Performance in EVs is cool to look at right now but seems to run contradictory to the ESG movement. In the IEA's roadmap to Net Zero by 2050, highway speeds need to be limited to 100km/hr to maximize energy efficiency and further reduce emissions. If we actually want to achieve these goals, cars need to be driven reasonably and this emphasis on production vehicle 0-60 and quarter mile times is missing the mark.I appreciate the outcome that you see, but most importantly the factors you see and how they'll work out. I disagree with the conclusions you're drawing but the thoughts behind the conclusions are valuable to me.
The changes that spurred my own adoption:
- the performance is crazy funI never cared about performance in a car - just gas mileage and reliability (27 years in a Honda CRX). Then I test drove a Model S and zowie! It's still not a feature I'd pay much for though.
- Refueling in the garage over night. I'd read enough that I was sure I understood this benefit. It was intellectual though, and took me something like 6 months of driving an EV before it really sank in. There's been a term around EVs for a long time - range anxiety - referring to running out of charge in one's EV. For me range anxiety has flipped. When I find myself in a rental or ICE for some other reason, I find myself refueling at 25-50%
With over night charging the refueling paradigm for transportation shifts to the paradigm most people use with their cell phones. Plug them in over night and its fully charged and ready to go for another day in the morning.
- Environment / climate change matter to me and I figured that if I could afford it and didn't make the shift, then I was slowing down the shift for everybody else. I also realize that this isn't a motivator for all.
- Not a motivator for me, but I've seen it articulated by others - national energy security. We can reduce our dependency on energy imports from other countries by generating electricity locally. The EV carbon and pollution footprint changes and improves with changes in the electricity production mix. ICE vehicles don't change (or at least change very little; there are some tweaks in gas formulation but at trivial scale by comparison).
I realize that many of these don't hold for all.
The primary dynamic that I see though is economic for the companies in the businesses. Whether car makers or oil miners, all of these businesses are very capital intense. The characteristic of capital intense businesses is a very high level investment in order to build the first unit of output. Car factory, oil well explore / drill / ship, pipeline transportation, etc.. These businesses can be crazy profitable when the investments have high utilization and can go bankrupt with bad utilization. I think of this sort of like leverage in the stock market - revenue up and downside carries with it outsized impact on profit.
My own mental model of what this will look like in the O&G industry (at much larger scale) is the coal mining industry. Somewhere around 2007 was the peak valuation for that industry. From then to 2017 the valuation on the businesses went down to roughly 0 - minor drops in market share, pricing pressure, combined to put companies through serial bankruptcies. Today, at least in the US, the remaining coal mines are owned privately and being operated as run-off assets; keep producing what's already in place but that's about it.
This is within a larger overall environment where coal's share of the countrywide energy pie dropped from something like 33% to 28%. Coal still has a massive share of the US energy pie today (20-25%?) and won't be going away soon, but the writing is on the wall. I've read of at least one circumstance where a colocated mine and electricity plant were no longer economic to operate. The fuel cost for the coal was so high that even with ~$0 cost to transport coal from mine to generation plant, the coal was still too expensive to buy and generate electricity with.
Today - any new or replacement capital investment for electricity production is cheapest via wind or solar. And its not by a little - it's a lot. New solar projects are selling their next 15 years of production at $20/MWh and lower. That compares to $60+/MWh for coal generated electricity, just for the fuel. More recently the solar and wind projects can incorporate sufficiently large batteries to level off / firm up the power provided and still keep the overall project budget and delivered power price in that $20/MWh range.
For O&G I see a very long runway where oil is being phased out. Probably the end of the century kind of time scale. But the business value of the companies will plummet to ~0 and that'll happen 'soon' (2030?). It will be WAY, WAY far in advance of significant drops in oil consumption.
I also see the best business valuation and operating characteristic for O&G is to operate existing assets and end exploration and drilling for new resources. I don't consider in-fill for existing wells / production fields as new investment (at least on land - deep sea is a different kettle of fish) - it's more like wringing the bit from the existing resource. The key here is that the companies being run this way have to stop borrowing money to fund dividends.
From my POV, if a company is borrowing money and paying a dividend, then the borrowed money is being used to fund the dividend. Money should only be borrowed in order to fund R&D and capital investment / maintenance. Using borrowed money to fund the dividend actually works reasonably well right now with trivial interest rates, but that's a party that can't go on.
For car companies a minor drop in ICE units is going to shift a low margin business from profitable to money losing fast. My guess is that a 10% drop in units will be enough to put most of these companies on the ropes. And the really tough thing for all of these car makers (Innovator's Dilemma) is that the primary competition for any really good EVs that they build, are their own ICE vehicles.
Ford will be replacing highly profitable ICE F150 sales with F150 Lightning sales. But the units won't be high enough to start to make them profitable. They'll need to build up to some minimal scale to become profitable and that will be cutting (replacing) the ICE F150 sales. The valley of death they need to walk to get to the other side (profitable EV sales) is going to claim a lot of companies. I don't know which.
And the economic dynamics that are so bad for the car makers is going to trickle down to the #1 demand source for O&G - transportation. That disruption is already happening with shifts in the fuel mix that is profitable for refiners. Some are setup so they can shift along with, maybe with modest capital investments.
In short - economics is going to drive the end of O&G, and they're already happening. The 2030 oil mining industry will be producing similar amounts of output as today, but company valuations will have gone down - probably to the level consistent with supportable dividend payments.
The US just recently achieved energy security on the O&G side and now we're looking at switching to rare earths that are almost entirely controlled by China. Good luck building any mines for this stuff in North America when nobody here wants it in their back yards.
I'm invested in companies that generate big free cash flow @ $40 WTI and already have the infrastructure in place while sitting on 20-30 years of proven oil reserves, so they require very minimal new cash. If we believe that Saudi Arabia will be controlling the market in the future, they currently need $60 WTI to break even with their economy being hugely reliant on O&G revenues and my companies will be raking in the money at those prices.
Capex towards new production is seriously low right now and I think the ESG movement will further exacerbate it. If demand doesn't keep pace, we'll be in for some seriously turbulent times in oil & gas. I see Brent going to $100 next year.
I'm solely concerned about whether the companies I'm invested in will have buyers for their product in 20 years and can't say I have any doubts about that!
