil consumption. They can still sell that oil overseas at a nice profit at $35, and solar kWh in the Gulf are still cheaper than their $35 oil fired elec generators. Dubai is currently building a mammoth 5 GW plant, which will be the worlds biggest. Thus solar fits well into their rational market share battle plan.

--Africa is also building out large and small solar. Morocco is building a nearly 1 GW, 6000 acre plant, and wants to be 40% renewable overall by 2020. A lot of africa has expensive grid power, and the solar there is dirt cheap.

http://www.tomdispatch.com/blog/176080/ ... young_man/

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Re: Large Energy stocks - why not?

Post by Valuethinker » Mon Dec 21, 2015 7:34 am

MY APOLOGIES if I have misquoted or misattributed anyone in the below due to the interthreading.

sawhorse wrote:I have really enjoyed this thread and have learned more than I expected, and I've found it more interesting than I previously thought.
carolinaman wrote:You and others present some very good explanations for oil economics: breakeven points, when to produce, when to drill new wells, etc. These explanations are based on rationality by oil producers. However, we may be in a situation where rationale actions are secondary to economic warfare and religious ideology.
Economic warfare is a good way to put it. I think the three countries that have the cheapest oil production (Kuwait, Saudi Arabia, UAE) want to drive out not only the US companies but also fellow OPEC members like Venezuela. There is a coalition of OPEC countries begging the Gulf countries to decrease production. It's like an economic civil war within OPEC.
I actually think what is going is highly economically rational. The Saudis have the lowest lifting cost in the world, and they need the cash to finance a huge capital expenditure programme (that high speed railway from Medina to Mecca for example) and a burgeoning population. Plus a war in Yemen and trouble elsewhere.

So they don't swing production. And other OPEC nations (except the small Gulf states) never really have-- in 1986 when the Saudis cut production the rest of OPEC just mopped up the difference. Saudis aren't going to make this mistake again. Let others, like Canadian tar sands and US frackers, take the pain as the high cost producers.
finite_difference wrote:I see very little future for coal. Even though the US gets 1/3 of its energy from coal production, I think (and hope) coal will continue to shrink. It's just too dirty. And it's why China is so polluted right now. As I understand it there's currently no way to make coal clean, barring some huge technological breakthrough.
I would like to see nuclear get developed more, but unfortunately it doesn't look like the political environment will allow it. Nuclear has the potential to be extremely green, but unfortunately the environmentalists don't seem to understand that argument.
Nuclear is c. 16% of US electricity and c. 8% of US energy in total (from memory). The problem with nuclear is not environmentalist opposition except in a few countries (like Germany). It's cost. The new nuclear power plants being built at Hinckley on the Bristol Channel in the UK will be the most expensive per MW of capacity every built-- and that's if AREVA/ EDF avoid the problems they encountered during the Finnish reactor (9 years late) and at Flamanville (5 years late).

Basically nuclear power is too expensive for a private sector utility to undertake *unless* the government guarantees the revenues (at £95/ MWHR inflation indexed, for 25 years, in the UK case ie USD150). Or a vertically integrated utility with the ability to pass on the costs to the consumer-- and even there (US case) there are government loan guarantees and incentives going in, etc.

OK the US gets c. 40% of its *electricity* from coal. That's nothing like 1/3rd of its *energy*. A common mistake. It only gets c. 2% of its electricity from oil. Add in a bit of home heating and oil (from memory) is 30% of its total *energy* (ie including transport).
I think oil will have a long future. All our cars depend on it. However it's possible that electric cars will take over but still that won't happen for several decades I think. But I don't understand how oil subsidies work. There are a lot of foreign factors. So the Saudis can increase production at a loss of $10 billion per year, but they can't support that indefinitely.
The Saudis are not losing money on any of their production. What is true is that their state budget is larger than the current oil revenues-- they have issued bonds for the first time in years (you heard that right, SA had zero government debt) and are dipping into their reserves, heavily.
Natural gas seems clean and a great way to heat your home, so although prices are depressed I would bet that has a long future too.

