We've read four bullish articles on energy investing the last two weeks, not the least of which is the article written (can't recall the source) by a 3rd party on why Charlie Munger, Warren Buffett's long-time partner, loves the energy sector, and thinks energy will post huge gains in coming years.
We are long only one holding in the sector currently, and that is Halliburton (HAL), which has had a nice return for clients since we added in the low $30s during the summer of 2012, when the guar gum issue raised its ugly head for the oil service companies.
Truth be told, we've never been good energy investors so this article might be perceived as "confirmation bias" but here is our reasons for staying out of energy, and in particular the crude oil or petroleum segment:
1.) With gasoline refining driving 50% of crude oil demand, I can't help but think the growing popularity of hybrids and electric cars will make a permanent dent in gas consumption. Currently, per the last source we read on TheStreet.com, one half of 1% of all cars on the road were hybrid or electric. But I consider this technology to be analogous to the PC in the late 1970s: expensive, not well understood and just waiting for its moment. The popularity of Tesla (TSLA) (no positions) and the growing popularity of the hybrid will eventually get to mainstream America once the battery and re-charging stations get to mainstream America.
2.) More and more I'm seeing corporate fleets, which are "natural gas" powered. Again this would reduce the demand for petroleum and gasoline.
3.) Per the Obama Administration goals, and a Motor Trend article, the EPA's goal is "53 miles per gallon" by 2025. Although this article is dated September 2011, I can't believe with the current Administration policies that this has changed much in two years.
4.) Although strictly anecdotal, living just north of downtown Chicago, the city is doing everything it can to get citizens on bicycles. Chicago is putting racks of bikes scattered on more and more popular traffic sites and allowing citizens free rental for 30 minute trips. More importantly, city streets are being converted to "bike-friendly" passages, which is forcing more people onto bikes, and fewer people in cars. More and more I'm looking to use my bike anywhere around the City of Chicago (within reason). This will likely reduce cabs on the streets, and is giving people many reasons not to use their cars. This trend seems to be growing too in places like New York and other cities. Whether this shift in transportation mode sticks or not remains to be seen.
5.) More and better production of US reserves, not to mention the looming privatization of Mexico's vast oil and natural gas fields, which has (supposedly) reduced US oil imports.
For me, these trends are lining up to produce a materially lower crude oil price, and eventually a lower price for gasoline.
Bullish case for energy is easy: the recovery in global economies as the global central bank's monetary easing starts to work its magic in Europe, Japan and eventually China.
Exxon Mobil (XOM) is out of favor and very unloved, but we'd only look hard at it near $80 per share.
Natural gas is the most intriguing sector to me of the sector. We owned Encana (ECA) for a while, but sold out when it didn't pop with natural gas last winter.
Finally, the trends in energy earnings growth estimates is (to be blunt) underwhelming:
2013 and 2014 Expected Energy Sector Earnings Growth
Source: Thomsonreuters data
As the reader can quickly see, energy sector earnings growth estimates are below the S&P 500's estimated earnings growth for both 2013 and 2014, which means relative earnings growth is below the benchmark, both for this year and expected to be below for next year.
To be sure, sub-sectors within energy can do well, even though the numbers for the entire sector look punk.
We are putting our logic out on Seeking Alpha because I want readers to prove me wrong, and tell me where I am wrong in terms of my thinking and logic.
Tear this article apart if you feel otherwise.
However, my own simplistic view is that within the US and elsewhere we are still finding more oil (higher supply) and the growth in demand for the electric and hybrid vehicle should reduce the demand for gasoline over time (i.e. more supply).