Wind is big business Source Vestas

When reading articles on Seeking Alpha, sometimes I wonder if I live in an alternate reality. And then I realise that, along with other investors in the energy and transport space, I live in a world that is changing at unprecedented speed. This means that investment in fossil fuel businesses is very challenging, while investment in "risky" emerging renewables technologies is becoming exciting rather than challenging. Bill Zettler's recent article on Exxon Mobil (NYSE:XOM ), where he sees little issue (other than cyclical challenges) for the next 10-20 years, set me thinking about returns from fossil fuel investments versus renewables. Bill said to buy XOM at $48 in June and now, in November, he advocates buying XOM in the mid-$30s. Here, I consider investment outcomes from two major companies, one in the fossil fuel space (Exxon Mobil) and the other in renewables (Vestas Wind Systems (OTCPK:VWDRY)). I also look more broadly at the two different energy and transport approaches (fossil fuels versus renewables). While fossil fuel investors with a long rearview mirror chant "what about Solyndra?", my take is that it is much easier to have successful investment outcomes in renewable energy and electric vehicle companies than in fossil fuel-based businesses. My own experience makes this a practical rather than theoretical story.

Most articles on Seeking Alpha, and certainly the management of Exxon Mobil, are clear that XOM is facing a severe cyclical event that will turn around. Very few articles accept that exit from fossil fuels is a structural change that is coming fast. Seeking Alpha's compilation of 10 Seeking Alpha authors writing about XOM in the past 30 days indicates 4 authors were bullish, 5 neutral, and only 1 bearish article was published. Wall Street ratings are more cautious with 18 of 25 analysts with neutral ratings, 4 very bullish and 3 bearish.

The facts about XOM's recent performance (well actually over the past decade) is that the company has gone nowhere and the last 12 months have been a disaster. Continuing on from Q2 results reporting, CEO Darren Woods didn't show up for the Q3 reporting, leaving the music to be faced by Stephen Littleton VP of Investor Relations and Secretary, Andrew Swiger SVP and Principal Financial Officer and Jack Williams SVP overseeing Downstream and Chemical businesses.

The Q3 results are portrayed in terms of all three of XOM's business areas being "at or significantly below bottom of cycle conditions". There remained no acknowledgement that the company is entering a period of structural decline. Indeed, there was an insistence that prices would have to rise in the future to meet expected increased demand. The conclusion is: "So, in summary, we see a recovery on the horizon across each of our businesses. We believe it is less a matter of if, but more a matter of when." Exxon management continues to double down on claiming that it is all just cyclical for oil and gas and things must change soon. There is no acceptance of the fact that Exxon's business is in terminal decline.

The major reason that XOM's share price hasn't fallen further is the extremely high divided (~10%) and XOM's management commitment to maintain the dividend as its primary business goal. Seeking Alpha Editor Carl Surran has summarised the bleak outlook for XOM to be able to maintain the dividend for much longer. It seems that XOM will need to raise a further $8 billion of debt in 2021 to keep the dividend, noting that debt increased by $21.7 billion in 2020 to $69.5 billion as of June 30.

Vestas Wind Systems is a Danish company that is entirely focused on the wind industry. About one half of its business is involved with manufacture and sale of wind turbines, while the other half is involved with servicing wind power facilities. It is the world's largest wind company with more 122 GW of wind turbines installed in 122 countries. Until very recently, Vestas was primarily focused on onshore wind facilities, although it had a 50:50 joint venture with Mitsubishi Heavy Industries (OTCPK:MHVYF) in the developing offshore wind market. The JV with Mitsubishi led to some misunderstandings about Vestas' involvement in offshore wind. Very recently Vestas announced that it plans to fully acquire the offshore JV business. The proposal is interesting because part of the transaction involves Mitsubishi Heavy Industries acquiring a 2.5% stake in Vestas and a board seat, ensuring that MHI keeps a strong relationship with Vestas. The offshore wind market is showing signs of dramatic expansion all around the world and plans for dramatic expansion in Japan are of particular note. Offshore wind might replace a half of the planned power retirements (notably coal and nuclear plants) by mid-century. See Steve Zachritz's article for more details on Vestas offshore wind expansion, including hints of a new offshore wind turbine.

