With so much money flowing into new markets like renewables and cleantech, we will see some companies succeed and perhaps become the next Tesla. We will also see some companies fail spectacularly. In other words, there will be a great deal of dispersion. We have seen hundreds of special purpose acquisition companies (SPACs) raised in the last few years, with many focusing on cleantech and other forms of energy and transportation disruption. Most of them assume a J curve in their revenues and profits, and I think it’s reasonable to expect that they won’t all achieve their projections. However, given limited sell-side coverage, identifying those that will make it and those that will not could prove to be lucrative.
The importance of time horizon for traditional and renewable energy sectors
In thinking about energy investment opportunities, I believe having a differentiated time horizon is essential — that is, focusing on the long term when others are focused on the short term, and vice versa. When things go bad in the energy sector, it’s difficult for investors to imagine how things can go back to normal. During the COVID crisis, for example, many were ready to write off the oil market, believing that prices were permanently impaired and treating the equities and debt of the companies accordingly. But as we saw, demand improved as vaccine distribution picked up and economic activity began to return to normal. And supply is down dramatically, given that oil is a self-correcting market with steep decline rates when little capital is being deployed by the industry.
Similarly, I think it’s easy to become too focused on the theme of oil demand declining over the next 10 years and miss other potential outcomes. For example, if demand rises as the economy improves, we may see inflation return. That could motivate investors to shift some of their current overweight in long-duration assets, such as technology and health care stocks, to commodities, including oil, which have historically been one of the most effective inflation hedges. Even if just 1% of those assets were to move into energy, which is about 3% of the S&P 500 right now, the impact could be enormous.
On the side of renewable energy, when things are good, as they have been for cleantech and other areas recently, it’s often hard to imagine how they could be less good. But the time horizon for renewables is getting pretty stretched, with the market looking out 20+ years and US$20 billion companies projecting no revenue for the next three to four years. In that environment, it’s not difficult to come up with scenarios that could negatively impact some of these stocks, such as the expiration of subsidies or increased competition leading to less profitable business models.
Future energy investment opportunities
The point is that in both traditional and alternative energy markets, there are numerous drivers of volatility and dispersion, and therefore the potential for many winners and losers. Figure 1 speaks to the opportunity to differentiate between the winners and losers. For more on how I think about this opportunity and the evolution of the energy sector, see my recent paper, “Decarbonization and the future of energy sector investing.”