Energy: Christmas Comes Early for the Solar Industry *** INDUSTRY FOCUS ***

Energy: Christmas Comes Early for the Solar Industry *** INDUSTRY FOCUS ***


Sean O’Reilly: The force is strong with the
solar industry on this energy edition of Industry Focus. Greetings, Fools! I am Sean O’Reilly
joining you here from Fool headquarters in Alexandria, Virginia. It is Thursday, December
17th, 2015, and joining me to talk all things energy and materials is Tyler Crowe and Taylor
Muckerman. What’s up, guys? Tyler Crowe: Going pretty good. Taylor Muckerman: Interest rates, that’s what’s
up. Crowe: Interest rates, oh my God. O’Reilly: That actually leads us right into
our first story here. Everybody run for the hills, God help us all, the Fed just jacked
up rates 0.25%. Crowe: And then … nothing happened. O’Reilly: Well, the market rallied, but it
just gave it all back. Muckerman: Is it down today? O’Reilly: Yeah, it’s down what it was up yesterday. Muckerman: 1.5% today? O’Reilly: That’s right, it kept rallying. Crowe: Yeah, it kept rallying after Yellen
kept talking, and I was like, “Okay, you apparently like what she’s saying?” Muckerman: Basically, the economy’s strong
enough, and interest rates aren’t rising fast enough. O’Reilly: Yeah, do you guys care about this? Crowe: We were just talking about this beforehand.
This is my personal opinion — the Fed rate hike was a lot like, I think, the Y2K scare
back in 1999. Everybody was panicked about it, and people were talking about all these
hypothetical situations of what could happen– O’Reilly: All the nuclear weapons are going
to go off at once. Crowe: Yeah, how it was going to be this staging
point of inflation. Muckerman: “Algorithms aren’t going to know
how to handle non-zero interest rates!” Crowe: Yeah, because we’ve had zero interest
rates for seven years, and we jacked it up 0.25%, and everyone just went, “blah, whatever.” O’Reilly: They’re saving the confetti for
New Year’s. Muckerman: I mean, the only thing as I could
see is, higher interest rates might lead to a stronger dollar, which could lead to more
pressure on oil prices. O’Reilly: The dollar was already rallied in
anticipation all year. Muckerman: Yeah, that, and, other countries
are easing monetarily. In the last seven years, we’ve tapered off that, but other countries
are following suit, so their currencies are getting weaker. We’re the strongest country
in the world, so our dollar is reactive currency. Crowe: Yeah, and it’s funny, it does work
to our advantage a little bit. Going to the energy sector, we’ve been talking a lot about
the oil boom, natural gas boom in the United States. We’re still a net importer of oil.
So, with a really strong dollar, we’re getting … well, it is denominated in dollars compared
to other people, but on imports, we get a pretty big bang for the buck when we’re talking
about the dollar right now. O’Reilly: Actually, on that note, first time
in 40 years, U.S. producers are allowed to export oil. What’s up? Muckerman: What? Crowe: Again, another blah moment. It’s something
we’ve been talking about for years, when’s it going to happen, and then it happens right
when oil prices are in the tank and we’ve had the narrowest spread between domestic
and foreign– Muckerman: But is that on a dollar value or
on a percentage value? Because prices are low. I didn’t dive in to look at the exact
number of the spread. Crowe: I don’t have the numbers in front of
me, but it was pretty close. I think there was actually a point last week where West
Texas Intermediate sold at parity to Brent. Muckerman: Okay, then even on a percentage
basis, it’s closer than normal. Because, yeah, there had been like a double-digit percentage
gap there for a while. O’Reilly: The irony is, they did this after
U.S. production finally seems to be pulling back, and they’re willing to list it now,
I guess, because we’re actually producing a decent chunk of oil here, even though we
are still importing a decent amount. Is this good for us? Not necessarily just as a country. Muckerman: I don’t know. We’re not the cheapest
producer in the world, so I don’t know if we could sell at the cheapest price on the
market. We’d still have to ship it. Mexico produces its own oil, Canada produces its
own oil, those are some of our biggest trading partners. I would imagine they’re both in
