All of the Above Please

Podcast Transcript

Ed Coyne: Hello and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott Asset Management. I'm pleased today to welcome Jay Dobson, Executive Director and Equity Strategist at UBS. Jay joins us with over 35 years of equity research experience with a focus on energy. Jay, I appreciate you joining us today on Sprott Radio.

Jay Dobson: Thanks for having me and the invitation, Ed. I'm really happy to do this.

Ed Coyne: Well, Jay, before we dive into energy, maybe tell our listeners a bit about yourself and the work you do over at UBS.

Jay: Thanks. I've been hanging around the energy world for a little over 30 years, sell-side, then a bit of a banking career, all in energy. A lot of that was in the downstream and midstream. We tackled the upstream over the last ten years or so. I'm in the chief investment office at UBS, so we manage all the mandates around the $2.7 or $3 trillion assets under administration within the global UBS.

I manage everything energy, from the well head-on through infrastructure, including utilities and solar, wind, et cetera. Nuclear too. It's something I tell my wife I'm probably married to now: the energy space. Still, with the energy transition and everything we'll talk about here this morning, there's a lot to get excited about when you're talking about energy.

Ed Coyne: To that point, with the energy transition, over 30 years in this space, you've got to have seen a lot of changes just in the narrative alone and in technology. Please walk us through that a bit. What's changed in the last 30 years? What stands out to you, and what's been different or unique?

Jay Dobson: The first thing that stands out to me is the natural gas transition. Though natural gas is a bit of a four-letter word these days, the move from coal to natural gas here in the U.S., even with LNG more globally, has been really interesting. A, it's an efficient fuel when you're using it in the combined cycle gas turbines. That's an interesting one, and obviously, lower carbon emissions than coal.

The second big one, I would say, is the shale revolution here in the U.S. I remember early in my career, we were struggling with whether the U.S. was going to be a declining oil producer. Now, we sit here with the highest oil production in the world for any country, and that will continue to grow. I was just on a call this morning when we thought U.S. production would grow slowly, and we called it 400,000 barrels a day in 2024.

My guess is if I had to risk that, it would be risk-adjusted to the upside, not the downside. You're still seeing growth, efficiency and M&A activity. I think the shale revolution has just been amazing. I think there are two of those things, and there are many more of them, including nuclear, as we'll hopefully get into. We have been shutting down nuclear power for a while, and now we're going to bring the Palisade Nuclear Plant back from the dead and put it back online. There are a number of exciting things: wind and solar. Those are some of the interesting things I think over the last 30 years: when you look back, you say, "Wow, if you don't think things are changing, you're just not paying attention."

Ed Coyne: sometimes people think of the energy transition as this or that. Talk about that a bit because it seems like we will probably have oil and gas around for our lifetime. We don't see that changing, which is also an addition. Could you maybe expand on that a bit?

Jay Dobson: Yes. It is a super point. If listeners could take one thing away from this podcast, it would be all of the above. We will need every energy source, not one or two of them. The biggest reason is that the energy demand globally continues to grow. If you think of it, at the most basic level, energy growth is a product of population growth, urbanization, and ongoing industrialization. We see that more in the developing world than in the developed world.

You watch what happened with data centers and industrial reshoring and electrification in the last year. All of these things are driving energy demand growth. I would say we're going to need all. I even used to say it a year or two ago when people would say wind and solar were the answer. I would say they're part of the answer. As an energy guy, I thank God for wind and solar, not because they're the answer, but because I'm not sure we could satiate the world's demand for energy with just fossil fuels. That's how fast I expect demand growth to grow. It's in all of the above.

We will need natural gas, oil, wind, solar, and nuclear. There will be new technologies, such as carbon capture and hydrogen. Hopefully, we'll talk about all of these, but it is an all-of-the-above scenario, particularly with where we're starting from, which is that 80% of our global supply comes from fossil fuels. Though I think some people, policymakers, and others would like that to be different, the reality is, and reality is often stubborn, the reality is that fossil fuels are fueling 80% of our energy demand.

