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Don’t Let Peak Oil Sneak up on You

Source: Insider Monkey.com

Discussions about peak oil usually degrade into a shouting match between environmentalists and energy companies. It may be entertaining, but what is most helpful is to take the facts and then act accordingly. A combination of these facts show that the energy is getting more difficult to discover and investors need to find forward looking companies that are willing to think outside the box.

The Facts

  1. Oil is more difficult to discover than it was 50 years ago and it requires more energy to extract.
  2. Technological development has opened up possibilities. Ultra-Deepwater, oil sands, and fracking are all examples of this growth.
  3. Prices and capital spending continue to increase. Even within this context it is difficult to provide substantial increases in the world’s oil supply like those seen in previous decades.
  4. The rise of national oil companies is an important trend. Over the past couple decades the world’s reserve to production ratio has increased, but in the non-OPEC world the reserve to production world has decreased.
  5. Renewable energies are growing.

The Summary

Conventional oil supplies are being constricted. The growing power of national oil companies relative to the free market will strongly affect the investing sphere. Midstream, downstream, and integrated oil firms will be able to work within traditional western free markets and in joint ventures with national oil companies. Having the technological ability and experience to work in more complex formations will be a critical skill set.

World Crude Oil Production data by YCharts

Where to Invest

TOTAL S.A. (ADR) (NYSE:TOT) is France’s national oil company. This integrated oil company has a large amount of downstream assets that help to provide stability. A critical aspect of any company is the management. A firm may be in a great industry with no debt and strong growth, but if the management is sub-par eventually the company will fall. The fact that Total’s management is willing to consider serious constrictions in the world’s oil supply shows that they are forward thinking and have not sold their souls to one story.

Total has a total debt to equity ratio of 0.48. The firm has more debt than ExxonMobil, but TOTAL S.A. (ADR) (NYSE:TOT)’s balance sheet is healthy. Its gross margin of 30.5% is around the industry average. The company is a strong firm with decades of experience trading a P/E ratio of just 8.7.

Solar

Total is a major investor in SunPower Corporation (NASDAQ:SPWR). Solar is still developing and Total shows foresight by investing in the industry right now. SunPower is operates under an integrated approach. It produces high efficiency panels in order to help reduce total system costs. In some markets it also operates a leasing model to reduce costs to the end user and drive more sales.

The solar industry has seen rough times recently and SunPower posted an EPS loss in 2011 and 2012. Things are starting to improve and it is expected to turn a profit in the next couple years. Its total debt to equity ratio of 0.74 is not perfect, but it is much better than that of many Chinese competitors. Its gross margin of 15.6% is strong and shows that the company has pricing power even in the midst of the current downturn.

The Oil Sands

Suncor Energy Inc. (USA) (NYSE:SU) has decades of experience in Canada’s oil sands. A major advantage of Suncor relative to other oil sands firms is that Suncor has upstream assets. North America is experiencing midstream constraints and heavy oil sells at a discount due to lack of pipeline capacity. Suncor’s upstream assets help to offset potential losses in their downstream operations. The company also boosts very low operating costs with their decades of experience and facilities built before the recent boom. Its gross margin of 53.4% is evidence of this strength.

Suncor Energy Inc. (USA) (NYSE:SU)’s total debt to equity ratio of 0.26 is very low and shows that the company has room to grow. Recently the company was forced to take a write down on an expansion project. Midstream constraints are causing management to be more conservative until the new pipelines are approved. At a P/E ratio of 17.4 Suncor is not cheap, but it is a good company to watch.

Conclusion

Peak oil advocates and peak oil deniers both have good points. Oil is more expensive and more difficult to discover. Yet, technology helps to offset some of these costs by increasing production from current fields and helping to find new ones. Investors can combine these insights to invest in forward thinking energy firms that are preparing for an increasingly energy constrained world. These three companies offer different ways that investors can profit while helping to support global energy stability.

The article Don’t Let Peak Oil Sneak up on You originally appeared on Fool.com and is written by Joshua Bondy.