Investing Around U.S. Energy and Climate 'Policy'

 |  Includes: BP, COP, CVX, STO, XOM, XTO
by: Michael Fitzsimmons
U.S. Energy Secretary Chu was recently quoted in a Financial Times article:

“We’re in a crazy never-never land situation,” he said, describing how companies were not making investments and banks were not supplying loans because of the uncertainty about when, or whether, a cap on carbon would be imposed. “Let’s recognize that we’re postponing an inevitability.”

But Chu need only look inside his own U.S. Energy Department to discover the “never-never land” reality he apparently blames on others. As Obama and Chu have been pushing for legislation to impose limits on U.S. carbon emissions and set up a trading scheme through which large polluters would have to buy permits to emit more, they have meanwhile given overwhelming support to the largest polluter and carbon emitter: the coal industry.
Oil companies argue that Congress is trying to place an unfair burden on motor fuels by offering too many concessions to coal. For example, the Waxman-Markey bill that passed in the House of Representatives last year allocates 2% of allowances to fuel producers but makes them responsible for 44% of emissions. How do Obama and Chu square such legislation with their rhetorical concern about clean energy and the environment?
Wood Mackenzie, the consultancy, said last year the proposed legislation could threaten the sustainability of the US refining industry, costing US refiners an estimated $100 billion a year within three years. American consumers, already whacked in the head by the economic contraction, will pay the ultimate price at the pump since U.S. government policy has made sure there are no realistic alternatives to gasoline fueled cars and trucks. No wonder major oil companies are fleeing the refining business in North America.
It’s very ironic that Obama and Chu support policies that reward coal, by far the dirtiest of the fossil fuels, while enacting excessively punitive measures against gasoline refiners, and completely ignoring the cleanest of all transportation fuels: natural gas. A simple chart summarizing fuel source CO2 and particulate emissions prove this point:
Chemical Structure Complexity
Particulate Emissions
CO2 Emissions lbs/million BTU
60-80% Carbon
5% Hydrogen
Very Complex
Very toxic
C6H14 (hexane)
C8H18 (octane)
C5H12 - C36H74
156 (gasoline)
161 (diesel)
Natural Gas
CH4 (methane)
Click to enlarge

As the chart implies, why spend billions on an attempt to make “clean coal” by sequestering dirty coal carbon emissions when one could instead start with a fuel (natural gas) that emits 50% less CO2 to begin with and at no cost whatsoever? In addition, the administration completely ignores coal’s dirty little secret – the toxic heavy metal particulate “fly-ash” that is stored above ground all across the nation. Well, some of it isn’t above ground….the TVA’s Kingston, TN coal plant dumped its fly-ash into the Tennessee River – an event that has destroyed that river system for generations to come.
Obviously, Energy Secretary Chu does not understand basic chemistry. Perhaps our Nobel Prize winning physicist should trade in his chemical engineering degree from MIT and enroll in a freshman chemistry class at Georgia Tech.
An energy department that is “agnostic” about natural gas transportation and the most abundant clean and cheap energy resource the United States has is sitting in a front-row seat at Alice in Wonderland. Clearly, Obama and Chu are on the wrong track on both energy and climate policy. It’s a world of blatant and mystifying energy policy double-speak. So, to help them along in case someone in the energy department may actually be reading this article, here is a strategic long-term comprehensive energy policy that not only creates good paying jobs, will reduce the country’s dependence on foreign oil, and also addresses environmental and climate change in a logical and pragmatic fashion.
There is reason for hope. Obama's and Chu’s policies are beginning to drive big oil companies to embrace natural gas. Exxon Mobil’s (NYSE:XOM) pending acquisition of XTO (XTO) is a good sign. An even better development is the following pointed statement by Jim Mulva of Conoco Philips (NYSE:COP):

“House climate legislation and Senate proposals to date have disadvantaged the transportation sector and its consumers, left domestic refineries unfairly penalized versus international competition, and ignored the critical role that natural gas can play in reducing GHG emissions,” Mulva continued. “We believe greater attention and resources need to be dedicated to reversing these missed opportunities, and our actions today are part of that effort. Addressing these issues will save thousands of American jobs, as well as create new ones.”

Although Mulva clearly endorses greater use of natural gas in this press release, it is a very carefully worded statement which does not specifically endorse natural gas transportation. It appears to be a coy reference to suggest natural gas should be used instead of coal in the electrical generation sector, which I certainly agree with. However, shareholders like me who have seen COP invest billions in Burlington Resources and Origin (and have seen the stock drop as a result), would much prefer Mulva aggressively and specifically come out and support natural gas transportation in the United States. Why he does not do this is as mystifying as Obama and Chu’s unwavering love of coal.
Investment Advice
Speaking of natural gas, check out these XTO press releases from Wednesday on earnings and proved reserves.
These results are outstanding. They further support my opinion that Wall Street’s response to Exxon Mobil’s acquisition of XTO is unwarranted. The stock has dropped around $40 billion in market value, which is close to the total all-in price XOM will be paying for XTO. XOM is a screaming buy at today’s $65.65 price (despite the paltry dividend yield). While I frequently take criticism for advising people to buy XOM stock, I would point out it is up 75% over the past decade (not counting dividends) while the S&P was flat or even a bit negative. During the oil price spike of 2008, XOM traded at $95/share. Who doubts it will again visit such levels sooner rather than later? While XOM is a strong and secure investment, the potential for greater stock price appreciation is clearly in the smaller oil & gas E&P companies that are little fish compared to the big fish in the energy universe. I’ll leave it as an exercise for the reader to do homework in this area.
Obama and Chu’s love of coal suggests investing in coal companies. From an economic, environmental and moral standpoint I cannot bring myself to do so. In the long run, the myth of “clean coal” will be exposed for the oxymoron it is. The administration’s policies will ensure billons of dollars and many years will be wasted doing so. As a result, these wrong-headed policies mean the U.S. will continue to wallow in economic stagnation, bouncing between deflation and inflation as economic growth is continually cut off at the knees by high oil and gasoline prices.
In addition to nice dividend paying companies that pay you to wait for the next oil price spike (BP (NYSE:BP), COP, Statoil (NYSE:STO), and Chevron (NYSE:CVX) come to mind), an investor should consider energy service companies (for which I predict industry consolidation and perhaps even fold-in mergers between energy and energy service companies). However, my favorite investment for the years to come is gold and silver bullion, ETFs like GLD and SLV. Gold traditionally fares badly in good economic times. On the contrary, it is a great asset to own during times of inflation or deflation and is therefore the perfect hedge against the unwise energy and economic policies of Obama and Chu.
Disclosure: Long BP and COP