This podcast was recorded on Aug. 18, 2016.

Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, August 18, 2016, so we're talking about energy, materials, and industrials. I am joined in studio by The Motley Fool's one and only Mr. Taylor Muckerman. How are you today, sir?

Taylor Muckerman: I'm doing quite all right. You?

O'Reilly: Not too shabby. I've got my coffee. I'm settling into talking about some energy.

Muckerman: We should do a show where you don't drink coffee in the morning just to see what happens.

O'Reilly: Half the reason I do it is for the prop just so I have something to do.

Muckerman: Branding, I see that. What does that say: "Washingtonian -- Great places to work"?!

O'Reilly: Yeah, from Motley Fool. This is old, too. It says 2007.

Muckerman: It's definitely old. Props to the mug, though, for standing up through the test of time.

O'Reilly: I would use one of The Motley Fool's Vanilla Ice mugs -- which was, apparently, just a practical joke from a few years ago -- but I try to keep it professional for our podcasts.

Muckerman: Those are pretty popular around here. I'd be surprised if you can even find...

O'Reilly: Don't we have like... We used to have hundreds or something.

Muckerman: Yeah.

O'Reilly: OK. First up, people may or may not be aware, but you are one of our co-managers of Fool Canada. What's the official title? I always forget it.

Muckerman: General manager of business and marketing, but I'm an analyst on the services.

O'Reilly: You and I, we actually both started out in Fool.com editorial.

Muckerman: Yes, we did.

O'Reilly: I'm still there. When did you peace out?

Muckerman: A little over two years ago.

O'Reilly: We loved your thoughts on energy so much that we're just like...

Muckerman: That's what I did on the editorial and then that's why it was a decent transition to Canada because over a third of their market is energy and materials. Combine that with banking and you had darn near 70% of the market wrapped up.

O'Reilly: I remember -- it was 10 years ago -- I was looking at all the companies listed on the Dubai Stock Exchange, because I was just screwing around one day. It's literally all banks and insurance companies and a few oil companies.

Muckerman: TMF Dubai, 2020.

O'Reilly: We should open one of our services there.

Muckerman: Why not?!

O'Reilly: It occurred to me recently, I was like, "We've got this guy that helps run Fool Canada. They're crushing it up there. He goes to Toronto occasionally."

Muckerman: Occasionally.

O'Reilly: We really should pick your brain, Taylor's brain, about what's the difference between Canadian oil companies and the U.S. industry.

Muckerman: In terms of companies, they operate pretty similarly, but they're dealing with oil sands for the most part rather than shale oil like drillers in the United States have been blessed with recently. When you look at the industry up there, Alberta is Grand Central Station. If you look at Alberta by itself, I think it's in the top five for oil reserves in the world.

O'Reilly: On the planet Earth?

Muckerman: Yeah.

O'Reilly: It's them, Saudi Arabia...

Muckerman: There's plenty of gas. Let's see. If you look at it, they have the third-largest crude reserves in the world. They're talking if technology improves, you could see 300 billion barrels of bitumen. Right now, with current technology, around 170 billion barrels.

O'Reilly: For the layman, bitumen is basically like tar?

Muckerman: Yes. Oil sands is what they have up there. It's very hard to extract, very greenhouse gas-intensive.

O'Reilly: They use those trucks. It's very messy.

Muckerman: To ship it in pipelines, you have to use diluent. They have to, basically, ship from the United States in a pipeline up to Canada, dilute the bitumen so that it flows through the pipeline -- because it's so thick and nasty that it wouldn't move on its own, so you dilute it a little bit -- so then you can ship it through pipelines to transport it. Which is kind of why crude-by-rail has been a big deal for them, because that was a big boom for oil sands, because you just loaded it into a truck or a tanker rather than having to ship diluent up and then combine it. It removed that step from the process because you could just put bitumen right in the tanks.

O'Reilly: All of this sounds expensive.

Muckerman: It is.

O'Reilly: Can you just give a ballpark estimate compared to... Last week, we talked about the Permian Basin. Where does Canada fall, globally, on the cost structure of things?

Muckerman: Depending on the offshore field that you're talking about, it's upwards in that range of offshore drilling. Right now, they're definitely not breaking even on barrels of oil that they're producing and you're also looking at Western Canadian Select being the kind of oil that you price in Canada, which is sold at a discount even to West Texas, which is sold at a discount to Brent.

O'Reilly: Because it's so dirty and it's a hassle.

Muckerman: It's dirty and it's more remote. One of the big bottlenecks in Canada is infrastructure to move oil around the country. You see Keystone XL got shut down, the plans for that... You got the southern leg on board, which is totally in the United States.

O'Reilly: Kinder Morgan just got approved for that $4 billion pipeline up there.

