One of the most interesting sub-themes that have emerged over the last few troubled weeks has been the issue of air pollution. I’m sure you’ve seen many articles showing that traffic flows have declined markedly which has resulted in much lower atmospheric pollution.

It’s also been observed that many of the most challenged areas hit by the virus and those with relatively high levels of pollution, industrial or otherwise. This has prompted many observers to wonder whether the virus might be accentuated by pollution. This, in turn, could inform post-crisis debate around cutting back emissions – which leads us back to the decarbonization debate.

Typical of this debate has been a recent note from last week from Killik – “Looking through medical journals, we have come across work that has found evidence of a link between pollutant exposure and the emergence of infectious diseases, while there is also evidence that those living in highly polluted areas are more susceptible to a variety of health conditions that make the risk of being severely affected by the virus significantly greater. As a result, we believe that a lasting impact of the coronavirus outbreak might be an increased focus on air quality, speeding up the decarbonization of energy supply. In addition, we expect tighter regulation around emissions, both at an industrial level and at a local level, with potentially more cities banning polluting vehicles and driving a shift to electric vehicles.

This analysis prompts the Kiilik analysts to suggest that the decarbonization agenda is still firmly in place which might help “renewable energy generators, grid network operators, electricity infrastructure suppliers, electric vehicles and energy-as-a-service providers. We see long-term losers in the oil and coal industries, and potentially other heavily polluting industries which could face significant regulation”.

Companies that could benefit according to Killik include:

Orsted is a leading renewable energy company specializing in the development, construction and operation of offshore wind farms. We expect offshore wind to see strong capacity growth, with the IEA estimating it could be a $1tn business in the coming decades. We believe Orsted’s focus, technical expertise, and operational excellence put it in a good position to benefit from this long-term growth opportunity.

“ SSE is an integrated utility company with operations across the UK and Ireland, which is increasing its focus on its networks and renewables businesses. Decarbonisation will drive the growth of renewables which will require significant investment into grid networks not just to integrate renewable assets but also so that they are capable of handling the increased complexity that comes with a power system that derives a greater proportion of its electricity from variable sources such as wind and solar”.

This all contributes to a wider debate about the oil sector. Some have had argued that the dramatic moves by the Saudi’s has been informed not just by a reaction to lower demand but also a move to guarantee its pole market position. That means putting US shale back in the box, as well as fighting back against the Russians. But another agenda – a very traditional one – might be lurking in the background, namely the need to under cut renewables by forcing down energy prices.

On the other hand, there’s also a sense that the Saudi’s know the game will be up in the next few decades and that they need to generate as much revenue as possible now to build up reserves against a future decarbonisation agenda.

However, this debate lands I think it is tough to build an overly optimistic case for the energy sector at the moment. A report this week from Morgan Stanley called the Oil Manual presents a number of other worrying headwinds.

These include:

First, low oil prices provide an opportunity for governments to unwind fuel subsidies. According to estimates from the IMF, global subsidies to the oil industry were ~$300bn as recent as 2017. We expect that governments may use the current period of low oil prices to start unwinding these.

Second, part of economic stimulus programs are likely to be used to boost clean energy investment. Governments around the world are announcing large stimulus programs to offset the impact of the coronavirus. With a move towards clean energy increasingly a priority, we think it plausible that part of the stimulus programs will be used to further boost investment in renewable energy.

Third, there will likely be long-term impacts on transportation from the current crisis. When governments try to ‘flatten the curve’ of coronavirus infections, they likely also extend it in time. We still assume a relatively rapid improvement in oil demand in the second half, but it may be longer before this truly normalises. Then, it is also unclear what ‘normal’ means for oil demand in the future. The number of people that work from home may be structurally higher. The number of business or personal flights may also be permanently lower in the future”.

Overall, this all spells even more trouble for the oil sector, with low prices for longer – very far from the possible scenario of $100 a barrel for oil in the next few years suggested by Westbeck.

But, but, but…everything eventually finds its way into the price and I wonder when we might see energy sector prices properly adjust for these headwinds, making some energy businesses absolute bargains. More on that over the next few days.

Thoughts on retail sector survivability

And sticking with Morgan Stanley, they’ve also just brought out a fascinating analysis of the bombed-out retail sector in Europe. Quite rightly they see retailers’ earnings in 2020 as “being pretty much irrelevant, with cash becoming king instead”.

They reckon around 70% of the selling space occupied by the retailers we cover has closed, potentially for months. Some are closed online too. The sales reductions in the coming quarters now look likely to be so big that most retailers’ earnings this year will be largely wiped out.

The key question, they reckon, is how much cash the retailers have left. Which is revealed in the graphic below. Their top investment idea is AB Foods, owner of Primark.