Posted by on in Energy

Oil: The Biggest Economic News of 2014

Oil: The Biggest Economic News of 2014

The precipitous drop in the price of oil and an almost equal sell off in oil stocks has been the most significant financial and perhaps industrial event of 2014. Even bigger than Alibaba’s IPO in September.

The reality is that we shouldn’t be surprised. In the last forty years, the price of WTI has only trended over $100 per barrel six times. Except for 1980, each time WTI reached this level it fell off a cliff. In 2008, it fell from $140 to $40 in five months. In 2011 it fell from $133 to $88 in three months. In 2012 it fell from $103 to $86 in two months. This year it fell from $107 to $55 in five months.

One thing that is for sure; big oil has seen this before and will batten down the hatches to weather the storm. In the last two weeks, dividends have been cut and capital expenditures have been ripped to shreds. Here in Canada, Canada Oil Sands was the first out of the block to cut dividends by 42% on December 4th. On December 12th, Cenovus Energy cuts its capital expenditures 15% to $2.5 billion. Penn West announced yesterday that it was cutting dividends from 14 cents to 3 cents and capital expenditure from $625 million to $215 million. Similarly, Husky announced yesterday that it is cutting capital expenditures from $5.1 billion to $3.4 billion. More cuts were announced today and more will follow.

The oil industry has been whacked but will survive. It has done so in the past and it will do so again. However, there will be a significant impact to world markets, currencies and countries.

Russia is in deep trouble. The average Russian is becoming an expert in currency control. Closer to home, Jim Prentice, the Premier of Alberta, said last week that no Albertan will be spared pain if oil prices remain low.

But what will a long term drop in the price of oil mean for cleantech, advanced materials and venture capital as a whole.

Cleantech:

  • Fortunately, the solar and wind markets should not be impacted very much. The reason is that petroleum-based fuels only account for 5% of electricity generation. Natural gas is more important than oil and the price of natural gas decoupled from oil several years ago. In fact, the price of natural gas has only fallen 17% this year and 26% from its high in March. Furthermore, the average cost of large scale solar has dropped 20% in the last year and nearly 80% in the last five years. SunPower is down 35% and First Solar is down 40% in the last three months. Could this be a buying opportunity?
  • Electric vehicles will become less attractive. Tesla’s share price has fallen from $260 to $205 in the last month.
  • Sustainability expenditures by oil and gas companies will be brought to a bare minimum to meet regulatory requirements. Examples include reduction in CO2 and tailings reclamation. Oil companies just aren’t going to put the environment ahead of their shareholders. They never have and they never will.

Advanced Materials

  • Chemical companies will see margins and cash flow increase as a result of the drop in one of their biggest input costs. Any petroleum-based chemical or material has all of a sudden become cheaper.
  • Consumer discretionary purchases will increase because people have more money in their pocket. Automobiles, TVs, computers and smart phones are just some of the items that will see an uptick. All of these items use an abundance of advanced materials such as semiconductors, conductive coatings, films, display materials, etc. On December 16th, 3M increased its dividend by 20%.
  • Airlines and travel will see an uptick. Planes are using more and more advanced materials. The new Dreamliner 787 has a fuselage made from carbon fiber and windows with electrochromic smart material. Airline stocks are up 10-20% in the last three months.

Venture Capital

  • Oil and gas companies will reduce and in some cases stop making venture capital investments. I just can’t see executives putting money into VC funds or early-stage companies when they are cutting dividends to their shareholders. The good news is that unless there is contagion in the overall market, I don’t see this spreading to other strategic corporate investors.

So as we depart 2014, the drop in the price of oil has made significant news. It has rocked countries, companies and shareholders. I predict that the worst is over and that oil has reached its bottom. Consumers, countries and companies are making adjustments and adjusting to the new oil reality. Advanced materials will emerge as a winner and cleantech will have some bruises.

General Partner, Pangaea Ventures Ltd. Chris is the founder of Pangaea and has been working with cleantech and advanced material companies since 1997. Chris is a lawyer by training and served as a partner with Osler, Hoskin & Harcourt.View Chris Erickson's profile on LinkedIn

Comments

  • No comments made yet. Be the first to submit a comment

Leave your comment

Guest
Guest Tuesday, 21 February 2017