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Alternative Market Briefing

Other Voices: Decarbonization and fossil fuel's growing weakness

Tuesday, August 25, 2020

By James Jampel, HITE Hedge Asset Management

Warren Buffet said in 1999: "Sometimes, incidentally, it is much easier in these transforming events to figure out the losers. You could have grasped the importance of the auto when it came along but still found it hard to pick companies that would make you money. But there was one obvious decision you could have made back then … and that was to short horses."

Today's "horses" are the most overvalued and vulnerable companies in the carbon value chain - select producers, processors, transporters, refiners, marketers and users of hydrocarbons, along with their suppliers. Given the uncertainty around the future of these businesses, they may never be as valuable as they used to be.

As it navigates a global health crisis, the world has continued its push towards "decarbonization," a global initiative to reduce fossil fuel use and to divest from companies related to hydrocarbons, in an attempt to prevent an even bigger crisis - the devastating effects of climate change. Although society has not yet achieved decarbonization, this inexorable trend provides ample opportunity for institutional investors to profit as the current cracks in the fossil fuel industry will only grow wider:

    1. The structure of the fossil fuel industry means that intense competition will continue.

    Oil, natural gas, NGLs and coal are all for the most part highly fragmented, commoditized, depleting, and capital-int......................

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