Investing in Peak Oil 101
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is easy to forget that we are already living in the midst of peak oil. In the past, oil prices and oil production roughly increased with each other. Around 2005, the world seemed to hit a brick wall. Oil prices increased, but global production just ticked higher. There are still profitable ways to invest in the energy market, but trying to find a company that will bring online an extra five million barrels per day is almost impossible. It is better to focus on smaller companies, or corporate giants that can develop new infrastructure.
The Canadian Oil Sands
Suncor Energy (NYSE: SU) is looking for growth in Alberta's heavy oil sands fields. The company is nowhere near the size of the oil majors like ExxonMobil. This is a great benefit for Suncor's investors, because it means that the 300 thousand barrels of production that the company wants to bring online by 2020 will have a substantial impact on its bottom line.
For long-term investors with multi-year horizons, Suncor is a good investment to watch. It has almost no debt with a total debt to equity ratio of 0.28. Its return on investment (ROI) of 5.7% and profit margin 6.2% are encouraging, given the challenges of being far away from U.S. refineries.
Treat Arctic drilling carefully
Royal Dutch Shell (NYSE: RDS-A) is facing the music. For years, it has tried to drill in the Arctic to open up new fields, but it was recently forced to cancel its drilling. Now, it is trying to use its large capital base to develop a world class network of LNG assets. Cooling natural gas and transporting it around the world isn't easy. New projects like Canada's Kitimat LNG export terminal will allow Shell to profit from the world's energy system without having to find and extract hydrocarbons.
The company has a low debt load with a total debt to equity ratio of just 0.2. It offers a dividend of 4.60% and a profit margin of 5.60%, but investors need to realize that the company is huge and will not offer very high growth.
The Bakken play
Kodiak Oil & Gas (NYSE: KOG) extracts oil in America's Bakken field in North Dakota. Like Suncor, this company is relatively small with an expected 2013 production around 30 thousand barrel oil equivalent per day (BOE/d). It plans to add 75 new net wells in 2013. These new net wells will substantially boost the company's overall production from its existing 140 net wells.
Even with its total debt to equity ratio of 1.19, the company is in a great position to grow with its profit margin of 49.4% and ROI of 10.5%.
Don't forget the auto industry
Considering that the majority of crude oil is used for transportation fuels like gasoline, the rise of electrical vehicles is an effective way for the world to deal with peak oil. Toyota (NYSE: TM) sells one of the world's most popular hybrid models; the Prius. As of the end of March 2012, Toyota had sold a total of 2.6 million Prius' since 1997. Considering that in fiscal year 2012 Toyota sold a total of 7.4 million vehicles, it is clear that the Prius still a niche product.
Countries continue using crude oil and gasoline, but slowly they are readying themselves for a world with less oil. Even though Toyota sells a number of quality hybrid vehicles, it has in no way abandoned traditional gasoline vehicles. The company does carry some debt with a total debt to equity ratio of 1.15, but its debt load is significantly less than Ford's. Toyota's ROI of 4.7% and profit margin 4.9% show that the company is making money, even if does trade at high valuations.
Recently, Toyota decided invest $50 million in Tesla Motors (NASDAQ: TSLA). The company sells its latest Model S sedan. The company is not trying to force the broad market to accept fully electrical vehicles. It is targeting the upper-end of the market where consumers can afford to spend more than $600 per month on a fancy toy.
As an investment, Tesla looks very risky. It has a total debt to equity ratio of 2.7, a ROI of (52)% and trades at a price to book ratio of 67. Investing in Tesla is a very high risk proposition, as its product is relatively new and it has a substantial debt load.
As the world readies itself to live with less oil, there are a number of good companies to invest in. If Tesla can use the next couple years to prove its profitability, then it will be worth a second look. Suncor and Kodiak are two profitable and growing oil firms to look at. For the time being, Kodiak's higher ROI makes it very attractive. Shell and Toyota are corporate giants that are dealing with peak oil by developing new products, but investors need to realize that these companies will not offer substantial growth due to their large size.
Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors . The Motley Fool owns shares of Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!