Fracking and tar sands I don't know much about. Frakking seems OKish but is still controversial and it seems like tar sands are pretty dirty -- if so tar sands may not be such a good bet.
Tar sands are very dirty unless someone comes up with industrial scale CCS (capture and storage). NG it looks like North America has huge supplies for the forseeable future, 10+ years out supply and demand may come more into balance and we will see a return to "normal" prices.[/quote]
If I had the money I'd bet 5-10% on oil and natural gas right now. Not on coal though.
I think it's unlikely that coal will rise in the United States, but the question is, will it actually fall, or will it merely stagnate?

I disagree that nuclear energy is being stalled by environmentalists. Rather, the risks of nuclear energy are too great. No one wants a nuclear plant near them. No company can afford the liability of a Chernobyl or Fukushima. No insurers would issue a policy for those companies.
You are ignoring the Andersen Act. The US, like many countries, underwrites the insurance for its nuclear sector.

The real problem is cost risk. The Chairman of Exelon put it well, it's too risky for a utility operating in competitive markets to invest $10bn of capital on one power station-- too much technical and financial risk. Nuclear, worldwide, is being killed by its cost, not by safety fears or the actions of environmentalists. There are exceptions of course (Germany, Japan).
Nuclear energy is great almost all the time, but when bad things happen, they are REALLY bad, and they stay bad for decades. Even if you're not interested in Chernobyl, it's worth reading this excerpt on a book about Chernobyl for the quality of the writing. The writer is Svetlana Alexievich, a journalist who won the Nobel Prize for Literature in 2015.

http://www.theguardian.com/environment/ ... gy.ukraine
There's also the long term waste disposal problem which is still unsolved. And the evidence shows no declining costs curves for nuclear power. What is gained in experience is lost in terms of higher safety specs, etc. Even for France, the poster child of a successful atomic programme, the last reactors were much more expensive than the earlier ones.

Grt2bOutdoors wrote:Coal is not going away, just ask India and China, if you don't believe me.
In China, coal is going away, literally. Their reserves can't keep up with usage. Due to geology, coal in China isn't as easily accessible as it is in the United States. In the United States, most coal mining is of the strip/surface type. In China, underground mining dominates. Underground mining costs more and requires large amounts of water which coincidentally is sparse in coal-laden areas.

China is investing more in solar equipment than any other country because they know that coal will soon reach the point in which marginal production costs increase as they're forced to drill deeper.
I think the issue is 2 fold. One the Chinese see an emerging market they have dominated via low cost production. Second they have a domestic air pollution problem which is threatening domestic stability. Experience in the US, Japan and other countries in the 1970s shows that once a country reaches a certain level of development, clean air and water become domestic political priorities.

After "the Great Fog" of London in 1952 (over 5,000 and as many as 20,000 died as a result of a very bad temperature inversion-- buses had men walking in front of them with flashlights to allow them to keep moving, in daytime) the Smokeless Fuels Acts were brought in. The Cabinet of the time thought that this would be impossible to implement but public demand was so great that it was done.

There's photos from the Pittsburgh Clean Air project (1960s) out there-- it looks like a Chinese city today.
Don't know about India.
Very bad air pollution problems, in some cases worse than China. Electricity system is a mess because subsidised electricity is a way politicians get votes. Sorting it out will be very messy. Coal of India is a partly state owned monopoly mess. They can import. Coal demand will grow, but probably not at the Chinese rate (India won't be a manufacturing superpower in the way China was).
Slick8503 wrote:Your comparison is not apples to apples. Solar is not continuous output. Solar's availability is not close to gas or coal. You are getting WAY more generated MW's for your money with a new gas plant vs solar or wind. Gas/Coal capacity factors run 70-90%, and solar is what? 30% on average? Probably less, depending on location.
It'll be interesting to see how solar technology develops. Certainly efficiency will improve over time.

