First of all, the Energy Industry is a very cyclical industry that is heavily influenced by overall global economic growth. In addition to being cyclical, the industry is in a long -term secular downtrend. The influx of hybrid and electric cars and trucks combined with a global preference for cleaner energy makes the outlook for demand less certain. In addition, the Covid-19 virus issues are crippling economic growth in China and this is having a dramatic negative effect on commodity prices with China materially reducing their purchases.
Fossil fuels deplete and are non renewable. In addition, they are not good for the environment leading to all the ongoing protests globally amongst the Aboriginals and other groups.
Large industrial warehouse spaces are converting away from fossil fuels to renewable energy with cost differentials coming down dramatically over the last several years.
However, with the recent collapse in crude oil prices to the mid thirties per barrel the price advantage has probably shifted to the fossil fuels once again. At current crude prices no company or government is making any sustainable profits and thus the recent price collapse can be viewed as a short-term response by both OPEC and Russia to permanently reduce the US shale production. At some point in the near future I am quite sure that sounder heads will prevail and production cuts will once again be a critical tool used to control short term price volatility.
As the name implies this industry is totally renewable especially in regards to wind, solar and hydro power. The industry is good for the environment and is the reason it is called a green industry.
The industry has been steadily growing for many years and is not considered cyclical like the fossil fuel industry is. Secondly it is in a long-term secular uptrend and this makes investments more certain over time. The high-tech industry is another example of an industry in a major secular uptrend and is one of the major reasons that technology stocks have outperformed the overall market consistently for many years.
Taking these long-term trends into account is the reason that Norway’s sovereign wealth fund has sold most of their fossil fuel investments. Norway is not alone in making this decision.
As of the end of February the industry weight of the Energy sector in Canada and the US is 15.9% and 3.6% respectively.
The Utility sector weight is 5.2% and 3.5% in Canada and the US respectively.
All the renewable energy companies are located in the Utilities sector.
Gradually these weights are shifting in favour of the Utilities sector over the Energy one. The recent crude oil collapse only exaggerates this long-term trend.
It is common knowledge that cyclical companies trade at much lower PE multiples than other sectors do. This is because the earnings component of the multiple is highly volatile.
For non cyclicals and growth companies, earnings growth is more consistent and predictable. This is the reason that they trade at a higher PE multiple than cyclicals do.