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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Morgan Stanley: Gasoline Industry Is About to Become Totally Worthless

The average energy investor is by now well aware of the sector's monumental shift from fossil fuels to renewable energy. Coal-powered power plants have been shuttering at an alarming clip as the price of electricity from natural gas and renewables undercuts them while wind and solar generation continue to gain the ascendancy.

But nowhere has this change been as dramatic as the transport industry, with EV titans such as Tesla Inc. (NASDAQ:TSLA) and NIO Ltd. (NYSE:NIO) now commanding substantially higher valuations than their imposing ICE brethren, General Motors (NYSE:GM) and Ford Motors (NYSE:F). Indeed, the global EV sector now carries a higher valuation than the global ICE sector despite accounting for less than 3% of new vehicle sales in 2020

It's a situation eerily reminiscent of the thousands of buggy and whip companies that were rendered obsolete in the early 20th century.

But now, a section of Wall Street says the situation is a lot more dire than that.

Morgan Stanley has argued that traditional ICE makers are destined to become money-losers as early as 2030.

MS' analyst Adam Jonas says the market may be ascribing zero or even negative value for ICE-derived revenues at GM and Ford and has listed a variety of factors that are likely to transform the companies' once-profitable assets into potentially cash-burning and loss-making businesses.

Pivoting to EVs

Morgan Stanley is hardly alone in its very dim outlook of the traditional auto industry.

A recent survey on institutional investors by the investment firm has revealed that 17% of respondents think ICE technology has no zero or negative value today, while 60% have rated ICE technology as only slightly positive. Just 23% think gasoline and diesel tech still carries a significant positive value. Related: Oil Prices Slip On Large Gasoline Build

But don't get us wrong: Nobody is saying that GM and F stocks are about to go the way of DMC, maker of the once-iconic DeLorean car of the Back to the Future fame.

In fact, GM and Ford could gain a new lease of life after belatedly going all-in into the EV megatrend.

Indeed, General Motors has vowed to end production of all diesel and gasoline-powered cars, trucks and SUVs by 2035 as part of the company's plan to shift its entire new fleet to electric vehicles.

GM also says it plans to use 100% renewable energy to power its U.S. facilities by 2030 and in its global facilities by 2035 and intends to become GM carbon neutral in both its global products and its operations by 2040. Further, the automaker says it will focus on offering zero-emissions vehicles across a wide range of price points and work with various stakeholders to build out the necessary charging infrastructure while promoting consumer acceptance.

If you think that does not sound like the usual GM playbook, you are not imagining things.

GM supported the Trump administration's pro-carbon lawsuit that was meant to force California and several other states with gas-mileage standards to lower them to the national standards. GM, however, flipped after Trump lost in November and withdrew from the suit on Nov. 23 after Biden became the clear winner. Since then, GM has announced a raft of electrification plans, which has helped GM stock rally 35% in the year-to-date. Related: Russian, Saudi Oil Giants To Benefit From Biden’s Anti-Oil Agenda

Morgan Stanley itself prefers General Motors to Ford, maintaining an Overweight rating on the stock while dropping Ford to an Underweight rating from Equal Weight due to a less-than-stellar sum-of-the-parts value.

In fact, Adam Jonas thinks GM's fair value could exceed 50% of current share price while Ford's is 20% lower:

"Our revised DCF and SOTP composition through the 2030 horizon factors in greater caution on our ICE forecasts for both companies, while increasing the value of the EV and AV-related businesses for each. For GM, the offset of the negative ICE adjustments and positive EV adjustments drives an increase in our price target to $80, suggesting over 50% upside. For Ford, our adjustments are substantially offsetting. This, combined with the recent run-up in the stock (which has kept pace with GM YTD) offers more than 20% downside to our price target."

Nevertheless, F shares have similarly climbed 35% YTD.

Need we say that both ICE stocks have handily outperformed TSLA, which has only managed a 20% YTD return.

By Alex Kimani for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on February 10 2021 said:
    Morgan Stanley must be deluding itself if it believes that the gasoline industry meaning internal combustion engines (ICEs) is about to become totally worthless. On the contrary, ICEs are here to stay throughout the 21st century and probably far beyond.

    Nobody should be fooled by the rising valuation of EV car manufacturers such as Tesla. Tesla's market valuation is based on hype and is therefore meaningless. What matters is the penetration of EVs into the global transport system. Despite its valuation, Tesla is a huge bubble waiting to burst.

    There are currently 1.5 billion ICEs on the roads globally of which only an estimated 4-5 million or 0.27%-0.33% are EVs. In 2018 total registered cars of all types on the roads in the United States amounted to 273.6 million while EVs amounted to 543,610 or a miniscule 0.2% and this with heavy government subsidies. In the UK where policy-makers are pushing to ban new ICEs by 2030, there are only around 100,000 EVs out of a total car fleet of 31 million or 0.32%.

