WHEB Commentary

Seb Beloe

A Crude Read-Across For Solar


From its peak at the end of June, the oil price had lost a third of its value by the beginning of December. As a consequence, November proved to be a pretty dark month for the oil and gas industrial complex. ExxonMobil, Chevron and the other oil majors were down between 6-9% during November, and some of the companies in the industry’s supply-chain, particularly those exposed to US shale oil activities, were hit even harder. Weir and Flowserve, for example, which make pumps for shale oil and gas fracking were down 18% and 13% respectively.

One part of the economy that might be expected to be relatively insulated from the collapsing oil price, is solar energy. More than 95% of oil is used in transport. Only Saudi and a handful of isolated island states use oil as a source of power generation. Solar meanwhile is almost entirely focused on power generation. The oil price really means very little to the commercial viability of solar. As Tom Werner, the CEO of California-based SunPower put it “The price of oil has almost nothing to do with future [solar] demand, even in [the Middle East]”.

The market too did seem to be getting this point. Back in 2010 solar and crude were highly correlated with a correlation coefficient of 0.7. Since then however the correlation had largely collapsed to virtually nil. This all changed in November when solar stocks followed the oil price and fell precipitously. Canadian Solar was down 24% over the month with First Solar and SunPower both down 17% and 12% respectively.

Several theories have been put forward to explain the sell-off in solar ranging from hedge-funds having to cover margin calls, to concerns over government appetite for solar subsidies. These may all be true in part, but we suspect that there is also a large group of investors who have simply been panicked by the rapid sell-off in the oil price and have hit ‘Sell’ on anything that looks like ‘energy’.

While investors are lumping solar in together with oil and gas under one big ‘energy’ heading, Germany’s largest energy utility E.ON has announced that it sees the world rather differently. Their plan, which will be executed over the next 18 months, is to spin off upstream hydrocarbon activities and their power generation assets into a new business. Meanwhile, ‘New E.ON’ will focus on developing wind, solar and other renewables, distributing electricity and providing customer services. As E.ON put it in the presentation announcing the new strategy, ‘Two very different energy worlds [are] emerging’. In time, the market will recognise this too.

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