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energy markets, CUI and global trading +2

10:17 07-Dec-18

A good point from a subscriber, which I thought I worth sharing:

The USA is not a net exporter of crude oil.  That figure includes refined products and condensate.  Additionally, there is a reason why they are shipping out ultra light oil (from shale) and still importing massive amounts of heavy crude from around the world....refined product yields.

I also thought that the categorization was rather misleading, and think that the projections that I referenced from IEA are probably relevant to crude, as you are implying, rather than the combination with refined products.  I apologize for not having time to try to check that, or making the differentiation clear.  However, I don't think it is important to any of the subsequent analysis which was my primary focus.

On Dec 7, 2018, at 9:23 AM, Esekla wrote:

America began the year by becoming a net exporter of natural gas for the first time in 60 years.  It ends it by becoming a net exporter of oil for the first time in 75, about 8 years ahead of the projections discussed here.  It's no coincidence that global carbon emissions are set to rise for the first time in five years.  Economics govern the industry rather than true supply availability; unused technology is capable of almost doubling the output of some existing oil fields and natural gas is still flared in in the U.S. despite rising prices.  The obvious implication is that humanity will run out of time before it runs out of oil, but the non-obvious one is that energy markets are as susceptible to gaming as any other.

That's why I think the headlines coming out of the OPEC meeting are one more thing that can't be taken at face value.  As I write this, the latest is that there has been progress towards an agreement on output cuts, which were hinging on Iran and Russia.  This is the bad side, of the shifts in political and economic power that I've talked about.  All of the nations involved have vested interest in crashing American shale.  That's a long shot, but some damage has already been done and the U.S. is not completely out of the woods yet.  This is part of why Schlumberger, with its diversified global operations, is the only oil company I cover.

It may also be why we're now seeing even traditional utilities join many states in thinking past the next election cycle.  Unfortunately, South America looks as important as policy in its northern counterpart in mitigating climate change, and I've been hearing scary rumors about Brazil, in particular.  We will have to hope that Europe is able to take more of a leading role in geopolitics.

CUI Global Update

In that context, news from the CUI Global Annual Meeting is somewhat encouraging.  The interesting parts start about 10 minutes in, and although they are not really new, they do bear reporting.  Management reports that the backlog has risen from $32M to 41.6M YoY.  More important is that the regulatory agency in Italy is now active again as of Sept.  Management has held tech mtgs with Snam in recent weeks, and expects GasPT deployments to resume in the new year.  As a reminder, the opportunity is for up to 7K units, which represents about €130M in revenue.  From this management continues to project a return to profitability within a matter of months, or even weeks.

The U.K. represents a longer-term and larger opportunity.  40 units are currently undergoing factory acceptance testing, which should be complete by late 2019.  If that is successful 10-45K units could be deployed.  Engie, in France, could follow with 100K units, and western Europe represents a total opportunity of €6-7b.  The meeting was brief, and ended no questions being posed, and average trading volume is barely above 40K, which lends weight to the idea that this stock is completely under the radar.  That doesn't make the prospect of an investment thesis that relies on progress in Italy any less scary, though, just potentially more profitable.  I think I've already been clear that other GRoDT stocks like FIT, which has lost market share, and MVIS which has priced its offering at 60 cents, are to be avoided.  RESN is the only other one I would take a chance on.  ERII is somewhere in the middle ground, but the current environment and its renewed emphasis on desal do not inspire confidence.

In conclusion, I still think that safe, undervalued high-yielders like Covanta and BGC are the best use for the majority of one's capital.  The former goes ex-dividend again on the 27th.   Long-term I continue to think that it would benefit from tweaking its process to address the plastics problem that oil has created, which China will no longer take on.  There are other possibilities, however.  The best of them is that projections on how long it will take us to switch away from oil are too lengthy, but I'm afraid the data points added here are not supporting that conclusion.

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