Are Oil and Gas Stocks the New Cigar Butts of Value Investing?

My Conversation on Renewable Energy with Gregor Macdonald

“Anything growing at a compounded rate of nearly 18%, as U.S. wind and solar have done for the past three decades, will double in four years, then double again four years after that, then again four years after that, and so on.” Bloomberg article on Renewable Energy

Wind and solar generation are growing exponentially fast.

Now look at this chart:

Coal consumption has been decimated and with it, the entire coal industry went bankrupt.

And guess what, growth in natural gas demand is next.

I’ve written before about opportunity in small cap energy and specifically in Black Stone Minerals (NYSE: BSM). The stock has done well and increased almost 50% inclusive of dividends since my post last summer. However, I now believe that a bet on energy is a bet against technology and is fighting a losing battle against the exponential growth in renewable energy. Because of that I have sold out of BSM. And the person to blame is Gregor Macdonald.

Gregor Macdonald is a freelance journalist who covers cities, climate, and energy. He has been all over the astounding growth in alternative energy for years. And Gregor warns that the days of growth in energy are done outside of a “dead cat” bounce post-COVID. And the implications are profound for any energy investor.

Value investing and value investors in general have struggled in the last ten years, mainly because traditional value investing has led investors to dead-end industries with no growth or worse, declining sectors. Traditionally, these industries turned things around, but technology and other trends have upended the traditional trend of mean reversion. Think Sears versus Amazon or e-commerce versus shopping malls.

Without growth, the energy sector may be like shopping malls, but Gregor says its worse because you can re-purpose a shopping mall, you can’t an oil well and then you have environmental liabilities to boot.

One of the dangers of value investing is getting stuck in what is known as a “value trap,” much like trying to get the last puffs out of a cigar butt. I’ve written about how value investing is still very much alive in growth sectors, like technology and cannabis.

The outlook for a sector that has stopped growing while fighting against the long-term trends of technological innovation is simply not good. I don’t want to fight technology and that’s what you are doing by investing in oil and gas right now. And this is the primary reason a sector that used to be 15% of the S&P 500 is now hovering around 2%.

Making things worse for oil and gas is that there is a bubble in anything renewable energy and anything related to electric vehicles. Why is this bad? Hundreds of billions of dollars are now flowing into alternative energy. You have to assume that while a lot of that money will be burned, that kind of capital is only accelerating innovation and bringing forward the future decline of fossil fuels.

Can you trade oil and gas stocks? Sure. But you are betting against exponential growth and technology. And you are ultimately betting on the greater fool to assume that oil and gas demand growth has returned.

I highly encourage you to listen to the below conversation I had with Gregor. And one last thing. If you are an energy investor who doesn’t follow Gregor (@GregorMacdonald) or subscribe to his newsletter the Gregor Letter (https://gregor.substack.com/), you are asking to lose money.

Here is the audio interview:

Here is the transcript:

Interview with Gregor Macdonald