Interest in commercial drones has been picking up speed lately, especially in consumer goods and delivery. But these aren't the only sectors eyeing the possibilities that come with usage of flying drones.
In this week's episode of Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman talk about a few oil and gas companies that are looking into drones to more efficiently and safely check for methane leaks, explore for new oil, and more.
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Also, the hosts look at two opposing statements from U.S. government agencies -- the Environmental Protection Agencyand National Oceanic and Atmospheric Administration-- on the leading contributor of methane production. Find out where the controversy lies, where most methane really comes from, and how much hot-button issues like this should worry long-term energy investors.
A full transcript follows the video.
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This podcast was recorded on Oct. 13, 2016.
Sean O'Reilly:Welcome to Industry Focus, the podcast the dives into a different sector of the stock market every day. Today isThursday, October 13th, 2016, so we're talking about energy, materials, and industrials. I'm your host, Sean O'Reilly, and I am joined byMotley Fool Canada general associate manager, TaylorMuckerman. Mr. Muckerman,any big Halloween plans coming up?
Taylor Muckerman: I don't know yet, I'm deciding whether or not to spend the time in D.C. or New York.
O'Reilly: You and the wife not getting any jointcostumes like the Underwoods or anything?
Muckerman: We have before,but I don't know about this year.
O'Reilly: What were you before? Crayons?
Muckerman: I stuffed apillow under my shirt, and she dressed like a cake. So,I was the fat kid that loved cake.
O'Reilly: Oh my God.
Muckerman: That's about as far as it goes.
O'Reilly: You two are something special.
Muckerman: (laughs) That's why we got together.
O'Reilly:So, for ourfirst segment here,don't know what to say other thandrones are coming to the oil patch.
Muckerman: Yeah,they sure are, thanks toGE(NYSE: GE), among others.
O'Reilly: One,I did not know that GE has a fancy $125 million facility called the Oil and Gas Technology Center. They're rolling out thishelicopter drone called The Raven,and it's going to help out oil companiescut down costs, be more efficientall that good stuff. Really quick, walk us through what exactly The Raven will be doing, and if you think it's good for the industry.
Muckerman: Thelatest version of The Raven can fly for about40 minuteswithout needing to be repowered. It can fly50 miles an hour, hasinfrared sensors on it to test formethane leaks,and they say that it can do the same taskas a human canthree times more efficiently, in terms of the time it needs. They've tested it withSouthwestern Energyand Oklahoma State University, and the test wentwell enough where Southwestern wants to test again,basically allowing this droneand its pilot to testpipelines or the well site for methane leaks,without the need for a human to bewalking around with a handheld infrared scanner.
O'Reilly: That'swhat I wanted to ask. Let's pretend I'm an employee ofKinder Morganor whoever. How does Kinder Morgan find these leaks right now?
Muckerman: You literally have people...
O'Reilly: A guy walking around?
Muckerman: Walking,driving along the length to the pipeline with infrared sensorsdetecting leaks. But the sensors that are predominantly used,apparently, don't tell you the degreeof the leakor anything like that, so you basically say, "There's a leak,"and you have to determine whether or not it'sbad enough to fix. Most of them probably are,especially with the EPA cracking down onmethane emissions in the fossil fuel sector.
O'Reilly: How big of a deal is this?
Muckerman: Early on, it's notbeing used by everyone,it's still being tested. But it seems likethere are other applications here. You can imagine drone use beingvery convenient at offshore oil rigs,people talk about using them to monitor the flaring towers on these rigs, that are often times quite high and if something went wrong,there could be fatal occurrencesthere because of explosions of natural gases not being flared --
O'Reilly: If onlywe had drones for the Deepwater Horizon spill.
Muckerman: I know,that could have maybe helped with something. But you would be more reliant on semi-submersibles for that instance,because it was on the ocean floor. But,you could have used drones to go in after the fact...
O'Reilly: Assess the damage.
Muckerman: The environmentmight not be very conducive to human life. You could have used drones for that. Those are some of the more applicable things. One company imagines dronesdoing away with exploration teams by usingAdvanced seismic equipmenton these drones to go out and find oil,and not just prevent spills or leaks.
O'Reilly: So,we're going to fly this drone over the Delaware Basin,it's going to do some sub-crust deal.
Muckerman: Well,Chevronis working with drones, and suggest thatdrones possessunlimited technological possibilities in the oil and gas sector. That's coming from one of the four or five biggest oil companies in the world. They've been working with them just briefly, but then, you've seen drones also be used Prudhoe Bay in Alaska and very harsh environments.
