The Buylyst Wager in Energy

Published on 01/19/18 | Saurav Sen | 5,687 Words

The BuyGist:

  • We need energy to move around and keep the lights on.
  • Moving around is predmoninantly dependent on Crude Oil. Keeping the lights is predominantly dependent on Natural Gas and Coal. 
  • All these "fossil-fuel" industries can get severely disrupted with the advent of Battery Technology. 
  • All fossil-fuel industries offers us a negatively skewed payoff scenario. The potental losses are huge. The gains are marginal.
  • However, investing in Renewables and Battery Technology offers us positively skewed payoffs. The potential gains are massive. The losses are marginal.

Start Me Up!

The purpose of this write-up is to lay the groundwork for my investments in Energy. This part of the economy is a complex maze of concepts, trends, themes and inevitabilities, which I intend to unpack in this write-up – to find investment opportunities. I’m not going to make any Macro predictions. It’s not my forte, and I think it’s a futile exercise anyway. My goal is to minimize potential losses, as opposed to catching the next big wave. So, to that end, I’ll think about the Macro environment. That’s what this write-up achieves – it’s my 30,000 feet view on this sector, which ought to guide me away from potentially major losses. And then, in related write-ups, I drill down into more “micro” topics, which is where you’ll find actionable investment ideas. The “micro” ruminations make more sense within the context painted in this write-up.

Energy, unfortunately, is also an inherently political sector. In the US, there’s a side that wants to “drill baby drill” without much regard for the environment, and there’s a side that wants to save the environment without much regard for cost. I’ll stay away from political arguments as much as possible. My view is that, in the medium-to-long term, economics will win over politics. The unassailable truths are that 1) most people like cheap Energy and 2) given the choice between saving the environment and polluting the environment – assuming equal prices – most people would choose to save the environment. As of writing this, we don’t have an “equal prices” situation, but that may change soon. The broader point is that both sides are somewhat right, and somewhat wrong. I’m on the side of Capital Preservation – minimizing my chances of permanent loss, and its magnitude. I will look at this sector through the Buffett-esque lens of Margin of Safety.

Margin of Safety is even more important in the Energy Sector because:

  1. We’re dealing with commodities (not specialized products) and...
  2. Geopolitics, Regulation and other Macro factors play a big role.

 But, basically, we need Energy to:

  1. Move around.
  2. To keep the lights on.
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