Undiscountable Trends: Energy Prosperity

• Posted by DynamicHedge
• on November 16th, 2012

There are some trends out there that are simply hard to quantify.  Certain products, needs, and ideas can lead to runaway growth that shatters traditional valuation models.  How can one quantify the fact that people would still be lining up for iPhones five years and several iterations later?  How can one quantify the changes to the transportation system in the US coinciding with the rise of fast food?  These trends are identifiable but the mostly efficient market we work in will never discount them properly.

Two reports were released this week.  The first came from the IEA reporting that the US will become a net energy exporter of natural gas by 2020 and self-sufficient in energy by 2035.  KKR also released a report a couple days ago outlining the opportunities and challenges for the shale gas revolution.

In my mind, energy prosperity is both a profound technological innovation and a powerful catalyzing idea.  It is a trend that could touch every sector of the economy and lead to some amazing things.  This investment theme is not new, but I feel it is under appreciated.  If you didn’t really understand the opportunity and potential pitfalls of this emerging trend, the KKR report is a must read.

The bull case

100 additional years of energy is a transformative change with the potential to reduce energy bills, reduce emissions, spark a manufacturing renaissance, enhance national security, reduce or eliminate trade deficit, add as many jobs as the auto sector (including parts manufactures) and grow the economy.

Requirements:

• Massive investment ($Trillions) in infrastructure (pipeline, storage, refineries)
• Favorable regulatory policy, especially regarding federal land grants

Primary uses:

• Electricity generation
• Industrial gas as both a fuel and feedstock
• Gas to liquids
• LNG for export
• Transportation sector (the real wildcard is civilian and commercial vehicles)

The risks

• Technology doesn’t deliver on its promise of safe extraction
• Boom/bust nature of natural gas markets stunts the revolution (depressed prices)
• Regulatory regime becomes overly hostile to industry (groundwater issues, etc)
• Public will not support infrastructure projects (opposition to pipelines, etc.)

Energy prosperity is a big idea — a potentially undiscountable trend that the market has yet to become a big investing meme.  I haven’t even mentioned the impact of alternative energy and increased efficiencies that are coming on board.  I truly hope that those in government and the private sector understand what the natural gas boom means for the economy and society.  Keep an eye on the players in this space over the long term.

Source: Historic Opportunities from the Shale Gas Revolution (KKR)

North America leads shift in global energy balance, IEA says in latest World Energy Outlook (IEA)

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