O'Reilly: HasCore Labs...
Muckerman: To my knowledge, no.I could go back through transcripts,but to my knowledge, no. Fromwhat I understand,that company is dealing mainly below the surface. Thisidea of usingseismic equipment on drones could help them out. But,as of right now,I don't think they're using drones for anything.
O'Reilly: Got it. Thisobviously isn't a tectonic shift,but as you said, unlimited potentialis what these guys are saying.
Muckerman: Yeah. You'realso seeing this used in the agriculture segment as well, to monitor crops,check out water usage andwater reservoirs ondistant parts of farms, and justgeneral field maintenance. And, the U.S.government has allowedfor the use of dronesin the agriculture segment. It's notany man for himself -- there are restrictions. Butthey have a lot of companies and small farmsto use drones to monitor things.
O'Reilly: Before we move on, so,I'm an oil company,I might start using drones to find oil and check gas leaks and all this in the future --how big a cost savingswould you speculate, as a percentage of capex or whatever?
Muckerman: That'shard to estimate. But as they growin the capabilities that they have,I would imagineyou could see some percentage pointsadded back to margins. Granted,you still need someone to fly these drones. They'renot completely independent of human interaction. But you will reduce some of the time needed to complete these tasks and also some of the safety risks that you see when a human is involved. So,I could see, not only predictablecost savings butunpredicted events not happening,which is hard to quantify. I could see thatimpacting that positively.
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So, Mr. Muckerman. EPAcoming out with some emissions estimates. Everybody would assume that the culprit for CO2 levelsin the atmosphere and all this stuff would becars. That turns out not to be the case.
Muckerman: Yeah. Thisdata actually came from NOAA, the National Oceanic and Atmospheric Association, tocounteract with the EPA. We have two government entities...
O'Reilly: Oooh! Rap battle!
Muckerman:... battling head to head. Apparently,fossil fuels only account for 20 to 25% of methaneemissions globally,whereas if you look at microorganisms and livestock...
O'Reilly: I was about to say, it's cows, isn't it?(laughs)
Muckerman: ... decaying vegetation,they called out rice paddies, they're generating...
O'Reilly: Hold on, rice paddies?! Really?
Muckerman: Yeah. The whole group ofmicrobial sources, 58 to 67% of methane emissions,compared to 20 to 25%.
O'Reilly: Decayingvegetation and wetlands and eventermites. But not fossil fuels.
Muckerman: Yeah, they'reonly a quarter at most,apparently.
O'Reilly: I was thinking about, a couple episodes, we talked about how U.S.gasoline demand isfinally at the highest level since the recession. I was also thinking howthat's actually an even bigger dealbecause our cars are more efficient now than they were eight years ago. Is this a product of the last 10 to 15 years of our cars getting better, too? Or has this always been the case?
Muckerman: I can imagine that thecars are getting better, their emission controls are getting better, outside ofVolkswagen.
Muckerman: (laughs)I guess they're getting their act together.
Muckerman: Yeah,awkward for them. But, yeah, emissions aredefinitely down from the fossil-fuel sector,especially when you look at natural gas production.
O'Reilly: Go Big Oil! Yay!
Muckerman: Natural gasproduction is up47% from 1990, whereas methane emissions from that is down 21%. Bothdirections, that's what you want to see.
O'Reilly: Natural gas,as we've covered, is a cleaner fuel.
Muckerman: Yes,cleaner than coal, cleaner than oil. Maybe not so to extract,but to use, it is definitely cleaner. That's been proven. And it'sgetting better in terms of how much they'reproducing in terms of methane. The EPA wants levels from 2012 to be down 40 to 45% by 2025. Nosurprise, some states have come out and filed suit to not have that impact theirspecific states. Fifteen states.
O'Reilly: Which states are they?
Muckerman: North Dakota and Texas lead the pack,two of the larger oil and natural gas producersin the country. But it's interesting to see the wild swing from fossil fuelsbeing the main culprit, according to the EPA, and them being abackseat driver to microorganismsand microbial sources...
O'Reilly: Don'tforget the wetlands.
Muckerman: ... fromthe National Oceanic and AtmosphericAssociation. And when the EPA was enacting this ruling,they did get called out for cherry-picking their data sources.
O'Reilly: Oh, really! So,bringing it back around, I'm an oil and gas investor,let's say. How much time do you spendthinking about this stuff long term?
Muckerman: Companies havestarted to try and fix theirmethane emissions in terms of flaring.
O'Reilly: And you haveTotal, with Crowe, you hear about what they do.