the top three or top five. So, I don’t know who were going to send this oil to necessarily. O’Reilly: Well, Tyler, what were you telling
me six months ago about how refineries– Crowe: It’s got to do with quality of oil
and our refinery capabilities. Muckerman: Yeah, because we were built for
Middle East oil. Crowe: Middle East oil, heavy, nasty crude
that we could actually turn into ultra-low sulfur diesel and gasoline. The theory now
is, we’re producing a ton of light, sweet, very easy to refine, high yield on gasoline
crude oil. And outside of the United States, refinery complexity, it’s a measure of people’s
ability to take crude and turn it into high yield products, outside of the United States,
refinery complexity is quite low. You look in a place like India, on what is
called the Nelson complexity index, they have refineries in the three to four range, which
is quite low, versus a majority of American refineries are in the nine, ten, eleven range
for refinery complexity, which means that we can take that heavier oil– O’Reilly: There’s a little bit of an arbitrage
here, is what you’re saying. Crowe: A little bit, yeah. Because that heavier
oil normally sells at a discount, because there’s not a lot of people who can refine
it. So, the idea is, we can take that really bad oil, turning into refined products here,
and sell it at a market rate– Muckerman: Which is largely Canadian and Mexican
oil. Crowe: Exactly, and then take our nice premium
oil and sell it somewhere else at a higher rate than we can take in cheaper– Muckerman: You said that with a jig, by the
way. O’Reilly: Oh yeah, for those of you who can’t
see. Tyler, you have some moves there. Crowe: I know, right? Muckerman: It’s the interest rate dance. Crowe: Speaking of that — I don’t know if
you guys saw this, but there’s another news site called Quartz. I feel we should have
gotten this, there were actually commemorable t-shirts that said “I survived the Fed rake
hike of December 2015,” and it had the chart of Federal interest rates. O’Reilly: Yellen was talking about, by the
end of 2016, being up just over 1%. So I want to have a “1% of Bust,” or something. Muckerman: What year? O’Reilly: End of 2016, a year from now. Muckerman: Okay. We’ll see. O’Reilly: “1.25% or Bust.”
Well, before we move on to discussing the Christmas present that Congress gave the U.S.
solar industry, I wanted to point our listeners to the newly redesigned focus.fool.com. There,
you’ll discover a special offer to join The Motley Fool Stock Advisor newsletter for all
Industry Focus listeners. All loyal IF listeners have access to a special discount on Stock
Advisor that works out to $129 for a full two-year subscription. And if you join, as
part of your Stock Advisor subscription, you can check out exclusive content from Tyler
Crowe and I’s recent trip to Houston, Texas, where we interviewed executives from National
Oilwell Varco and DistributionNOW. I don’t know if you want to add anything there, Tyler?
It was a good time? Crowe: Great interviews. I sat down with CEO
Clay Williams for over an hour, just talking about the business in general. A lot of the
things that you think about as a long-term investor, not just, what are the margins and
that stuff, but stuff like leadership, corporate culture, what has allowed them to blossom
as a corporate leader in the oil and gas space, beyond just, “They’ve got a good balance sheet.”
So, if somebody’s looking to get into the people-end of the business, it certainly was
a great talk. O’Reilly: And DistributionNOW, I interviewed
the CEO, Workman, and he noted how he and his team, they have leadership classes once
a month or something, they hand out books and stuff. So, it’s definitely in their DNA
to focus on culture and stuff. Crowe: Yeah, it was really fun to see in contrast
with some of the stuff that we talked about on an everyday basis. Muckerman: Probably thank Pete Miller for
that. Crowe: Oh, it totally was, because when we
went to go do them, Robert Workman actually did mention, “Well, we weren’t planning on
doing this, but I sat down with a beer with Pete Miller.” And he was like, “Oh, I
got this interview request from over at The Motley Fool–” O’Reilly: “These jokers over at The Motley
Fool.” Crowe: “I don’t wanna do it.” And Pete Miller
was like, “You go on, and you do that.” Muckerman: Respect my authority! O’Reilly: So, guys, I don’t know if you’ve
