President Trump And Energy Policy, You Can't Fight Momentum

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Includes: BP, BTU, CNTE, ENGIY, RDS.A, RDS.B, TOT, TSLA
by: Keith Williams

Summary

President Trump finding that Government is complex: Obamacare challenges.

Climate/energy issues are more significant as they have major economic and international implications.

Even if President Trump exits the Paris Agreement, will it make much difference (other than to the US)? The world marches on with climate action.

Australia shows resistance is futile.

Thoughts about investment in companies involved in climate/energy transition.

On the campaign trail Donald Trump treated rallies as theatre, where the goal was to whip up the crowd and get them behind him. In such an environment most politicians are wary about what they say, because the next town has a different audience and the news flows rapidly. Not Donald Trump, he was happy to play each crowd and hence he built up a complex web of inconsistencies that would eventually have their day of reckoning. Take Obamacare, which the Republicans had been railing against for 7 years. Donald Trump's statements on the campaign trail were full of inconsistencies, promising to throw the whole thing out to his right wing audiences, while saying everyone would be better off under his plan to his more moderate audiences.

The curious thing is that over 7 years no one seems to have done the work to establish what would replace Obamacare. Steve Bannon's "move fast and break things", isn't consistent with the world's proudest democracy. So it wasn't really surprising that the push to close down Obamacare didn't get anywhere, because within the Republican party there was no consensus about what to do. As Paul Ryan, Speaker of the House said, "we are going to have to live with Obamacare for the foreseeable future", indicating that there is much work to be done to find a healthcare plan that is better than Obamacare and doesn't disenfranchise 20 million citizens, with a tax cut for the rich. Of course true to form President Trump blamed the Democrats, although clearly the failure was within the Republican Party.

You might ask what the relevance of this is to energy policy? I think there is a lot in the Obamacare failure that is highly relevant to your investment in either new (low carbon) or old (fossil fuel) energy companies. At the highest level, the same issues that beset Obamacare are there for the energy transition to low carbon and the move to reduce greenhouse gas emissions to avoid global warming. However, the story is more complex because it is an international one, with the US being but one (albeit very important) player.

Differences between Obamacare and Climate/Energy Policy

Changing US health policy is an internal thing. While other Governments might look to the US to see how it is managing healthcare, whether the US has Obamacare or Trumpcare is not going to exercise a lot of attention in the international scene or indeed amongst other Governments.

Climate/Energy policy is different because the whole world is affected by climate/energy policies. Each country contributes to greenhouse gas emissions and hence has a role to play in addressing the problems of global warming. The fact that the US is the second biggest emitter of greenhouse gases is of major relevance.

Therefore while Obamacare is parochial politics, Climate/energy politics isn't.

President Trump's views on Climate/Energy policy

A recent article and commentary in Bloomberg puts the Republican Party position on climate change on a par with Nicaragua, Syria and North Korea. Eric Roston from Bloomberg says that the Republican Party is the only major political party in the world that doesn't accept the basic science underlying climate change. This gets pretty weird when James Delingpole asserted recently in Breitbart that the Great Barrier Reef is not under threat, when there was massive damage caused last year and this year looks likely to repeat the bleaching problem, which ultimately causes the death of corals. Perhaps an approaching cyclone might stir up the water and cool it down to prevent further bleaching this year.

Given the disdain for factual treatment of Climate Policy and need to decarbonise, one might expect that President Trump is going to reverse the dramatic action to decarbonise the US economy, especially the exit from coal. However, just as has happened with addressing what to do with Obamacare, it is clear that not all positions within the Republican Party are extreme concerning climate change.

Indeed Secretary of State Rex Tillerson is being targeted by Myron Ebell for his cautious approach to exit from the Paris Climate Agreement. Myron Bell is also attacking Ivanka Trump and Jared Kushner for advocating that the US remain in the Paris Agreement. Wise heads are saying that walking away from an international agreement is no small thing. And Tillerson's view is that the US needs to be at the table, when the rest of the world is taking action.

At this stage, apart from freeing up environmental protections, which will surely hurt American citizens, and an attempt to get various oil pipelines back on track, President Trump has been uncharacteristically quiet about what he plans to do.

Who knows who will win the internal tussle? Whatever, I think this is a much more complex issue than Obamacare. And it has to be faced soon.

Who owes whom?

A major preoccupation by President Trump in seeking to "make America great again" is getting other countries to pull their weight and pay their fair share, after what he sees as the rest of the world exploiting America's international role in many areas.