Vestas Q3 reporting indicated a 31% increase in revenue compared with last year, highest ever quarterly deliveries and full-year guidance was maintained. The offshore wind developments are grounds for even more optimism about the track that Vestas finds itself on. Investors might compare the Vesta Q3 reporting with XOM's Q3 to get a sense as to how different the business environment is for these two companies.

Even more extraordinary is the fact that only one author (bullish) wrote about Vestas on Seeking Alpha in the last 30 days and there was no (that means none) coverage of Vestas by Wall Street Analysts in the last 90 days.

Notwithstanding a COVID correction in late March, Vestas' 12-month performance is up 110%. Its 5-year performance is up 221%. This is a marked contrast with XOM which is down 46% over the past 12 months and down 54% over the past 5 years. Indeed, for most of the last decade, XOM has gone nowhere, but the last 12 months have been a disaster.

The above comparisons between XOM and VWDRY relate to investment over recent years. They summarise what has been rather than what is coming next. In the next section, I consider why I expect that what has happened over recent years is but a foretaste of things to come. It is clearly not too late to participate in the electrification of energy and transport. Vestas is well positioned to participate in/lead an unprecedented expansion in offshore wind developments, while Exxon faces the end of its industry as the global switch to net-zero emissions takes hold.

There was a time when I used to be puzzled at how IEA reports would show some penetration of renewable energy in global power projections, but the curves always flattened. I suspect that this was because the IEA, with a long focus on fossil fuel, found it difficult to conceive that renewables could fill a role filled by fossil fuels for the past 100 years. I think most writers on Seeking Alpha remain unable to comprehend a world where fossil fuel will disappear rapidly. If readers who have this view want to see what is really happening, a quick read of the latest IEA report on renewable energy might get their attention.

Recently, there have been a number of major developments concerning decarbonization of the global economy. Europe and the UK are strengthening their commitment to exit from fossil fuels. China has made a major commitment to net zero emissions by 2060. Key countries Japan and South Korea have recently made commitments to net zero emissions by 2050.

Of particular relevance to XOM and transport is a report that British Prime Minister Boris Johnson is planning to bring forward a ban on sale of new petrol and diesel cars to 2030, having recently moved forward plans for such a ban from 2040 to 2035. It seems possible that the 2030 ban might include some hybrid vehicles, but there is little doubt that the intention is to provide a step-change towards electrification of transport. This has huge implications for XOM because it becomes explicit that the current moves are not cyclical, but reflect a long-term trend to exit fossil fuels. This is about the end of the internal combustion engine and hence a huge slice of Exxon's oil market. This is happening all over the world.

The British PM Boris Johnson has heralded that the upcoming Presidency of Joe Biden will be an opportunity to get very serious about emissions reductions. He has explicitly called for aggressive international action and Joe Biden has made clear that he intends not only to act aggressively on internal US actions on climate change but also return the US to be a major international driving force on climate change.

Notwithstanding that the Biden victory still has challenges for action at home because it isn't clear which party will control the Senate, there is no doubt that the US will rejoin the Paris Agreement forthwith after 20 January and that the US will assume a major role in international action on climate change. So, even if Biden's $2 trillion investment in renewable energy in the next 4 years gets messed up, renewables will be strongly promoted because the world plans to address climate change and move towards net-zero emissions by 2050. Recent statements from China, Japan, and South Korea all back up the planned actions.

