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  1. Home
  2. / Investing
  3. / Energy

It's Not Easy Going Green

The message is clear: Buy traditional energy stocks.
By TIM MELVIN Nov 25, 2014 | 04:00 PM EST
Stocks quotes in this article: RDC, TDW, MIND, DWSN, GOOGL, CVX, RDS.A, COP

While most of us are stuffing ourselves with Turkey and trimming while watching Uncle Harvey plow through the family's gin supply, one subset of society is going to have a hard time focusing on food and football Thursday. Oil traders will be checking their smartphones and sneaking into the other room to check news from OPEC's meeting in Vienna. OPEC is divided going into this meeting, with the Saudis, Kuwait and the United Arab Emirates content with lower oil prices, while Venezuela, Iran and Iraq desperately need higher prices. Most observers believe that the oil pumps will stay at current levels and that prices will continue to weaken into 2015.

As important as the OPEC meeting is for the short- to intermediate-term direction of oil prices, something even more important happened recently for the long-term direction of carbon-based energy. Two engineers that worked on Google's (GOOGL) green energy project RE<C, Ross Koningstein and David Fork, wrote in IEEE Spectrum that at the end of the day, green energy is simply not yet a viable alternative. According to their article, they started out highly confident that with steady progress using renewable technology that a green future was just around the corner. What they found out was very different.

In a commentary on their article that appeared in The Register, Lewis Page pointed out, "Even if one were to electrify all of transport, industry, heating and so on, so much renewable generation and balancing storage equipment would be needed to power it that astronomical new requirements for steel, concrete, copper, glass, carbon fibre, neodymium, shipping and haulage would appear. All these things are made using mammoth amounts of energy: far from achieving massive energy savings, which most plans for a renewables future rely on implicitly, we would wind up needing far more energy."

In short, the cost is higher than the benefit, so a breakthrough or new disruptive technology is needed to make green energy a reality.

From an investor's point of view, this is a simple message. Buy energy stocks, especially those with good old dirty sources like oil, coal and natural gas. Global energy use is going to grind higher in the decades ahead and most of that demand is going to be met by the big three dirty fuels. Emerging markets such as China and India have no intention of large-scale conversion to renewable energy. They may make noises and even sign treaties that promise that 16 years from now they will think about reducing carbon footprints, but they will dig and burn the cheapest fuels they can find to drive growth.

Eventually the global economy is going to get on track and the current excess supplies of oil and gas will begin to be consumed. At that point we will see capital expenditures in the industry pick up again and drillers like Rowan Cos. (RDC) and oil-services like Tidewater (TDW) will see business increase and their stock prices recover. We will begin to search for oil and gas again and that will be fantastic news for seismic data companies like Dawson Geophysical (DWSN) and Mitchum Industries (MIND) that currently trade at sizable discounts to book value. It will probably be an adventurous ride, but long-term ownership of the largest coal stock, Peabody Energy (BTU), is starting to makes sense as well.

Blue-chip buyers can get in on the energy resurgence in the decades ahead as well. Right now several energy giants, including Chevron (CVX), Royal Dutch Shell (RDS.A) and ConocoPhillips (COP) all trade below their Graham number valuation. All three pay strong dividends, and ConocoPhillips and Chevron have strong histories of raising their payouts, so they should be great dividend growth stocks as well.

I am not an energy expert by any means, however, looking at the costs and difficulties with storage and transmission of so-called green energy programs like solar and wind have led me to the conclusion that it is simply not viable right now. It is too expensive and the global economy is not currently strong enough to support a massive move away from carbon-based fuels. It just seems to make economic common sense to me, and now even some of the greenest of engineers and academics are starting to agree.

Green energy is a wonderful idea and I am hopeful that at some point in the future we will develop the technology that lowers the costs and overcomes the challenges of a cleaner, greener world. Unfortunately, that is a long way away and until then we will dig, drill and burn to provide the energy the world needs. Given current valuation levels of energy stocks, that's a huge opportunity for patient, long-term investors.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Melvin was long RDC, although positions may change at any time.

TAGS: Investing | U.S. Equity | Energy

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