Quick reminder – Merryn will be interviewing Charles Plowden of Baillie Gifford on Thursday. If you haven’t already registered to watch it, make sure you don’t miss out!
Back to this morning – I saw a very striking chart on Twitter the other day. Dylan Grice of Calderwood Capital (an occasional MoneyWeek contributor) noted that electric car-maker Tesla is now valued at roughly the same amount as the entire S&P 500 oil sector.
“The equity market seems to be saying that oil has no future, and that energy transition is basically here. I feel like that’s jumping the gun.” Needless to say, I agree.
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A future of self-driving hover-cars
One day our cars will all be electric. One day they will all run on batteries with incredibly long life expectancies. One day said batteries will all be charged up via the wind and the rain and the sun.
In short, we will drive (or rather, be driven) to and from our destinations in weather-powered vehicles, and the only environmental impact will be the bits of our cars’ tyres that rub off on the roads, which will no doubt then become the next big headline enemy we have to deal with, at which point we’ll finally get the hover-cars we’ve all been waiting for since the 1950s (or the 1980s, if Back to the Future is more your era).
That all sounds lovely and I can’t wait, but it isn’t happening today. And it isn’t happening tomorrow. It may take a while longer and, in the meantime, as one Robert Burns once put it, “the best laid schemes o’ mice an’ men gang aft agley”. In other words, the market should probably be pricing in a little bit of uncertainty, given that, as Grice points out, the energy transition hasn’t actually arrived yet.
Yet, things still seem heavily weighted towards the Tesla end of the argument. There are some utterly extraordinary statistics in John Authers’ Bloomberg newsletter this morning: Tesla is now the sixth-largest company in the US by market value; it is the world’s largest car maker on the same measure.
Not only that, when it joined the S&P 500 index last month, it single-handedly rendered “Wall Street’s estimates for five-year earnings growth more optimistic than they had ever been”. In other words, analysts expect Tesla’s earnings to grow so rapidly that its inclusion in the S&P 500 has distorted estimates for the entire index.
Anyway. Is it a tech bubble? Is it a green bubble? Is it just a Tesla bubble? Who knows? Shorting Tesla (or anything in its vicinity) feels about as sensible as running out in front of one of its cars just after the driver has decided to stick the autopilot on and snatch 40 winks.
A better way to express and profit from scepticism on the Tesla bubble is to look for “anti-bubbles”. And the most obvious one here is not so much in the other car makers (though they might be worth looking at), but in the old-fashioned energy sector.
How to invest in oil
Markets are starting to wake up to the fact that the death of oil might have been over-exaggerated. When the price of a vital commodity turns negative (as oil did briefly in April last year) then even the most gloomy of oil analysts had to feel that something of a bottom might have been reached.
Since then, we’ve had ongoing abstention by producers, with Saudi Arabia springing a surprise production cut on markets earlier this month. The oil majors are focusing on grabbing headlines for their “clean” investments. Just this morning, Shell has bought Ubitricity, which owns the biggest public electric vehicle charging network in the UK.
And yet, life is returning to oil markets, even as the price steadily recovers from the tough days. As Justin Jacobs in the FT reports, the number of rigs for drilling oil and gas in the US has risen for nine weeks in a row and is now about 40% higher than at its low point in summer 2020. Oil services companies have been reporting better than expected fourth-quarter earnings, as activity starts to pick up.
As ever, the market has anticipated the rebound, with the S&P oil and gas equipment and services sector up about 60% in the last three months alone. And yet, the industry really is recovering from an extremely low ebb – oil producers are not keen to splash the cash yet. As Jacobs notes, the biggest driver of the industry in recent years has been desperately-expanding US shale producers – and those days are over now. Shale players, having been told off by their investors, are “now consolidating and shifting to an emphasis on profits over production growth”.
That in turn indicates that supply of oil will recover more slowly than demand for oil. So while in the long run, oil may well be doomed in favour of electricity, I suspect there’s at least one more boom-and-bust cycle to squeeze some juice out of here.
What does it all suggest? You can invest in oil in a number of different ways. My colleague Dominic has always viewed BHP Billiton as the best bet (yes, it’s best known as a miner but it gets a lot of its money from the sector and appears to be a better play on the oil price than BP or Shell).
That’s just one idea. We’ll have more in MoneyWeek magazine as we look more into the burgeoning new commodities supercycle in coming issues. If you’re not already a subscriber, get your first six issues free here.
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