noticed, but solar’s got a little bit of a pop. Crowe: Something like that. Muckerman: A little bit. As hot as the surface
of the sun, those stocks. O’Reilly: Congress gave them a Christmas season. Crowe: It’s the season of giving. O’Reilly: They extended the tax credits, God
bless us, everyone. Crowe: They gave the oil industry an export
lift. O’Reilly: The Republicans had to give something
to the democrats. Crowe: “You get a subsidy! And you get a subsidy!” O’Reilly: The extension actually went further
out than I thought. It goes into the 2020s or something? Crowe: And even beyond. O’Reilly: Give us the primer. Crowe: This is the proposed bill that’s on
the omnibus spending, what’s been added. Basically, instead of the investment tax credit at 30%,
basically getting chopped for all residential in 2017, and down to 10% of commercial, it’s
being extended all the way out to 2019 at that 30% rate for both. And then, in 2020,
it goes down a few percentage points, 2021, it goes down a little further, and then at
2021, it goes down to 10%. Muckerman: Which is what it should have done
in 2016, right? Crowe: Right, but that’s for both, residential
and commercial. 10% for what appears to be perpetuity. They don’t seem to have a real
limit on when that 10% subsidy goes down. O’Reilly: Taylor, did this throw off any Excel
spreadsheets for any businesses? Muckerman: It sure seems so, if you saw SolarCity
sell off about 50% just a few weeks ago, and now it’s up 100% back to where it was. So,
yeah, some people didn’t see this coming. This tax credit cut was looming over everybody’s
head. Now, they’re getting it back for a heck of a lot longer than I think anybody would
have expected. It’s amazing what they can stuff inside a bill that has to pass Congress
before it shuts down. O’Reilly: Because that was a $1.1 trillion
spending bill. Crowe: It was a big one, yeah. Just give everybody
enough to sweeten the pot a little bit to keep it going. But, one of the interesting
things, like you were saying, the big sell off in SolarCity, one of the reasons it did
have that sell off was, on its most recent earnings, they were talking about scaling
back gross and working within their cashflows. Muckerman: It was actually making a profit,
but it sold off. O’Reilly: Well, they lowered their growth
profiles. But it was like, “We’re only going to grow at 60% per year, or something.” Crowe: It was kind of an admission that the
Federal tax credit in 2017 was going to have a pretty large impact, and we’re going to
try to adjust our business model before it got there. Not driving to the edge of the
cliff at 60 mph and then trying to hit the brakes. They were trying to tap it before
it actually happened. O’Reilly: You guys may or may not know the
answer to this– Muckerman: Thanks for the confidence. O’Reilly: I feel like I’m about to get a “Congress
isn’t that smart” comment, but did anybody work when picking the year that these would
drop to the 10% or 0% that they were going to drop to next year? Just about efficiencies
of solar cells and everything, by the end of the decade, we think these will actually
be competitive to where we don’t need to subsidize them? Crowe: I really doubt somebody in Congress
did that. Muckerman: Not because they’re stupid, but
because this is not their avenue of expertise. Solar experts could have predicted that. Crowe: Yeah, maybe a solar lobbyist would
have been able to chirp something in somebody’s ear, but I have a hard time thinking members
of Congress are looking– O’Reilly: So they picked these years out of
a hat. Crowe: –really intensely looking at cost
per kilowatts of installation of the solar panel, and saying, “Yeah, if we start to taper
at this rate, we’ll be good.” O’Reilly: I’m giving them too much credit,
I’m sorry. Muckerman: It was pretty interesting at the
Paris conference, and another speech recently, Elon Musk was talking about, if you just took
a small corner of Nevada and covered it completely in solar panels, you could power the entire
United States. O’Reilly: What about transmission lines? Crowe: That’s the problem, right? Muckerman: Yes. If you imagine breaking that
up and putting it in four corners of the United States, the same acreage– O’Reilly: Maine is not a good place to put
solar panels. Muckerman: Well, New Jersey is one of the
biggest solar states in the country in terms of growth over the last five to ten years.
