3 Reasons to be Bullish on Energy Stocks

(MENAFN- Daily Forex) Climate change is causing devasting fires. Greenhouse gas emissions, at lows during COVID-19 lockdowns, are returning to their former levels, and not surprisingly, America emits more greenhouse gases than any other country in the world. But there is a new sheriff in town, and president-elect Joe Biden has a monumental task ahead of him if he is to reduce climate change as he promised. However, even if Mr. Biden can make good on his promises (and there are he can do even without the support of Congress), it is going to take time. For this reason, and for others outlined in this article, I am extremely bullish on energy stocks.

are trading at extremely low prices now, with prices pushed down by the decline in travel thanks to COVID-19. The continual development of renewable energy sources has also reduced the demand for oil. The facts speak for themselves; Saudi Aramco, which debuted in an IPO on the Saudi Tadawul in December 2019 in the largest IPO on record, saw its net profits plummet by 45 percent in Q3 2020. The company's profits sat at 44.21 billion riyals ($11.8 billion) last quarter, nearly half of its 79.84-billion-riyal profit in the third quarter of 2019.

Exxon Mobil (XOM), a 92-year member of the Dow Jones Industrial Average, was booted out in August and replaced by Salesforce (CRM). Exxon was considered one of the most valuable companies in the United States for much of the early 2000s, hitting a market value of just over $400 billion in 2011. Exxon remained the most valuable company in the US until (AAPL) overtook them in 2012. But how the mighty have fallen – while Apple's value exceeded $2 trillion in August 2020, Exxon's value declined to under $175 billion the same month.

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Chevron (CVX), another energy titan that maintains a presence in over 180 countries, has been similarly plagued by the rise in alternative energy and the decreased demand for fuel. And yet, all three of these companies remain committed to paying high dividends, which makes them attractive for investors.

But there is more.

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There are hundreds (if not thousands) of studies indicating that electric vehicles (EVs) produce less emissions than those powered by fuel (also known as internal combustion engine vehicles – aka ICEVs). indicate that EVs produced in China and driven in the EU emit 22 percent less CO2 than diesel vehicles and 28 percent less than gas-powered vehicles. Other studies, such as from the universities of Cambridge and Exeter, and Nijmegen in The Netherlands, show that the lifetime emissions from EVs can be up to 70 percent lower than emissions from petrol cars. The same study predicts that by the year 2050 every second car on the streets in the world could be electric. This certainly does not build a solid case for being bullish on energy stocks.

However, a deeper look into the world of green energy paints a dramatically different picture. For starters, in order to mine enough metals to create the batteries for all of these electric vehicles, we would need to extract metals and minerals in significantly larger proportion than what is currently being mined. Indium, for example, is a mineral used to prevent the corrosion of batteries and improve their energy density, will need to be mined, by some estimates, up to 920 percent more than its current mining levels. This task may be difficult due to the mineral's wide dissemination in the earth's crust, which creates limited potential for easy mining. According to , the US currently imports 100 percent of its indium, which requires transport, which will undoubtedly increase the life-cycle emissions of car batteries. Nevertheless, indium prevents batteries from releasing toxins into the environment, and are a critical component of battery creation.

Silver and lithium are among the other resources that will need to be mined in greater quantities in order to support the creation of car batteries.

But increased metal and mineral mining is not just a problem for electric car batteries. It is relevant for other forms of renewable energy, such as the creation of wind turbines and solar panels. Worse, a by MIT and the University of Chicago's Argonne National Lab found that there are potential problems for using batteries for grid-scale storage, and that renewable energy plants don't meet shifting needs as well as natural-gas combined-cycle energy plants. Add inefficiency to the high probability of pollution and natural habitat destruction that comes from lithium plants, and suddenly green energy is not quite as green as it sounds. This does not even account for the blades from wind turbines which cannot be recycled and end up going into landfills when their lifetime expires in 20 to 25 years.

