When looking for clues as to market trends it is always useful to examine share price. This can often be your first clue as to emerging paradigm shifts or just health of a particular industry in general. In the case of energy, some interesting paradigm shifts are occurring which seem to be flying under the radar at present. For instance, a quick look at the share price of oil and gas companies, particularly those engaged in the self styled “shale revolution” to those engaged in competing energy activities such as solar, is eye opening to say the least.
If you are an investor, positive returns on portfolio assets are important to your future wealth. If you’re running a company, share price becomes critical because it can affect different metrics. An upward trajectory in your share price, for instance, can beneficially impact your company’s ability to tap into the capital markets to raise more money for future growth. This can be crucial in an industry like shale extraction which has significant capital requirements. Shale wells, whether gas or tight oil, are very expensive to drill and complete.
In addition, there are more layers. Markets are considered leading indicators. This means that patterns which emerge in share prices can indicate an underlying, but not necessarily obvious, pattern in the broader economy. Though it is often obscure at first, the markets can be pointing to a potential new trend. That is why it is so important to examine share pricing and make comparisons within a particular industry or within competing industries.
The shale revolution has been characterized by a frenzy of drilling for dry gas, liquids and tight oil. While the industry has indeed produced large quantities of gas and oil, its business model is questionable over the long term. Shale operators have relied on massive amounts of cheap debt to finance their activities though the wells themselves are not proving to be the energy panacea industry purports. This has been confirmed by many independent entities but most recently by the University of Texas which states that shale potential has been considerably overstated. Tad Patzek, head of University of Texas at Austin’s department of Petroleum and Geosystems Engineering, spoke with the science journal Nature. Patzek was quoted as follows:
“‘The results [of our study] are “bad news”… With companies trying to extract shale gas as fast as possible and export significant quantities… “we’re setting ourselves up for a major fiasco'”.
Equally significant is the reaction of the stock market to these shale operations.
Examining share prices of companies engaged in shale extraction over the past two years, it quickly becomes apparent that investors don’t see great potential in shales. Given its self promoted image of being revolutionary, this should have translated into share price returns that are above average. Taking five companies which are considered the darlings of the shale industry, Continental Resources, Chesapeake Energy, EOG, Range Resources and Cabot Oil and Gas, the best performer was EOG racking up 50.32% in gains over the past two years. While this may sound like a reasonable return, it pales in comparison with its solar competition. Further, EOG’s oil and gas peers fared much worse. Continental, for instance gained a mere 15.67%, Chesapeake 10.46%, Cabot -4.2% and Range a dismal -25.97. This is not revolutionary performance.
Interestingly, companies engaged in solar generation have share performance figures that are significantly better. Solar City, Canadian Solar, Jinko Solar, Trina Solar and SunPower have amassed returns ranging from 132.89% to 588.47% over the same time frame. The worst solar performance is double the best oil and gas performance. The best solar performance is ten times better than the best oil and gas performer.
But perhaps most importantly, a trend is emerging with regard to how the markets view the future prospects of oil and gas against that of solar. In other words, the markets appear to be telling us that there is no comparison. Solar has more future potential than oil and gas. Moreover, this same pattern of underperformance in these large independent oil and gas producers is also occurring in the Majors. Companies like Exxon Mobil and Shell have provided mediocre returns compared with the Dow. These same companies used to be the leaders of the Dow. Now they are the laggards.
A new energy paradigm appears to be emerging. Investors have unambiguously voted with their dollars and solar was the clear winner. Perhaps this isn’t turning out to be a shale revolution so much as a solar eclipse.