Generational Investing: Divesting Away From Fossil Fuels
Summary
- Strong economic reasons why renewable energy will overtake fossil fuels.
- Fusion energy is here and it is basically free!
- This strategic shift is because of our commitment to generational investing.
- Manycarbon-based energy assets may be stranded due to renewable energy usage.
Introduction
My wife and I are merely stewards of a certain amount of capital that has been in our family for generations. It is our duty to invest this for the long term (30 years minimum) and find stable but growing assets. Through research, we have decided to divest from fossil fuel extraction companies to a large extent. These companies have become an impingement on the portfolio performance. (We will not name them specifically because we don't wish to have this writing viewed as a polemic against any company). We now understand that the long term viability of renewable energy will provide a more stable and growing asset base since many of the renewables like wind and solar are now competitive or less expensive than traditional electric power.
We are planning to replace the standard large-cap equity exposure in our portfolio with an ETF or mutual fund that contains few or no fossil fuel companies.
Thesis of renewables vs. fossil fuels
The economics of certain renewable electric energy sources are at the point of equality with fossil fuels, and in the case of many wind and solar farms, cheaper; but always, renewables are less polluting and quieter. Clean fusion energy is available and free; look to the sky! (But do so with caution for your eyes.)
There is a major trend change in electric energy production and delivery. The old way is centralized fossil fuels; the new way is distributed renewables. Developing countries will be the greatest beneficiaries of distributed electric systems. There are many forms of renewable electric energy; however, wind and solar seem to be leading the rest. Demand for electricity is growing, but efficiency is too. Look at the LED (Light Emitting Diode) residential light bulb price decline of just the last two years! Everything I'm writing about is to some degree anecdotal; however, it indicates that a major trend change is occurring.
Imagine that just nine years ago, Thomas Friedman discussed the future need for simple lighting:
"All of this is being driven by the rate of growth of the world's population. We're adding a billion people every 13 years. If all they required was a single 60 watt light bulb for four hours a day, we would need twenty new 500 megawatt coal burning power plants."
(Source: Thomas Friedman from his book, "Hot, Flat, and Crowded" 2008)
Now, with new technology, villagers don't need those power plants; companies can supply solar powered lamps for them. Their governments (with help from the wealthy developed countries) can subsidize the solar cells instead of huge power plants. This would displace many kerosene lamps, even at 200 milliliters per day when multiplied by 900 million families living on less than $2.00/day, it is significant.
In spite of crude oil coming up recently to trade solidly at $50+, the oil majors have not participated to the degree one would expect. The trend away from traditional energy has begun, apparently in earnest a few years back. This chart shows the divergence of the S&P 500 (SPY) vs. the energy tracking (XLE):
Source: Google Finance 2017
Economic Analysis
Potential demand for household power is huge. Consider the needs of the developing countries, where more than a billion people don't have any electric power.
Please view the attached video presentation by Professor Jay Coggins, Department of Applied Economics at the University of Minnesota. The main point of the presentation is the economic reasons why renewable energy is happening and will continue to accelerate capacity because his research shows it is less expensive than adding fossil fuel capacity.
(Click on image below for the video.)
Source: Jay Coggins, University of Minnesota©
If you are pressed for time, please skip to time frame 7:23-11:30 to hear Professor Coggins state the scale of capital needed in the next few decades and state the case for long term investment in renewables.
Currently we spend about 8% of Gross Domestic Product (GDP) - $1.7T in the US on energy. (12:33)
Citigroup (C) commissioned a large study comparing action and inaction. (16:24)
Wind is less expensive in Minnesota with Excel Energy (XEL) and in other parts of the country and solar beats gas for a new electric generation project. (21:30-25.20)
Land area required for all solar electricity in the USA. (32:50)
Subsidies to oil and gas companies comparison chart. (43:40)
Carbon stranding and accelerated selling of assets. (34:50)
No one can predict the timing of the crossover point where renewable capacity exceeds conventional power production. There is ample evidence that the trend is accelerating.