Muckerman: That was an expansion, I believe. But then, you look at Enbridge's(NYSE:ENB) Northern Gateway Pipeline, which was supposed to go from Alberta to the West Coast so that it gives oil more access to Asia. That was originally approved in 2014, but I believe they just lost an appeals case recently, so that pipeline...

O'Reilly: Was that an environmental thing?

Muckerman: Yeah. It was an environmental thing with the native tribes in that area. There were some areas where maybe the government and Enbridge overlooked, and so during the appeals process, those were brought up and now that pipeline is back on the shelf.

O'Reilly: Got it.

Muckerman: That's one of the biggest issues outside of the high cost to produce it versus the low cost that it's currently selling at. The big thing there is infrastructure, because when you look at Canada, they use hardly any of the oil that they produce. It's pretty much all exported, mostly to the United States. They're big on natural gas and even bigger on hydropower in Canada. They're one of the cleanest energy-producing countries in the world in terms of what they use to produce energy, but the oil that they produce and export is very expensive and dirty.

O'Reilly: Yeah, plus their population is not big.

Muckerman: It's about a tenth of what it is here.

O'Reilly: There's like 90% of the Canadian population lives within 100 miles of the United States border or something like that.

Muckerman: You look at Ontario and British Columbia are the hubs and you've got, obviously, Calgary is a big city, Montreal is a big city, Quebec, but if you look at Vancouver and Toronto and then the surrounding areas of those two cities, Canada in a nutshell.

O'Reilly: Taking a step back, Canadian oil sands basically cost the same as offshore like in the Gulf of Mexico or something.

Muckerman: It gets up there.

O'Reilly: It's like 60, 70, 80, you need that to justify these projects.

Muckerman: If you look at some recent projects, you look at Suncor (NYSE:SU) just developed a $13 billion project in Fort Hills, but that's like, they said, "OK, that's pretty much our last major project."

O'Reilly: For?

Muckerman: For the foreseeable future. They are turning their mind toward smaller projects because they're a little bit more predictable. Obviously, they're less expensive.

O'Reilly: Don't want to overcommit, man.

Muckerman: Yeah, you don't want overproduction at this point in time.

O'Reilly: On the flip side of that, though, I can't remember when we talked about this, but I seem to remember us talking about an offshore auction in the Gulf of Mexico and there were no bidders. I've been looking at Suncor and a couple of other competitors. They're still producing. They're still doing some projects. Is it just because it's on land? What's the disconnect there if the costs are the same? Why is nobody going to the Gulf, but Canada is still doing some stuff?

Muckerman: I'm pretty sure in those auctions, you've got a limited time frame that you have to drill or begin producing before the money that you spent at the auction is just a sunk cost. I guess it's a sunk cost immediately, but then it basically just disappears. You get nothing for your money if you don't drill soon enough. A lot of these companies in Canada have the right to that land so they can...

O'Reilly: They own it and that's it.

Muckerman: Yeah. They might as well produce. You've got the transportation. Offshore, you have to have a unique transportation for each well because there aren't these pipelines crisscrossing the Gulf of Mexico, thankfully. With the oil sands, these companies -- like we talked about last week -- the companies have to keep the lights on, but they are trimming back. If you look at 2014, oil spending was around $80 billion. This year, two years later, it's around $30 billion for the full year of 2016. It's the biggest two-year change since they started measuring that in the 1940s.

O'Reilly: I'll never forget we saw the capex is now down to like 1952 levels or something.

Muckerman: Yeah, it's bad.

O'Reilly: Eisenhower wasn't the president. Taking an investor perspective to all this, it sounds like based upon all that we've discussed in this show that -- ignoring nationalities and tax effects and all that kind of fun stuff -- do you need higher oil prices to even think about investing in a Canadian oil company? In the $40-$50 world, should we be looking in the Permian Basin?

Muckerman: Sure. You look at Suncor, it's integrated so it's got the full operations just like...

O'Reilly: Their refining operations have been doing well.

Muckerman: Yeah, they have. That may be a company to look at. For us, in Stock Advisor Canada, we've never recommended an energy or oil and gas producer. We have quite a few pipelines and quite a few services companies on our scorecard. That's the method we've been choosing to address the Canadian energy market because we're benchmarked against the S&P/TSX and so you have to have energy exposure, because once energy started to rebound earlier this year, it was...

O'Reilly: You don't want to lag it, obviously.

Muckerman: Right. We did quite well during the downturn comparatively, but once that uptake hit, it was a noticeable lacking portion of our portfolio. We've got several companies that either maintain pipelines, own pipelines. They go out there and provide equipment in the drilling fields. We've got that exposure that way. I think it permeates through the Fool to stay away from producers, in large part, because commodities are so cyclical. The services companies are affected as well, but maybe not to the same degree.

O'Reilly: Got it. Cool. All right. Moving on, it's been a while since we did this, but we got some listener questions.