Ed Coyne: At least in the short term. A lot of people are looking at this critical material energy transition as that move to try to be carbon neutral by 2050. First and foremost, how realistic is that? Second, who will be some potential winners in that movement?

Jay Dobson: I've got to be a little careful here so as not to offend any of our listeners, but with the caveat that I'm not looking at new technology-- and look, new technology will emerge, but when people say net zero by 2050 with great degrees of confidence, they can't necessarily be betting on things that don't work today. With today's technology, I think net zero 2050 is very difficult to attain, maybe even impossible. As you know, I'm a total optimist, Ed, so I want to believe we can do this. I think American and even global ingenuity will move us in that direction.

I think we're going to make mistakes if we focus too myopically on decarbonization and lose sight, hopefully only episodically, of affordability and reliability of supply. I encourage people to think of that like a three-legged stool. If I rip out the reliability, security, and affordability leg, suddenly, the decarbonization stool doesn't stand on one leg. I think that's important.

You mentioned the winners. I do think wind and solar are big winners, and nuclear is a big winner. I would argue, and this is a little counterintuitive, maybe approaching the black swan category, but I think some big oil companies are winners in this. Now, they will have to make that transition, but what excites me about the big oil companies is that they know how the system works. They understand how global energy is derived and delivered.

That's what people want. People don't want oil, they don't want gas, they don't even want nuclear. They want, "I'm sitting here using my cell phone." They want their cell phone charged, the lights to come on and over, and the cool air. That is what people want, and if they don't get that, they will be upset. I think there's going to be several winners. I think the obvious ones are wind, solar and nuclear.

Ed Coyne: You said something earlier that I think is worth repeating, which is the word reliability, right? Even in the U.S., we've seen rolling brownouts and so forth. What are some of the more reliable energy sources out there? Wind and solar are great, but they're not 24/7. I'm leading the witness here to talk about nuclear a little bit. You're seeing more and more reactors being extended and so forth. What do you see in that universe's nuclear ecosystem from an energy standpoint today?

Jay Dobson: It's a good question, and I would have to step back one level, Ed, to start because I think it's something people don't understand. From a reliability standpoint, wherever any of your listeners are, walk over to the wall and turn on the light. The light comes on; you make a power plant somewhere close to you to do something. There was an instantaneous reaction to your demand and supply met.

That is the definition of reliability because you don't care if there's adequate supply. You wanted the light to come on at that moment. You wanted the AC to power up at that point. Reliability, by definition, is understanding the instantaneous matching of supply and demand. That's nuanced in the electricity world. In that recognition, you say, "Well, what if I hit the light and I'm awaiting a solar, and a cloud is overhead?" I know I'm talking about a low-probability event, but we have to manage coincident resources like wind and solar that generate power when the wind blows and the sun shines. Even if we put batteries behind that, we're talking about two or four hours of battery backup, not 16 or 24, which would blow out the economics then.

I think it shines a light on things like natural gas-fired capacity and nuclear because these are dispatchable. If you're very close to a nuclear plant, you hit that light switch; you probably made that nuclear plant spin up slightly to react to your demand. It's the same thing with natural gas, which tends to cycle slightly more than a nuclear plant. Texas is encouraging the addition of new gas-fired capacity to meet what they believe will be a shortage of supply even though they continue to add massive amounts of wind and solar, which, again, at their most basic level, are coincident resources.

I think nuclear has a great future ahead of it. You saw the White House working on that yesterday, trying to figure out how they can help the industry develop from utility-scale large to SMRs. Even policymakers and industries are wrapping their heads around nuclear being a big part of the solution.

Ed Coyne: There seem to be more and more conversations around nuclear and even copper and some other materials, as well as technology. Those two seem to go hand in hand more than ever before. Can you talk briefly about what we see from that 24/7 demand, whether AI, computing, or a data center? What are you seeing in that space? What are some of the topics that are being talked about as they relate to the coexistence of tech and energy?