So, clearly, somewhere in the Northeast, we could do it. And then, this other article
I read said if you just covered the entirety of Spain in solar panels– O’Reilly: Europe’s good to go? Muckerman: No, you power the entire world. O’Reilly: Oh. Wow. Spain. Wow. Muckerman: That’s all it takes at the efficiency
we’re at now, so imagine if we get more efficient. O’Reilly: Which is, I don’t know, at best
23%? Muckerman: Something like that. O’Reilly: Cool. Moving on to, another one
bites the dust. Magnum Hunter Resources files for Chapter 11. I think this company was a
penny stock? Crowe: It was close. Muckerman: There’s a few of those penny stocks
out there in energy parts. Crowe: They’re not the only one, yeah. Muckerman: It was a $2.5 billion company in
2014, at its peak. O’Reilly: Yeah, so, was this just, was their
cashflow that bad? A lot of people are doing a lot of finagling right now, and these guys
just couldn’t? Was it that bad? Muckerman: Well, if you look at their balance
sheet over the last three of four years, you can see that debt to equity, debt to capital
creeping up and up. It was like, 40%, 60%, 100%, 170%, and now it’s just too late. They
can’t survive. Their income was decent, they suffered this year. But, interest and coverage
ratios just weren’t there. This was a darling of the shale patch for quite a while. O’Reilly: Where were they operating? Crowe: Marcellus and Utica. In terms of an
attractive place to be– O’Reilly: Yeah. They weren’t in western Pennsylvania
or Michigan or something. Crowe: No, they were. Muckerman: Yeah. O’Reilly: I should have guessed. Crowe: They were in Ohio, right near home
state. You don’t have one of their rigs in your backyard? Muckerman: Not anymore. It’s owned by some
bank now. Crowe: Also, on a small side note, I find,
there are certain CEOs in the energy industry who are very good cheerleaders for their stock,
for their industry, or whatever. And the CEO of Magnum Hunter Resources, I’m sorry, I don’t
have his name in front of me right now, he is an amazing cheerleader, and can find — he
can put lipstick on the ugliest pig. One of the statements that he made was, “This is
going to be an unprecedented move that’s going to make Magnum Hunter Resources–” O’Reilly: Gary Evans? Crowe: Yes. “It’s going to make Magnum Hunter
Resources a stronger company, they’re going to re-emerge as one of the leaders in the
shale patch again.” And I was like, your company just filed for Chapter 11, and you’re talking
about how wonderful this is going to be. Muckerman: Above all hope. O’Reilly: It’s just a re-organization, Tyler. Muckerman: What a great organization. O’Reilly: Did he get a golden anything? Crowe: No, he’s still there. O’Reilly: It’s just a re-organization, like
I said! Crowe: A golden opportunity to wipe out all
shareholder value and turn all the bond into equity later on. Thinking about this a little
more broadly, one of the things that I think is holding the industry back, we talked a
lot over the year, “We need to see some bankruptcy so that production will roll off, and it’ll
help correct prices.” But, as this says in their Chapter 11– O’Reilly: They’re going to keep pumping, baby. Crowe: They’re still pumping. And a lot of
these companies that are filing for Chapter 11 are still producing, and it’s not really
helping the situation, because they have to find some way to pay off all those debts,
and the only way they know how to do it is pump oil. So, if we’re not losing production
from companies going bankrupt, where are we going to lose it? O’Reilly: Obviously, their capex will drop,
because it’s really hard to approve the capex budget in bankruptcy court. So, naturally,
those will decline, I would hope. Muckerman: An immediate drop isn’t going to
take place, but eventually. O’Reilly: Yeah, I would think decline rates
are the only saving grace there. So, we’ll see. Moving on from western Pennsylvania to– Muckerman: Where are we going next? O’Reilly: The Russian Federation! Oh, there
so many fun jokes we’re going to be able to make with this segment. Russia is for sale.
Anybody at the table want to buy anything there? O’Reilly: No? Muckerman: No. O’Reilly: You don’t trust Putin to not take
your assets or anything? Muckerman: Yeah, I’ll stick to American shale
patches. O’Reilly: An article in the Wall Street Journal
states that Russia could sell a stake in Rosneft to bolster its finances. I guess I could sell
it to the Mafia? Muckerman: The shale geopolitical war is working,
Russia’s crumbling. O’Reilly: I mean, I know Russia is hurting.
Their currency’s crashing. But we don’t know too much about their budget, do we? Muckerman: Well, we know they’re not meeting
it with current oil prices. Other than that, they have the reserves– Crowe: I think it’s something like 40% of
their federal budget is tied to oil royalties. Muckerman: They’re producing at record levels
… because prices are so low. Crowe: We’re going to make it up on volume!
No, I’m just comparing them in my mind to the budget of Saudi Arabia, because it sounds
crazy, but I’m pretty sure Saudi Arabia is more open and honest about their budgets than
Russia. Muckerman: They might be. Maybe. Probably
because America has a little bit better relations with Saudi Arabia. O’Reilly: Who would buy this, Tyler? Crowe: Well, BP bought it seven years ago.
BP has almost a 20% stake in Rosneft. To be honest, I would not be surprised– Muckerman: How’s that working for them? Clearly
not great, if they’re trying to sell– O’Reilly: Fool me twice, shame on me. Crowe: They get a couple hundred million dollars
in dividends every years. O’Reilly: Pay a few salaries. Crowe: I would not be completely surprised
if you did see a big oil company come in and take a small slice of the pie. BP is obviously
there, so it’s not like this is completely, what would you say, a fixed book or something? O’Reilly: Actually, all joking aside, wasn’t
it ExxonMobil a year or two ago, when the Crimea stuff started to happen and we were
all like, “Rrrr, Russian is terrible, blah blah blah.” And Exxon said, “No, we’re just
going to keep doing business with them, it’s fine.” Muckerman: Yeah, they didn’t shake it off.