Muckerman: Yeah. So,companies are addressing it. I guess it goes to show thateven the government might not have a full grasp onexactly where these emissions are coming from,because two competing organizationsin the same government...
O'Reilly: I want to see these two government agencies throw down. It could be good.
Muckerman: Yeah,we could have a debate.
O'Reilly: A mic drop.
Muckerman: It doeskind of show that there might be a virtuous cycle ofdecaying plant matter, warmer climates,warmer climates causing more decaying plant matter,warmer climates, then being amplified by thatadditional decaying plant matter and this whole feedback loop.
O'Reilly: Dun dun dun.
Muckerman: The Earth isslowly killing itself.
O'Reilly: Actually,when you sent over this topicearlier, I was curious as to whatcountries are currently consuming the most oil,because we all know that the United States is No. 1.
Muckerman: By far.
O'Reilly: Yeah.I actually didn't know we were this high.
Muckerman: Yeah. I knewthe level we were at, but I didn't know comparatively. Especiallywhen you talk about the growth in China and India of gasoline demand.
O'Reilly: Yeah. So,according to the United States Energy Information Administration...
Muckerman: The EIA,very good source for data andgeneral information, for anybody out there: www.eia.gov.
O'Reilly: For all you oil and gas nerds(laughs) in present company.
Muckerman: Yeah,fair enough.
O'Reilly: Is that the last website you look at at night and the first one in the morning?
O'Reilly: I'm screwing with you. But theUnited States, EIA says, consumes 18.96 million barrels of oil per day. That is...
Muckerman: That's a lot.
O'Reilly: That's some oil.
Muckerman: Itmight sound like a lot,but then when you compare it to the next closest user of gasoline...
O'Reilly: China, 10.5 million.
Muckerman: See? Now you really realizejust how much the United States consumes.
O'Reilly: It reallytapers off from there. Japan, number three, is 4.5 million. Less than half. They import all of it. India, 3.6. Russia. 3.5.
Muckerman: Meanwhile,Russia is the world's leading producer of oil,and they consume very littlecomparatively.
O'Reilly: Yeah.I was actually surprised how much Saudi Arabia consumes. They're in the seventh spot here,and they actually consume just under 3 million barrels. Don't they use it for other stuff than cars?
Muckerman: Yeah,a lot of their energy and power comes from oil.
O'Reilly: Yeah, they burn it.
Muckerman: Yeah. It'ssuch an abundant resource over there. But, they realize thatoil revenue is not going to last forever, so they've beenreally gearing up for a renewable revolution inSaudi Arabia.
Muckerman: Yeah, absolutely. They're inthe right part of the world for it.
O'Reilly: One ofthe only things more abundant than oil in Saudi Arabia is sunlight.
Muckerman: Well, sand. But that's a great reflector.
O'Reilly: Before we head out, Taylor, any stocks you're interested in right now?
Muckerman: Yeah,we can link the stock back to the first topic,drones. The company is calledAeroVironment(NASDAQ: AVAV), ticker AVAV. Traditionally has been linked to thegovernment and military spending, throughunmanned aircraft systems. Been acontractor with the government for 20-25 years. That's the biggest portion of their business,but they are branching out into drones for use in oil, gas, additional applications in the U.S. military, also,electric vehicle charging stations. So,kind of a diverse company herewith the backbone of the U.S. governmentfor the majority of their revenue right now. But then they give you avenues of growth with drones andelectric vehicle charging stations, among other things. The stock sold offquite recently,end of August, August 31st. Looking good. Balance sheet is pretty strong. But because it's a contract-basedcompany at the moment, revenueisn't quite as visible, so there is some lumpiness there. But a business that anyone that'sinterested in profiting off ofincreased use of drones and the like,I think this is a cool company to take a look at. That's ticker AVAV.
O'Reilly: All right.Thank you for your thoughts, Taylor! Have a good one!
Muckerman: You, too!
O'Reilly: That's it for us, folks. If you're a loyal listenerand have questions or comments, we would love to hear from you. Just email us at firstname.lastname@example.org. Once again, that's email@example.com.As always, peopleon this program may have interests in the stocks they talk about, and The Motley Fool may haveformal recommendations for or against those stocks,so don't buy or sell anything based solely on what you hear on this program. For Taylor Muckerman, I am Sean O'Reilly. Thanks for listening and Fool on!
Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman owns shares of Core Laboratories. The Motley Fool owns shares of and recommends Core Laboratories and Kinder Morgan. The Motley Fool owns shares of General Electric. The Motley Fool recommends AeroVironment, Chevron, and Total. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.