Jay Dobson: The evolution has been at the data center and AI level. They used to worry about latency, meaning how fast their access to the internet responded. Now, they care a lot less about latency and about getting access to power. Why is that? AI and data center demand is rising rapidly, meaning developers are developing many of these facilities out there, driving expectations for electricity demand growth up significantly. To rewind to where we started, the energy transition would've been complex if global demand was going to grow, not at all or slowly. Now, with AI and data center demand, forget even about industrial demand, which will continue growing; you're seeing demand growth accelerate.

Look, you can build a data center in probably 12 months. It probably takes 24 to 36 months to build a power plant from the forward permitting stage. What you see with these data centers, and we saw what happened with one very large e-retailer, they went directly to a nuclear plant in Pennsylvania and said, "Hey, we'll pay you a lot of money to buy 1,200 acres right next to your facility, and we'll buy power directly from you so that we can have a data center right there."

I think the land grab, if you can use the term, is around access to power and power right now and will be for the next couple of years until we're better in the realm of building hopefully some new nuclear, but some new natural gas fire capacity that can come on a little quicker and satiate some of this demand. The demand for AI is growing rapidly, and some people say, "You're hearing about this. Are we seeing it?" If you look at a utility in the Midwest, their commercial sales over the last eight quarters have grown 8% quarterly.

Ed Coyne: Wow.

Jay Dobson: It's crazy, and that's all data centers. It's showing up, and it's accelerating, and you're going to see it more and more and more. Loudoun County, Virginia, has the highest concentration of data centers in the U.S., and right now, the local utility will say, "Sure, come build another data center. We can't supply you power until 2027."

Ed Coyne: At some point, Amazon will buy a reactor. I don't know when that will happen, but I suspect you'll see it in the news sometime in your lifetime.

Jay Dobson: I agree. I wouldn't be surprised if companies put those in a contract saying, "Hey, I'm not going to guarantee I'm buying because I don't know what the cost will be." Still, you'll have some memorandum of understanding saying, "Hey, if it's in the zip code of economics and we can do it, yes, we would expand to include SMR." I completely agree. I think people are going to stand behind that. I get excited about SMR because I hope it is an economic breakthrough. I got excited when we saw the last nuclear plant built in the U.S. down in Georgia.

I've been a fan of nuclear power for well over 20 years, and it made me physically ill to watch the plant continue getting delayed and the cost rising, so we ended up three years behind schedule and twice the budget expected. However, it's now online and will likely operate for 80 years. Even 30 or 40 years from now, people will be exhaling and saying, "Wow, what a great decision that company made." I still would like to get to the point where we can say it will cost $X billion and $X billion. That's not a pipe dream because that happens, and as an American, it pains me to say this. That happens in China and India, but it doesn't happen here in the U.S.

Ed Coyne: I renovated a bathroom, and it didn't happen. Time or money.

Jay Dobson: Exactly.

Ed Coyne: We probably have a long way to go, but we can always hope on that. You're right. Even if the cost and time are more than people expect, it will still be a cost-benefit plus if you can widen your lens and look out 50 years or 80 years. What are some of the things you want to talk about that I'm not asking? Maybe investors would benefit from knowing about the world of energy.

Jay Dobson: What I do like to point out is a thing like methane emissions. The oil and gas industry is full of all-hog commitment to reducing methane emissions, so pipeline leaks and accidental gas emissions are at the wellhead. Fully committed. These companies are investing in technology. The technology has become relatively inexpensive. I think many of my very green friends want to vilify the old oil industry, and I think I try to tell them, "Look, these guys could be a massively positive partner if you just embrace them."

Whatever happens in the election, I think the Biden administration should have an all-hands on deck in the Oval Office or some part of the White House with the entire energy industry. That would include nuclear, oil and gas, saying, "Guys, we need to do this together." So many times, particularly in the divided world we're in, we see we're going to celebrate this technology, but we're not going to celebrate this technology. All of the above can be a carbon-reducing strategy. Again, adding wind and solar energy initially reduces some other parts.