Muckerman: Yeah, we did, didn't we?

O'Reilly: Leland Payne, out there in Fairview, Texas, wrote us in and says, "Sean and Taylor, on Friday, my friends over at CNBC talked a lot about the potential that ExxonMobil,Chevron, etc., could cut their dividends, if WTI went below $40 and stayed below $50 the rest of this year and next year. The point was made that XOM could more easily increase its debt to maintain the dividend, but my question is: Couldn't they sell some stock they could have bought back in the past year to keep paying the dividends as well? According to Reuters, XOM purchased $210 billion of stock in the decade ending December 31, 2015."

Basically, should Exxon just sell some of its stock on the open market, then it's bought back and it's probably just sitting there in the Treasury stock portion of the balance sheet, or should they take on debt? Should they cut the dividend?

Muckerman: I definitely don't see a dividend cut in the future. You saw Phillips cut their dividend earlier this year by 75%, I believe. For the most part, the other majors are standing pat. I don't see Exxon cutting its dividend. I don't know if they would sell back shares to the market, because buying back shares has been their thing for so long.

O'Reilly: Buying back shares and the dividend is their thing.

Muckerman: Right. That is their thing.

O'Reilly: Arguably, it's more their thing than producing oil.

Muckerman: In the last couple of years, yes. Their reserve replacement ratio has not been all there.

O'Reilly: What did they hit, 60 or 70 last year?

Muckerman: I don't remember what it was last year. Their long-term average is over 100, but the last couple of years not so much. You look at them, their solvency ratios aren't terrible. Debt to equity is 25%. EBIT to their interest expense is 21 times. They can clearly take on a little bit more debt if they need to, which I think would be their method, because when you look at this company, they're very highly rated in the debt markets, so they can get that cheap interest rate, cheaper than pretty much everybody else in the business.

O'Reilly: Cost of capital obviously for debt is way lower than equity, so they should go that route, if they were doing anything.

Muckerman: If you sell equity, you're diluting your shareholders, which is the exact opposite of shareholder return, and those two methods -- like we just talked about -- have been pretty much the entire shareholder return portfolio from Exxon in the last few years. You remove that and you'll lose some shareholder trust.

O'Reilly: You got a tweet.

Muckerman: I did. I did get a tweet.

O'Reilly: Do you want to read it or should I?

Muckerman: I don't have it up on my computer so go for it.

O'Reilly: Ben Thomas tweeted at your friend and mine, Taylor Muckerman, on August 8, @TMuckerman. Question: "With oil companies cutting exploration budgets, how will this eventually affect contract-driven midstream companies?" You and Crowe, man, you guys were all about the fee-based pipeline guys, but that's not always the case with some of them. Is this going to eventually affect that? Because the production in a field that a pipeline is close to starts dropping...

Muckerman: It's a question I've definitely wrestled with myself, because I'm an investor inSpectra Energy. I believe that's the only pipeline company I'm invested in. No, actuallySunoco. I think that could certainly become a problem down the line. You want to be invested in the pipeline that has access to the major fields. They would probably be the last to witness a downturn in production like the Eagle Ford, the Permian. You want access to natural gas demand centers like the Northeast.

O'Reilly: Avoid pipelines that are in the midcontinent.

Muckerman: You can argue that, but again that's where a lot of the refiners are. I think you're quite a ways away from having to worry about a shortage of oil and natural gas being transported, especially natural gas, which, again, Spectra is mostly natural gas. Maybe, I think oil pipelines -- you might have a little bit bigger of a worry sooner, but I certainly don't think that that's anytime within the next five to 10 years, just because there is so much potential that we can flip the switch pretty easily. We just talked about last week EOG,Pioneer Natural Resources, and Continental talking about 10-15% production growth.

O'Reilly: At $50 for the next five years.

Muckerman: Yeah. Those are three of the biggest names in the shale oil business, EOG being the largest in the U.S. shale oil business. I'm not too worried about the continental U.S. production waning to the point where continental U.S. pipelines are really feeling the pinch.

O'Reilly: Got it. Last week we talked about Donald Trump's energy plan based upon what he said publicly and on his website, and bottom line cut regulations...

Muckerman: Cut regulations, all four with coal, all four with fossil fuels. Not trimming everything back renewably, but that's not going to be his focus because what he said was basically, "We're going to focus on resources that are more economically viable at this point in time." Even though solar and wind are coming closer and closer into parity with oil and natural gas, he's choosing to focus on coal and natural gas and oil saying that he wants to bring coal back 100%. To which point of time he's referencing as 100% I don't know, but that was...

O'Reilly: I think that's a reference to the focus as opposed to an actual growth rate.

Muckerman: Yeah.

O'Reilly: In this episode, we wanted to hit, of course, the democratic nominee, Hillary Clinton's energy plan.

Muckerman: Can't talk about one without the other.