From Scientific American:
"The report found that U.S. wind energy will continue to be one of the lowest cost electricity generation technologies available, with the long-term wind electricity price available through a power purchase agreement coming in at about half the expected cost of just running a natural gas power plant." Scientific American 2017
From British Petroleum (BP):
"Despite high growth rates, renewable energy still represents only a small fraction of today's global energy consumption. Renewable electricity generation (excluding hydro), is estimated to account for nearly 8% of global electricity generation. Renewables do, however, play a significant role in the growth of electricity, contributing almost 40% of the growth in global power generation in 2016." BP 2017
This graph gives one a quick measurement of consumption relative to energy source in the USA. Obviously, the demand for renewables is still small but gained the most in 2016.
Decision Makers Leading
China is leading the way in renewable energy commitments. The country plans to invest about $361 billion in renewable, low carbon energy by 2020.
Saudia Arabia's national oil company Aramco plans to sell up to 5% of itself in a massive IPO. This is a huge change in sentiment from the largest oil producer in the world.
Britain plans to ban sale of all diesel and petrol cars and vans from 2040 onward.
Duke Energy (DUK) goes big on solar, drops nuclear charge for customers a $6,000,000,000 investment.
The large utility company Xcel (NYSE:XEL) plans to increase renewable energy supply to 41% by 2021.
Volvo (STO:VOLV-B) becomes the first major car manufacturer to go all electric by 2019. They claim the global electric fleet will match internal combustion vehicles by 2050.
Mercedes-Benz (ETR:DAI) will offer electric versions of all its models by 2022.
It's not just in high-price gasoline Europe:
Ford (F) and General Motors (GM) plan to expand their electric vehicle lines.
India plans to sell only electric cars by 2030 .
The island of Kauai (Hawaii, USA) is now about 40% solar with batteries. Tesla's systems replaced the main diesel generator at about 14 cents/KWh. (TSLA)
Interesting Technology Examples
Dear readers, before you get all riled up, many of these examples are not scalable to utility size. The purpose here is to list human inventions that are useful and efficient renewable sources of energy:
A recent example is a large floating solar plant in China.
Here is a small device, if one has a nearby stream or river and a stick and line:
Energy to go: the world's smallest hydropower plant | Eco-at-Africa
Source: Deutsche Welle Copyright March 9, 2017
Lithium companies are attracting solid investments: LIT Latest News & Analysis - Global X Lithium ETF
Our fellow Americans in Kentucky have a bright future in solar, I was really glad to see a good use of the old coal mines.
The Hyperloop, first proposed by Elon Musk, CEO of Tesla and SpaceX, is now approved as feasible and insurable by a major reinsurance company. Very fast and very efficient as proposed.
Action
We based our decision to divest fossil fuel producers purely on the economics of renewable resources, not necessarily where the industry is today but where it will be in the future. I see renewable electric production in a nascent state compared to total usage. I place a lot of respect on the research done by Professor Coggins in the above video where he emphasizes that economics will drive the switch to renewables.
We've now sold off most of the drillers, field support and oil majors starting back in 2012 when I decided crude would never reach $100 again because of the rise of the fracture producers. Now sources tell me that there is great supply of fracture oil and gas available at about $60 crude spot. If one calculates the inflation adjusted price of gasoline, it is obvious that there is little price appreciation in US dollars since 1980.
Therefore, we have decided to replace the large-cap equity exposure of the fossil fuel related stocks. We currently have 25.74% in an S&P 500index fund which has 5.9% energy. Low fees are important so the focus shifts to Exchange Traded Funds (ETF). If just starting out using monthly purchases, we would probably choose one of the mutual funds with low exposure to fossil fuels so that commissions on the ETF would not reduce the buying power. You can see our current total allocation table at the end of this article. For the IRA accounts, switching to an ETF is justified because it's a tax-sheltered trade; however, for our taxable accounts, we don't want to pay capital gains taxes at this time, so we won't trade. Below is a list of possible candidates:
The Calvert U.S. Large Cap Growth Responsible Index Fund (CGJYX) is a non-energy mutual fund and carries a low fee of .32%. It is a small fund at $52M and contains only .52% energy.