    Moreover, Morgan Stanley’s claim that traditional ICE makers are destined to become money-losers as early as 2030 couldn’t be substantiated because it is based on flawed assumptions.

    Morgan Stanley should thing seriously of the major hurdles that will continue to bedevil any significant take-off of EVs well into the future.

    The first is the need for trillions of dollars of investment to expand global electricity generation capacity in order to accommodate the extra electricity needed to recharge the millions of EVs that are supposed to be on the roads by 2040. How could such expansion be sourced: nuclear, hydrocarbons or solar?

    The second hurdle is the hundreds of billions of dollars of investments needed to build a global network of charging points.

    A third is the realization that oil is irreplaceable now or ever. And whilst EVs are benefiting from evolving technologies, ICEs are equally benefiting from the evolving motor technology. As a result, ICEs are not only getting more environmentally-friendly but they are also able to outperform EVs in range, price, reliability and efficiency.

    The notion of global net zero emissions is an illusion. Therefore, it is unachievable in 2050 or 2100 or ever. Moreover, even a gradual energy transition can’t succeed without huge contributions from natural gas and nuclear power because of the intermittency of solar and wind

    EVs are going to face an uphill battle against ICEs. And while they are bound to get a share of the global transport system, they will never prevail over ICEs. As a result, ICEs will continue to be the dominant means of transport throughout the21st century and far beyond.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Michael Fulkerson on February 10 2021 said:
    Is Morgan Stanley really that ignorant to make such an irrational statement, can they make asphalt without oil, plastics without oil, can Tesla and all the EVS take over the world and the next 5 years well electric planes be the way, etc. I don't think so I believe the future is hydrogen and that natural gas will be the number one element.
  • C J on February 10 2021 said:
    Well officially the future is unknown so speculation is all any of us can do.
  • Angus Malarkey on February 11 2021 said:
    "But nowhere has this change been as dramatic as the transport industry, with EV titans such as Tesla Inc. (NASDAQ:TSLA) and NIO Ltd. (NYSE:NIO) now commanding substantially higher valuations than their imposing ICE brethren, General Motors (NYSE:GM) and Ford Motors (NYSE:F). "

    BFD. Not going away anytime soon.
  • Sir Douglasa Whittingam on February 13 2021 said:
    The writing as the wall and Battery as a service is providing a near term solution while better charging options develop. I'm sure fueling was a objection in the horse & buggy era. We will always need oil for many products in the supply chain, but ICE for transport are a failed strategy. Small scale nuclear is already providing impressive & safe results in Europe, (see Fluor). Invest in green energy or be left behind!
  • John smith on February 13 2021 said:
    "The average energy investor is by now well aware of the sector's monumental shift from fossil fuels to renewable energy"

    The writer of this piece is delusional. Wind and solar combined, after many years of heavy investment, are somewhere around 2% of global energy supply. Hardly "monumental" - especially when global energy demand has been rising 1.5% EVERY YEAR for decades (pre covid).
  • JAMES OHARA on March 04 2021 said:
    In reply to dr m.s.
    Car manufacturers values are dependent on the amount of cars they sell and by the 2030's few new sales will be ICE vehicles. Manufacturers who aren't investing in ev veichles now will have their kodak moment soon.
    Ev's are many times more efficient than ICE veichles. For a gas engine only around 10 to 20% of the energy in the fuel powers the wheels the rest is lost by mostly heat and friction. For ev's around 80% of the electricity poweres the wheels so only around 20% is lost. For markets such as europe replacing ICE vehicles with evs would have a relatively small impact on the amount if electricity generation capacity required.
    ICE technology is mature and any improvements in efficiency or in any other metrics are small. In fact Daimlier launched its last ever new engine design in 2018, so for them and others such as VW there is no long term future in internal combustion engines.
    For ev's for example battery technology is advancing at pace, within 3 or 4 years evs will be cheaper to buy than ICE vehicles. What is the market for ICE powered vehicle when you can buy an ev for less money that in Europe for example will cost around 75% less on fuel costs, around 50% less on maintenance, is quieter, more powerful, handles better and is easier to drive than an ICE vehicle.
    It is delusional to think oil and gas for power applications wont be replaced. Renewables are the cheapest form of electricity in most areas of the world and getting cheaper year by year. By 2030 the vast majority of new vehicles won't have engines and by 2035 their is unlikely to be any.
    For oil the leveling off of demand over the next 10 years followed by a gentle decine as predicted by many in the oil industry will not happen. It is highly likely Global oil consumption peaked in 2019 and will decline significantly over this decade.
    International oil economist you may be expert on the decline of ICE vehicles you are not
  • Max Nacht on March 10 2021 said:
    "friendly but they are also able to outperform EVs in range, price, reliability and efficiency." I agree on range, but price will soon be equal and reliability and efficiency already are ahead of ICE. Range will follow.

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