O'Reilly: She actually said a lot. Do you want to run it down?

Muckerman: It's almost a mirror image of Donald Trump's plans. She's all in on solar. She wants a half-billion solar panels by 2020, which would be a 700% increase...

O'Reilly: Yeah. I saw that I was like, "That's kind of high."

Muckerman: ...then, renewable energy for every home in the United States. That's in the next decade -- the half-billion panels by the end of her first term, if she's elected, and then the renewable energy for every home in the United States, that's within the next 10 years. All in on renewable energy. Though she is throwing some support toward coal, maybe not in the form of job creation, but she did say that she wants to allocate around $30 billion to make sure that coal families that have been in the business and relying on that for their retirement, she wants to make sure that they're taken care of. As we talked about last week, maybe Trump can help it for the next few years, but these folks need to worry about the next decade.

O'Reilly: Coal plants are being shut down, is the bottom line.

Muckerman: Right. We talked about coal plants becoming more efficient per miner, coal production in the United States peaking about a decade ago, coal employment peaking in the '80s. I think that that might actually be more beneficial for these coal families to have this money set aside to make sure that if a coal company goes into bankruptcy, the government might be able to step in and make sure that your retirement plan and your health insurance are still active.

O'Reilly: It was kind of a top-down thing, because she starts off her energy plan on her website. It's blatant. You can find it easily. She's talked about climate change. She talked about meeting the Paris Accords that were recently agreed to and getting U.S. emissions down between 26% and 28% below 2005 levels by 2025, so it's nine years from now.

Muckerman: I believe Donald Trump wants to completely abandon the Paris Accords and stop giving money to the U.N. for climate change initiatives.

O'Reilly: She would go around and give these speeches, like she would say, "Bill Clinton's going to be doing a lot of economics-type things and he'd be focusing on coal country and stuff."

Muckerman: You have to figure that he's a resource she's going to use.

O'Reilly: Yeah.

Muckerman: Looking at her climate change, she wants to reduce American oil use by about a third and then continue to rely on nuclear power. It's about 20% of our U.S. power generation now. It's a clean source. It's about 60% of our zero-carbon-emissions power load. You're looking at solar and wind and hydro being another portion of that.

O'Reilly: It's been so interesting to me that other developed countries have been stepping back from nuclear ever since the Japan disaster in 2010 or '11? I think it was '10. Anyway, but you had all these countries shuttering nuclear reactors like, "Do we really want to be doing this?" She's not scared or anything like that.

Muckerman: Trump, in his plan, he said he would allow them to live out their current contract in life, but Hillary wants to try to extend some of these, if not all of them, because they are such an important base load supply of power. Aside from the potential disaster, while they're operating, they're a clean source of power.

Again, you have people arguing about the disposal of the nuclear waste once it's used up. That is obviously an environmental concern, but while they're operating, these are clean sources of power. I feel like I can't remember an incident in the United States where a nuclear power plant was leaking harmful amounts of radiation. If you look at Fukushima, that was a terrible confluence of drastic events.

O'Reilly: Tsunamis and earthquakes.

Muckerman: It was a terrible situation.

O'Reilly: You can make the argument, Japan is not the best place to put a nuclear reactor. They are an island.

Muckerman: It's an island. Fair enough.

O'Reilly: On the Ring of Fire.

Muckerman: Yeah. We're relatively safe compared to them. The history, here in the United States, has a great track record.

O'Reilly: Bottom line, it sounds like, I don't know, if and when Hillary Clinton won, it'd be good for renewable energy companies.

Muckerman: Yeah. It seems like she wants to accelerate it, because that 700% growth over the next four years in solar panels is definitely beyond...

O'Reilly: It seems so hard.

Muckerman: ...it's beyond most predictions. I don't know if that's going to be government subsidies or what, how she wants to implement that, but that's the focus. You would expect solar and wind to probably benefit from a Hillary presidency. Again, as we talked about many times at The Fool, these are four- maybe eight-year time frames, and the president doesn't have all-encompassing power. You still have the Supreme Court and both houses of Congress. You're looking at these campaign tactics not always going to work out the way they seem. We don't necessarily encourage investors to invest based on campaign stumping.

O'Reilly: Got it. Bottom line, not surprising, politicians...

Muckerman: It's Republicans, Democrats. Republicans want to support fossil fuels. Democrats want to support renewable fuels.

O'Reilly: This is not surprising.

Muckerman: This is not surprising, no.

O'Reilly: Cool. All right. Well, thanks for your thoughts!

Muckerman: Yeah, I appreciate it.

O'Reilly: Have a good one!

Muckerman: You, too!

O'Reilly: That is it for us folks. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at industryfocus@fool.com. Once again, that'sindustryfocus@fool.com.

As always, people in this program may have interest in the stocks they talk about and The Motley Fool may have formal 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!