Again, that's not at night when the wind isn't blowing, or the sun isn't shining, but we are reducing carbon emissions by doing that. Having all of the above can reduce that. What we have to be careful of is, again, that reliability/affordability. When we go back to things like the Russian invasion of Ukraine, which took a lot of natural gas off the market very quickly, we see the response. It wasn't that people didn't consume more. We burned a lot more wood and coal, probably more than we had in the last ten years before 2022. These volatilities and life changes have an impact. I think that's something that I want almost to reiterate. We talked about it already.

I think the industry's commitment to reducing methane emissions is durable. Regardless of the election, the policy that may come out of the White House will probably have fewer consequences. Hopefully, we will still drive towards decarbonization, but it'll always have different tones. These are probably the two bigger things that I'm hearing about. Then I guess the last thing, which I think is unanswerable, but people ask, "What's the next big thing?" I hear that from investors, and I hear that from my boss, like, "Hey, energy transition, what should we be doing?"

Right now, I'm saying, "Hey, I think this existing energy we have is probably going to be the biggest benefactor," but yes, we're going to have to look at SMRs, we're going to have to look at hydrogen, we're going to have to look at carbon capture, we're going to have to look at nuclear fusion. We're going to have to look at all these things, and some of these are further out on the horizon, but we should be working hard on all of these things because, again, all of the above does mean all of the above. It's both the existing and the aspirational.

Ed Coyne: From an investor's point of view, how do you suggest investors take advantage of all these things going on out there? How are you advising the advisors at UBS, for example, on capturing or participating in this? Any words of wisdom on that side from an investor listening to this podcast today?

Jay Dobson: Yes. It's a great question. We get it a lot. I would say diversify. So many people come to me and want to say, "Hey, this new whiz-bang technology is it, and I want to participate." I'm not dissuading people from that, but my point is, look at it in its totality. Ensure we own oil and gas, electricity, wind and solar, and nuclear. There are ways to play this: size that in the context of a diverse portfolio, and then you can resize those.

I would say commodity markets are commodity markets. As oil prices increase and we see those get to a fairly peak level, maybe we can reduce our exposure there slightly and increase it elsewhere. Then, when oil prices or gas prices are low, we go back to that. What I do think about the energy transition when we're looking back 20 years from now, I do think we're going to say we were probably slightly more successful than we thought, but that transition was volatile. That volatility is, I believe, an opportunity for investors.

Make sure you understand all of the above. That means I don't exclude anything from that diverse portfolio, but I also am actively watching that portfolio so that all of a sudden, we see big gains in one part of the portfolio. We have to say, "That's probably a little cyclical. We're going to have answers," because I would say in almost any commodity; electricity, natural gas, oil, name it, the cure for high prices is high prices and the cure for low prices is low prices, which means there are natural cycles in those commodities. When all of a sudden they go up, you're going to understand, hey, it may take some time, but those prices won't last because it will cause people to do things, and you will see a reaction. Within a diverse portfolio, I would own every part of energy.

Again, what are the companies doing? When you're focused on specific companies, what are they doing in the context of their competitive advantage? I ask every CEO I meet, "What do you think you do better?" You do get answers that are somewhat crazy. It means the CEO has thought about it, and he believes their competitive advantage is relatively obscure, and that's a blessing and a curse. The first challenge any CEO has is understanding what their competitive advantage is.

Ed Coyne: Jay, I appreciate you taking the time today to join us on Sprott Radio. How can our listeners who want to follow you reach out to you or follow you to see what you're up to?

Jay Dobson: I'm James Dobson. If you search for me at UBS, a lot of information is out there. I'm on LinkedIn, probably not as active as I should be. Again, what I love about this job now, having spent 30-plus years in it, is helping people understand these topics because you can't help even your policymakers, whether you're helping them at the voting booth or otherwise make good decisions, unless you know the problems. Increasingly, all of us are challenged to understand the problems.

Ed Coyne: Jay, again, thank you, as always, for taking the time today. This was an informative podcast, and I really appreciate you sharing your wisdom.

Jay Dobson: Thank you, Ed. I appreciate the invitation. It's always awesome to spend a little time and share some ideas.

Ed Coyne: Awesome. Thank you, Jay. Once again, I'm your host, Ed Coyne. Thank you for listening to Sprott