Few Things to Know About Our Current Energy Transition from Fossil Fuels to Renewables.

In a discussion hosted by Bridgewater Associates (the world's largest hedge fund), Daniel Yergin discussed the current energy transition, geopolitics, and government. Daniel Yergin emphasizes a few things about our energy transition:

• Energy transition to oil from coal took nearly a hundred years. 
• Instead of trying to control oil supplies, now we are trying to control materials used in batteries and solar panels. Increasing lithium and cobalt prices pose a challenge for electric vehicles. 
• Electric vehicles may need subsidies to make them affordable. 

Governments can offer subsidies, but the loss of revenue due to the subsidies need to be compensated by higher taxes, lower social benefits, or higher deficits. The world is grappling with excessive debt levels and does not have the flexibility to take on more deficit spending. Take the example of Japan, where the outstanding government bonds have crossed one thousand trillion yen for the first time.    

You can watch the Daniel Yergin discussion on YouTube.  

Energy Transition will be Messy and Expensive. Hold on to Your Barrel of Oil for Now.

Many people anticipate that electric vehicles will win the transportation race and replace the internal combustion engine. Many journalists and energy experts have been warning for a while that the transition from fossil fuels to renewables will be messy. Daniel Yergin says that we are in an energy-mix era. 

Lithium - one of the critical materials used in batteries - is in short supply, and its prices have increased by 5x. Electric vehicle battery costs are set to increase for the first time in a decade. 

Meanwhile, European Union is beginning to realize that they cannot simply abandon nuclear power and still keep the lights on. They plan to classify nuclear power and natural gas as "green" power sources. In my opinion, there is no such thing as fully green energy. For example, lithium mining and mining for other materials in producing an electric vehicle are damaging to the economy. The world needs good recycling technology to create a circular economy and minimize emissions and environmental damage.       

General Motors Ultium Battery and Global Vehicle Platform for Electric Vehicles.
(Source: General Motors)

The surge in oil prices in the past year, coupled with the reluctance of oil companies to invest in new oil discoveries, could lead to higher energy prices and even an energy shock. This lack of investment in new oil supplies could increase inflation.   

I am going to buy Total S.E. (NYSE: TOT) on any short-term weakness

Total S.E. is on Bank of America's Top Rated Stocks list. When I saw that name, I was intrigued. Why is an oil giant from Europe on this list? I have done my research and found out that they have a growing green energy portfolio for which they are not getting much credit now.  I am going to buy on any short-term weakness (below $45 may be a start) and put it away for a long time and keep collecting the dividend (6.6%).

(Source: Google)

Exited my position in Redfin and Energy Recovery

I had written about Energy Recovery Inc., (NASDAQ: ERII) on my blog on July 25, 2020. I had taken a small position in Energy Recovery on July 24, 2020 at $7.70. Since then the stock has had a nice run and I sold my position today at $8.50 for a 10.3% gain. The technical indicators are still flashing a buy for Energy Recovery. But the stock has had a sharp run-up. The MACD also had a bearish crossover and that was partly the reason for my sell. The Relative Strength Index was at 63 today and I did not wish for it be in the over bought territory before I sold this position. 

Exhibit: Energy Recovery Technical Indicators on August 11, 2020.

 (Source: Tradingview)

I took a position in Redfin on August 10, 2020 at a price of $41.80. I never had full conviction for this trade. I felt Redfin (NASDAQ: RDFN) was too overvalued and there were too many uncertainties in the economy and in the housing market. Given the loss of unemployment benefits for millions of Americans, I wasn't sure how this was going to impact the demand for housing. The Federal Reserve has done an admirable job of lowering the interest rates and stabilizing the financial markets. But even they cannot create jobs or pay unemployment benefits or prevent evictions. So, I felt that the economy is in a very precarious position.  In this current situation, I did not want own a company like Redfin. It may be a speculative bet at these valuations and economic conditions. I sold Redfin at $43.50 for total gain of 4%.   

 

     

     

Iberdrola and Orsted - The Global Renewable Energy Giants

      This was the headline from the Financial Times that caught my eye:

(Source: FT.com)

    The article talked about how the US spending on wind power is set to go from zero 10-years ago to $78 billion in the 2020 decade. That is a truly astounding turnaround in the fortunes of the renewable energy sector. A couple of years ago I had heard of this renewable energy company called Iberdrola from Spain. At that time I briefly read about it in the financial news and did not do an in-depth research into that company. This headline spurred me to action. We are in the midst of a far-reaching energy transformation that could transform every aspect of life by the year 2035. I wanted to learn more about not just Iberdrola but also Orsted - which is another renewable energy giant from Denmark. I don't remember hearing about Orsted until it was mentioned in this Financial Times article.

    Iberdrola comes from a very long history that dates back to the 20th century. The Wikipedia entry for the company makes for a fascinating read. Today it is one of the largest energy companies in the world with subsidiaries in multiple nations across the globe. Its subsidiary in the U.S. is called Avangrid. Avangrid has about 7,000 employees in the U.S and is headquartered in Orange, Connecticut. Iberdrola had revenues of € 36,437 million in 2019. In 2018 its revenues were € 35,075. Its EBITDA exceeded € 10 billion for the first time in 2019. Avangrid is traded in the U.S stock markets in the NYSE under the symbol AGR. 

    Orsted on the other hand had total revenue of DKK 67,842 million in 2019 (€ 9,113 million Exchange rate as of July 18, 2020: 1 Danish Krone = € 0.13). In 2018 the company had revenues of DKK 76,946 million (€ 10,336 million). Orsted had EBITDA of DKK 17.5 billion (€ 2.35 billion) in 2019.