I don’t know if it was Exxon, but I remember a story about a big oil company doing that.
If you want access to the Arctic, this is a pretty decent shot. Crowe: If you want access to the multiple-billion
barrel shale oil reservoirs in the Bazhenov and things like that, you need to have some
partner in Russia. And ExxonMobil has worked with Rosneft extensively over the years. I
would not be completely surprised if, and we say we wouldn’t buy it, obviously, as individual
investors, it would be difficult. But I can see a big oil company looking at that and
being like, “Eh, it’s not a bad idea.” O’Reilly: Do these companies worry about being
lied to? Muckerman: Who knows. They deal with China,
they’re chomping at the bit to get back into Iran as soon as that was re-opened back up.
So, they’re not pouring all of their eggs into these terrible countries. One rotten
egg here, one there, one potentially rotten egg. So, they’re not totally putting their
company on the line with these bets. Crowe: And you also have to give these big
companies credit because, oil is what you call a geopolitically critical resource. You
have companies that are national oil companies, basically run by states in certain places,
and all of these integrated majors work with them, in most of these places. And you almost
have to give them kudos for being able to manage the political minefield that it is,
actually getting through this. O’Reilly: We’ve got better politicians at
ExxonMobil than Congress. Crowe: Maybe better diplomats. O’Reilly: Yeah, diplomats. Muckerman: Another safety blanket, though,
is these countries need to produce oil, since they are mostly are state-owned. O’Reilly: They need the technology. Muckerman: So, like, Saudi Arabia is not going
to let the oil industry fail. Iraq’s not, Russia’s not. So, they’re going to step in,
and they’re going to take the necessary precautions to ensure that these state-run oil companies
are– Crowe: Total signed a deal. O’Reilly: I was going to ask you about them. Crowe: Earlier in the year, they signed a
deal with the Abu Dhabi on-shore petroleum company, and it’s been a commission project.
And it has some of the lowest cost production, and it’s actually been one of the reasons
that Total has been successful these past few quarters, and remaining semi profitable
on its upstream production versus other companies. O’Reilly: Well, that’s it for us, guys. If
you’re a loyal listener, and you have questions or comments, we’d love to hear from you. Just
email us at [email protected] And before we go, guys, it is book week here on Industry
Focus. What are some of your favorite investing books? Crowe: I guess I’ll start. Probably two. One
of them, I really doubt — I wouldn’t say go out and buy it. If you can find a copy
that a friend has– O’Reilly: A free giveaway pile. Crowe: Don’t buy it. On Amazon, it’s $1600,
don’t buy it. It’s Seth Klarman’s “Margin of Safety.” Great book. Muckerman: There’s PDFs online, you can find
it, I have it on my Kindle. Crowe: It’s a really great read, it’s kind
of a more modern version of “The Intelligent Investor.” I think it’s a really good one.
Or, if you’re looking for something a little bit simpler, I really like “The Little Book
that Builds Wealth” by Pat Dorsey. Muckerman: The author has said, he doesn’t
mind if people use PDF. It’s expensive because it’s no longer produced, so it’s a collector’s
item. So, don’t feel bad if you’re going out and reading a PDF form. He put it out there
for the general investing population to learn from. My book, I’m gonna stick with energy, I’m
going to say “The Frackers,” because if you don’t understand what’s going on in the shale
revolution, how it came about, who were the key players that got it kick-started– O’Reilly: Who wrote that? Muckerman: Gregory Zuckerman. Crowe: We actually did an interview with him
last year around this time. Muckerman: Yeah, it came out last summer,
or somewhere around there. But, it’s not necessarily an investing book, but if you want to understand
how the heck we’re doing what we’re doing, and what’s actually going on behind the scenes,
tremendous read. It’s a great story, too, so you’re not just sitting there, “Oh my God,
this is so confusing, all this petrochemical science!” It’s nothing like that. So give
it a shot. It’s a short read. Crowe: Wall Street Journal reporter went out
on the oil patch to learn about it, and delivered it in a way that is entertaining. O’Reilly: Awesome. Well, that’s it for us,
thanks. As always, people on this program may have interests in the stock they talk
about. The Motley Fool may have formal recommendations for or against those stocks, so don’t buy
or sell anything based solely on what you hear on this program. For Tyler Crowe and
Taylor Muckerman, I’m Sean O’Reilly, thanks for listening and Fool on!

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