The accelerating wind down of the global coal business is a cautionary tale for investors that XOM investors might consider. Many of the arguments used by those suggesting purchase of XOM shares because they are out of favour are similar to those used to encourage investment in Peabody Energy (BTU) as it slid into bankruptcy, leading to total loss for investors (and to be repeated again soon). The IEA makes clear in a 2020 report that coal is under threat everywhere and that while the COVID-19 pandemic has decimated demand, this is not just about COVID. The switch from coal to renewables is indicated by 90% of new energy production in 2020 being from renewables. I have catalogued the decline in Peabody Energy since 2014 with many articles on Seeking Alpha. Those with access to the Seeking Alpha library might find interesting the many parallels between the situation that XOM finds itself in now in comparison with BTU's experience as it slid into bankruptcy.

Five years ago when I reviewed our long-term investment portfolio, I considered investment in fossil fuel based businesses in this portfolio and rejected the idea because, from my perspective, a low carbon future is looming rapidly. I have followed and written about major fossil fuel companies (especially Peabody Energy see above). I've also written about Exxon Mobil and other oil and gas majors, noting that all have major travails and some (e.g. BP (BP), Royal Dutch Shell (RDS.A) (RDS.B)) are seeking to change to achieve net zero emissions by 2050, while Exxon Mobil insists on staying the distance with oil and gas.

In terms of placing investment dollars in the energy and transport sector, I considered which areas of renewable energy and electrification of transport might be attractive. I initially focused on solar companies and purchased SunEdison (OTCPK:SUNEQ), SunPower (SPWR), First Solar (FSLR), and Enphase (ENPH). SunEdison's huge ambitions got the better of them and this company went out of business. The other companies went through various near-death experiences, but I kept them and have added to my Enphase investment as I thought this company was building an interesting technology position in supporting harvesting solar power and also managing electrification.

As I became more confident, I decided that wind power offered real prospects and tossed up between DONG Energy (now Orsted, (OTCPK:DNNGY)) and Vestas Wind Systems. In the end, I decided upon Vestas but regret that I didn't also purchase Orsted. I may do so in the future.

Finally, after agonising about Tesla (TSLA) and watching it take off, I chose BYD (OTCPK:BYDDF) as an unloved electric car/battery manufacturer that seemed to have a strong future.

Here's the deal for XOM investors who harp about Solyndra (which I did not invest in): other than SunEdison, which was a complete loss, all of my renewable energy stocks have performed well; some, like Enphase, BYD, and Vestas (32x, 5x, and 3x increase respectively in share price for my investments) have been very successful. I've kept all of these stocks as I believe that they have further to run due to global developments in plans for net zero emissions, including the strong focus by President-elect Biden on emissions reduction and renewable energy. The stars are starting to align about climate change and emissions reductions at a time when dramatic cost reductions have been achieved for renewable energy developments. And call me "greenie" if you like, but I am very happy that these investments are helping make the world safer for my children and grandchildren.

It surprises me how much focus there is on companies like XOM which have legacy products that don't have a future, despite clear evidence that change is happening now. The stock prices of major companies like XOM show clear evidence that the future is catching up.

Here I've provided an update as to why I think that fossil fuel stocks are no longer interesting for long-term investors. This is especially true for companies, like XOM, whose management believes that there will always be a market for their products (at least multiple decades) and hence who hold tightly to a business model that is clearly in trouble. I've also indicated that the fate of the coal industry might be a useful model to think where investment in XOM might be leading; and I do hear those who insist that XOM is too big to fail... it isn't.

On the other hand, I suggest that the renewable energy industry, and particularly wind, and specifically Vestas Wind Systems, are worthy of consideration for long-term investment in the energy sector. My investment at the end of 2017 in VWDRY has trebled in value.

Perhaps my article will help investors pause before thinking that buying XOM at $36.94 is a bargain, and review the facts about investment in renewable energy companies, such as VWDRY. Hard times as a fossil fuel investor might just turnaround for you in the renewables space.

I am not a financial advisor, but I do pay close attention to the transformations happening in the energy and transport sector as everything gets electrified. If my commentary is helpful for you and your financial advisor in considering this investment sector, please consider following me.

This article was written by

Disclosure: I am/we are long ENPH, SPWR, FSLR, VWDRY, BYDDF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.