One area where America clearly hasn't pulled its weight is in the area of climate change, where America has grown by (until recently) being the world's largest emitter of greenhouse gases for many years. Basically America has grown rich while not paying for the pollution it has caused. This was formerly a major stumbling block in getting international agreement on climate change. In the end the developing countries have decided that, while the US hasn't pulled its weight (a reversal of President Trump's complaint), they are going to just get on with climate action because they are being hurt by the pollution and also they see an economic benefit to taking climate action. China and India are key countries with this new approach.

There are a lot of major US companies who understand this and look with apprehension as President Trump threatens to do a Steve Bannon ("move fast and break things").

I think the recent history of the Australian energy markets is instructive in helping understand investment in the energy transition.

The Australian experience

The bottom line for Australia is that its scientists were major innovators in the development of solar technology. Through lack of support at home, Australian-educated technologists ended up being highly influential in first Germany's and then China's solar revolutions. The result is little benefit to Australian industry from this innovation. If you don't get behind a major technology transition, you end up following it.

Australian Federal politicians have been antagonistic to exit from fossil fuels because they fear that Australia is so reliant on fossil fuels (notwithstanding that Australia has among the best solar and wind resources in the world). So there has been a policy vacuum and much antagonism to renewable energy. The result is that the country's energy grid has been brought to its knees through lack of forward-looking investment at a time when investment in fossil fuel (especially coal) is no longer possible. And the country has been dragged into the Paris climate agreement, while trying hard to stay at the end of the line and miss the good times that early adopters get. These are real issues that are relevant to investment.

The US has a much more robust and supportive entrepreneurial environment, and this has led to a number of transforming technologies relevant to the climate issue being advanced. The development of the electric car through emergence of Tesla (NASDAQ:TSLA) is a case in point.

The effect of a federal government can be critical to internal developments as is being seen in Australia currently. Fortunately both in Australia and the US, the states have a major say in energy investment and support for the energy transition.

Having indicated that Governments can have significant influence on major transitions, I do think the energy transition is now becoming unstoppable, so it is time to think about this when you review your energy portfolio.

Examples of different business plans concerning Climate action and exit from fossil fuels

I suspect that looking back on this time from a decade hence, it will be clear that there were many indications as to the future that we have trouble seeing now.

Here I provide some thoughts about 3 classes of fossil fuel energy companies:

i) "Kodak" companies intent on staying the same because they are the best at what they do and they think this provides them with a future;

ii) "A bob each way" companies: signs of change, but still heavily committed to a fossil fuel future;

iii) companies that have management that accepts the need to decarbonise and who are setting out to change direction or having new businesses that take advantage of the transition.

i) "Kodak" companies: The most prominent companies in this space are coal companies, such as Peabody Energy (BTUUQ), Cloud Peak Energy (NYSE:CLD), Contura Energy (OTCPK:CNTE). Deep down these companies don't accept that the changes are significant to their business activities. Many acknowledge that there is change happening, but they are confident that there will always be a role for them.

In general the energy companies most focused on President Trump helping their business plans are the "Kodak" companies. His actions are not going to save these companies.

ii) "A bob each way" companies: Most of the oil and gas majors ( e.g. BP (NYSE:BP), Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B)) intend to remain primarily as oil and gas companies, but they are becoming aware of the need to diversify with low carbon investments as climate action, including pricing of carbon and other headwinds for fossil fuels, becomes a reality.

iii) Companies planning to benefit from a low carbon future : These companies have management teams who have a priority to change the business of the company from a fossil fuel-based business towards renewable energy. Companies include Engie (OTCPK:ENGIY) which is transitioning from coal to solar, and DONG Energy (DC:DENERG) which is transitioning from oil and gas to offshore wind. Total (NYSE:TOT) has major investment in solar energy and storage, while retaining a major focus on oil and gas.

Conclusion

At this time it isn't clear what role President Trump is going to play in the energy transition, notwithstanding lots of threats during the election campaign. As I indicate, walking away from an international agreement is no small thing, and doing so is more likely to hurt the US than help it in the face of concerted international action.

The transition is happening, governments and companies in the US and around the world are engaged; these impact upon investment decisions and portfolio structure. Even if President Trump decides to "move fast and break things", it is unlikely that he can stop the momentum.

The companies mentioned above are but a few examples of the kinds of actions being taken by companies in the energy and transport space. Perhaps you might look at your energy and transport portfolio in the context of this kind of analysis, as currently many portfolios are skewed towards "Kodak" or "Bob-each-way" companies. I don't think this emphasis is a good way of navigating the choppy waters of the major energy transition.

I am not a financial advisor. I seek to make sense of major transitions in the energy and transport space. This includes trying to understand what role politics has in this process. If you find my commentary useful in thinking about your investments in this space, please consider following me.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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