Have the next 20 years for utility stocks already started?
August 26, 2019
At a conference earlier this year, I saw maybe the most surprising thing of my young career. An executive from big oil, declaring to a room full of individuals who had made the majority of their wealth in oil, "the oil and gas party is over."
The energy sector as a whole is changing, energy should no longer predominately refer to oil and gas because the growth is moving onto new technologies and the infrastructure to support them. Given this, it's not surprising that Maarten Wetselaar, head of Shell's new energies business declared earlier this year:
We are not interested in the power business because we like what we saw in the last 20 years; we are interested because we think we like what we see in the next 20 years.
It's possible for the first time we are seeing the public markets provide the data which indicates that statement may very well be true. For the first time since August 2015, the S&P 500 Energy Index (anchored by oil) is offering a higher dividend yield than the S&P 500 Utilities Index - that run in 2015 lasted only a month, we're going on month 4 this time and the spread is getting larger.
That's right, oil and gas companies are paying more for investors to hold their stocks than utilities even at a time when utilities face daunting challenges like business model disruption, increased regulatory pressures, and a risk profile that's come under scrutiny after the wildfires in California earlier this year.
Why is this happening? There are likely several factors, but there are a few major trends that are worth discussing.
- Climate change - over half of the Fortune 500 companies now have sustainability goals listed on their websites or inside their filings with the SEC. Major asset managers are also leaving oil and gas companies that do not address climate change in a major way. Just last month, the UK's largest asset manager dropped Exxon over fears that they were "inadequately addressing threats posed by climate change."
- China: China's economy is slowing, but it's also rapidly becoming less reliant on oil & gas thanks in large part to the adoption of solar and EV's. China is already the world's largest solar power producer and continues to make extensive investments in solar generation. Additionally, the EV market in China grew 126% in 2018, however, it's down to 2% in 2019. This could indicate a worst-case scenario for oil and gas. The Chinese economy is now slowing, yet even when it grows oil and gas companies are seeing less of the rewards due to the demand for renewable tech.
- Electric Vehicles - electricity consumption is now rising about 67% faster than energy consumption since the turn of the century and EV's are a major reason why. Since 2011, EV's are responsible for a cumulative reduction of 352,000 BPD (barrels per day) in oil consumption - for context, that's like removing Peru or Portugal's demand for energy daily. Even more concerning for big oil, 1/3 of that number came in the last year.
It's possible then, that the next 20 years for energy has already started, and that we're on a path of profound change in not only how the public market views the sector, but how private investors do as well.