There is a geological vs. economic mismatch. The countries most invested in solar power aren't those that can harness it best, and the countries that can harness it the best aren't invested in it. The climate of several sub-Saharan African nations is ideal for solar power, but those countries can least afford the initial infrastructure costs. The Gulf countries are also very suited for solar power, but oil is so cheap that there's no pressing need to use solar. So you get overcast high latitude countries like Britain leading the push. It's almost comical when you think about it.
In the long run, places like Morocco will ship power to the European grid. But there are all kinds of national issues (eg EDF prevents the Spanish from building HVDC lines over the Pyrenees) to be overcome.

Even within Europe, a Spanish or Italian solar array is going to be 2x or 2.5x as productive as a German one. Yet Germany has the largest installed solar GWage.

In Africa and parts of Asia there will be decentralized solar power. With storage or (already in place) diesel backup at night. Solar water heating is already big in places like Botswana.

What's going on here is disruption of the centralized utility model. How it will all pan out is not at all clear.
Ultimately, the focus must shift from finding new sources of energy, however "clean" they may be, to reducing energy consumption. People have been saying that for decades, and there have been improvements such as more efficient cars, but it seems that the improvements never outpace the increases in usage.
[/quote]

Maybe. There's not a lot of evidence that, if you take into account imports and "unmeasured" emissions like transport and shipping, that nations experience a topping out of per capita energy demand-- ie exporting your industry to China and then importing the goods is not a net per capita reduction.

There's lots that can be done, should be done, with energy efficiency. But so far, little or no sign that in the long run this means you consume less energy. People save money with LED lightbulbs, but they then spend more going on holiday, etc.

What matters is the clean ness of the energy-- low emission energy production. Energy efficiency is necessary and important (although the US very high per capita consumption is matched by Australia and Canada, suggesting geography has a lot to do with it) and getting the US down to say the level of the richest European states like Sweden and Germany in per capita energy use would be an amazing thing (and might be possible), but it's no panacea.
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Re: Large Energy stocks - why not?

Post by Valuethinker » Mon Dec 21, 2015 7:48 am

I am as guilty as anyone else of taking this off topic.

As investors, I do not see a case that we can better anticipate trends than the market as a whole. Regardless of our personal opinions re the environment, global energy trends etc.

It may be the case that the oil price is "undervalued". I don't think any environmental measures now on the table have an impact on oil and natural gas in the next 10 years, and maybe 20 years. Fracking by contrast will have a significant (and negative) impact on the price.

Coal is a "delta point" but again there we don't know how things will play out: most new coal demand will be in China, India and other emerging markets. And the stock market value of coal firms, globally, is now tiny-- so it's in the price as far as one can see.

I understand why people think Energy stocks are cheap but I would not suggest the average boglehead "play" this one.

https://t.co/0dVGnFJCAJ estimates investors have spent $25bn trying to "call the bottom" in oil.

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Re: Large Energy stocks - why not?

Post by just frank » Mon Dec 21, 2015 8:05 am

I don't think this is OT at all, @ValueThinker . The title of the thread can be interpreted as 'Why not go long large energy stocks?"

Let us count the ways.... :twisted:

The Coal business is in decline. Despite still being a very big business, and likely continuing for decades more in some form, nobody thinks its a good investment.

Oil is the next in line for multiple disruptions that reduce long term demand. Paris COP21 is an international commitment by 188 countries to foster that disruption in oil and coal as fast as possible using their national policies and financial resources.

I think it is safe to say that Bogleheads understand exponentials. Disruption is caused by exponential reductions in cost by new, superior technology.

A recent 40 min keynote talk on this coming energy disruption process here: https://www.youtube.com/watch?v=RBkND76J91k
Last edited by just frank on Mon Dec 21, 2015 9:50 am, edited 1 time in total.

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