ProShares S&P 500 Ex-Energy ETF (SPXE) but it's thinly traded and only $7M of assets.
SPDR S&P 500 Fossil Fuel Reserve Free ETF (SPYX) -might be a better choice of ETF - dividend is similar to SPY 1.77% vs. 1.86% for SPY. With $180M in assets and growing, it does have oilfield support companies and metallurgical coke companies allocated to 1.6%, so not a pure non-fossil program but a close proxy.
Pax Global Environmental Markets Fund (PGRNX) has no fossil exposure and emphasizes water pollution control. Even with high expenses at 1.23% delivers alpha against most measures. Since it is global, it's not suitable for our trade.
Since our portfolio is with a large financial advisor, we have access to an institutional class fund: DFA U.S. Sustainability Core 1 Portfolio (DFSIX) which has a small component of refiners and vertically integrated oil majors and also cover 2100 stocks, so not a direct replacement for the S&P 500; however, low fees at .25% is good.
Another candidate is (ETHO) is based on the Etho Climate Leadership Index (ECLI) - an index of more than 350 companies listed on the NYSE Arca stock exchange that have the smallest carbon footprint in their industries. It has a pretty good gain against the (SPY) for the short term and is a low fee ETF (.49%). ETHO has no energy holdings so that fits our criteria. It has $21M in assets.
Comparing the three finalists in the graph below, compared to (SPY) one can see relative performance is similar or better for the fossils free/low securities for the last 19 months.
Source: Google Finance
The risk, in our opinion, is owning the fossil fuel reserves so (SPYX) is the best choice in a limited field. We intend to trade out half of the position and wait on adding more or going into one of the other finalists.
Conclusion and Outlook
I still drive a gasoline car in Minnesota. It is a 2008 with 70k miles on it, way below average for a Midwest car. I'm retired now but even when I was working it would stay parked for days and weeks on end because my city has excellent bus and light rail service. We also have a hybrid sedan for the stop and go driving in the city. Liquid fuel internal combustion engine transport is not going away anytime soon, especially in rural areas; however, as I stated above, the major new trend is clear to me.
We own assets that we want to pass on for future generations with a mandate to take only a little and grow the rest. We have concluded that divesting from fossil fuels to renewable energy is the right decision to more growth with less risk due to carbon stranding. I hope the oil majors will allocate some capital to renewables; they have great talent and intellect available to do this. As a society, it is important to create permanent infrastructure - when an oil well dries up you have a liability for a hundred years, when a solar panel expires, you can replace it and recycle the old one.
As shown above in the Economics section, renewables are still a small percentage of total energy production worldwide; however, they have an accelerating growth that will benefit investors long term.
Disclosure:
We own an equivalent to (SPY) jointly. I wrote this article myself, and it expresses my own opinions and actions. 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. Below is our current allocation across all accounts whether IRA or taxable:
Emerging Markets Core Equity | 6.97% |
Foreign Small/Mid Value | 4.16% |
International Value Stock | 7.78% |
US Large Cap Value Stock | 6.21% |
US Micro Cap Stock | 2.07% |
US Small Cap Value Stock | 4.05% |
Intermediate Bond Fund | 10.87% |
High Yield Bond | 4.49% |
Emerging Markets Bond | 1.54% |
Foreign Bond | 3.39% |
Intermediate-Term Bond | 9.52% |
S&P 500 Index Fund | 25.74% |
Foreign Large Growth | 8.03% |
Small Cap Growth Index | 4.05% |
Cash & Money Market | 1.13% |
This article was written by
Analyst’s Disclosure: I am/we are long SPY. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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