Interestingly, unlike electric vehicles which are gaining in popularity, rooftop solar panels have not taken off with the same popularity. According to an October 2020 report by , only 3 percent of 84 million eligible hopes across the US have rooftop solar panels. One could argue that this means the industry has lots of room to grow. But I argue it is a sign that traditional heat and electricity are not going anywhere all that quickly. Adding to this is the fact that solar panels are currently subsidized by the US government. But if these subsidies were to expire, which they may down the line, solar power is likely to be more expensive than traditional oil heat and standard electricity.

ESG investing is a recent concept that applies to investing in companies that have solid environment, social, and corporate governing policies. Top rated ESG companies are likely to be tech companies that work on reducing their carbon footprint or those that have a culturally diverse (and gender diverse) board of directors or executive team. Interestingly, when researching the top ESG investing opportunities, you won't likely find any renewable energy stocks (though Tesla often makes the list).

The main theory behind ESG investing is that if companies aim to do good, they will, by virtue, perform well. Unfortunately, this isn't always the case. Many analysts believe that the recent success of ESG funds is because they're heavily weighted in big tech, which has had a strong run, especially since the spread of the coronavirus. The good news is that it's possible to invest in both ESG funds (or individual stocks) and energy stocks. They aren't mutually exclusive. It's also important to consider that as the popularity of social virtues and environmental consciousness grow, ESG stocks are likely to gain popularity, making them a good part of a long-term trading strategy. But energy stocks are likely to provide good profits in the nearer term.

Here's why:

1 – Demand has nowhere to go but up.

Today's current COVID-19 climate has decimated many industries, including both the travel and energy industries. But this will not last forever. Eventually, the skies will reopen, the borders will reopen, and people will not just resume travel, but they are likely to swarm the skies (and roads and oceans) in droves. This will, without a doubt, raise the demand for fuel, which should raise prices. The International Monetary Fund (IMF) does not expect a dramatic recovery for oil prices soon, but it forecast a range between , which may be as much as 10 to 20 percent higher than current prices. And, if Saudi Arabia gets its way, prices may head back to $60 per barrel or more at some point in the coming years.

It may not happen tomorrow, but as a long-term investor, I can only expect that at some point, oil prices and energy stock prices will rise. With the current high dividends, oil stocks seem like a mitigated risk, as the return is expected to remain stable (choose carefully here, some companies are planning to cut dividends).

2 – Energy stocks are currently cheap.

Big tech stocks are trading near all-time highs, leaving investors with minimal capital little opportunities to enter the market in a significant way. If you are a risk taker and/or have a bit more than no risk appetite, energy stocks may provide a great alternative to big tech, which many analysts argue is trading in a bubble. For example, you can currently get about 100 shares of XOM for $3200, or one share of Amazon for about $3311….and AMZN does not even pay dividends. Big tech stocks like Amazon, Microsoft, and Zoom, are all up many percentage points from their 2020 lows, but I can't help but question if they have more room to run, or if the big tech bubble will eventually burst. Energy stocks certainly are not without risk, but I like to think that at these low prices, there is excellent potential for growth not to mention the dividends.

Buyer beware – energy stocks may go even lower in the short term, but that only raises the potential for growth in the future.

3 – Green energy is not taking over that quickly.

While I wish I could say that we will be reducing carbon emissions and cleaning up our environment TODAY, I do not think this is entirely likely. In most countries, the cost of a fully electric or hybrid car is significantly more than that of a standard ICEV. Although one could argue that the cost of fuel evens out the pricing when it comes to cars, the sad truth is that in today's recession, consumers aren't necessarily going to be willing or able to shell out for a car with a higher sticker price. Ditto on the used car market – car buyers looking for a bargain are more likely to find a steal on ICEVs than on EVs.

When it comes to solar energy, there are still many, many hurdles that companies face before getting solar panels to become more mainstream. There is a reason only 3 percent of US homes are using solar panels today, even though solar panels were first created some 120 years ago.   Same for wind turbines; the first wind turbine was created in the US in 1888 (though wind has been used to power boats and water pumps for over 5000 years), but they haven't yet gained widespread popularity, and may take decades more to really have an impact.

All in all, if you are looking for some good opportunities and have some time to wait, energy stocks may provide just the bargains you are looking for.

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