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Unpopular but essential – petroleum products improve lives in unappreciated ways

Unpopular but essential – petroleum products improve lives in unappreciated ways

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We encounter petroleum1 products on an almost constant basis – like something as inconspicuous as an iPhone case or as essential as indoor plumbing. Though petroleum is synonymous with automobiles, this represents less than half of petroleum demand. Perhaps surprisingly, an almost equivalent amount of petroleum demand is derived from non-transportation sources. Where else do we encounter petroleum products? How about in milk cartons, golf balls, MRI scanners, lipstick, crayons, and solar panels.

Regardless of its ubiquity, petroleum is often vilified for its role in the environment, primarily from use as transportation fuel. Today, transportation accounts for 14% of global greenhouse gas emissions, with approximately two-thirds coming from cars and trucks.2 Agriculture, industrial, and power are all bigger emitters. As a feedstock for materials and polymers, the problem with petroleum here is not so much with emissions – since it is chemically reformulated versus combusted – but disposal. Though progress continues towards reducing the environmental impact, petroleum is nevertheless a vital component to a functioning global economy and to sustaining and improving living standards globally. In this blog we explore the essential role of petroleum products, what is being done to minimize the negative impacts, and the practical reality of alternatives.

Petroleum meaningfully improves the standard of living for people globally

Petroleum is used as feedstock to make everyday products, ranging from products large and small, recreational and essential. In healthcare, this includes medicine bottles, IV bags, ventilators, personal protective equipment, and hand sanitizers. For recreational items, these include tents, bikes, canoes, rope, backpacks, and fishing poles. Other applications include detergents, home insulation, carpets, furniture, food packaging, diapers, and vehicle bumpers and instrument panels. The list is endless. Petroleum products are used in so many applications because it can be engineered – optimizing its features for being lightweight, durable, corrosion-resistant, and cost-effective – to serve a specific purpose.

But aside from these every day, often mundane aspects, petroleum is essential in providing billions of people with humane living standards: clean water, sanitation, and clean burning fuel, to name a few. For example, petroleum is a feedstock to produce polyvinyl chloride, commonly known as PVC. Indoor plumbing and water infrastructure rely heavily on PVC pipe because of its durability, moldability, recyclability, and cost-effectiveness. Without PVC, more expensive alternative materials, such as steel or copper, would inhibit the proliferation of indoor plumbing and water infrastructure, specifically in developing nations. According to the World Health Organization (WHO), two billion people still do not have basic sanitation facilities such as toilets or latrines, and without effective, low-cost materials such as PVC, these basic sanitation needs will go unmet much longer than necessary.

Propane is another example of petroleum being used to meaningfully improve lives. According to the WHO, approximately three billion people still cook with solid fuels such as wood, crop wastes, and dung. These cooking fuels are detrimental to your health, with an estimated four million people dying prematurely each year from solid fuels.3 In India, approximately 78% of the population in 2015 used solid fuels, leading to an estimated half a million deaths a year, with women and young children the most vulnerable. In 2016 the Indian government launched Ujjwala, which provided both access and subsidies for propane. As a cooking fuel, it burns much cleaner and more efficiently than solid fuels. Since it was easily distributed in cannisters provided for free by the government, propane coverage has now reached approximately 90%, immediately improving the lives of hundreds of millions of people there. The Ujjwala program remains popular domestically. Today, India is amongst the largest propane importers, supplied in large part by US exports.

Figure 1: US LPG exports to India

Source: Bloomberg NEF, June 2020.

Petroleum alternatives exist, but so do tradeoffs

Hypothetically, a “green” solution for replacing harmful solid fuels predicated on renewable power would have a smaller carbon footprint than propane, but practically, that would mean hundreds of millions of people would suffer for years, if not decades, waiting on solar and wind farms, transmission lines, and distribution infrastructure, nevermind being able to afford an electric stove. Instead, utilizing propane not only results in meaningfully better health outcomes for millions of people today, but also immediately improves the environment. If two billion people were to switch from wood to propane, carbon emission would be reduced by approximately 415 million tons annually – about the emissions from the United Kingdom – and deforestation would decline by approximately five million acres – equivalent to approximately 40% of annual global deforestation.4

Plastics, which are almost entirely derived from petroleum, have been essential in increasing energy efficiency, reducing food waste, and enhancing health and safety. Plastics are versatile, durable, cheap, and lightweight, and common applications include packaging (e.g., clamshell boxes, bubble wrap, protective film) and food-service storage and preservation (e.g., milk jugs, bread bags, yogurt containers). Though alternatives such as aluminum and glass do not utilize petroleum as a direct feedstock, the tradeoff of their (i) high heat requirements (provided mostly from coal and natural gas) during production and (ii) additional weight5, thus requiring greater energy for transport, renders their overall carbon footprint significantly greater than plastics.

Figure 2: Carbon footprint

Source: Morgan Stanley, Peak Plastic? We’re Not There Yet, January 2020.

Plastics are currently amongst the largest sources of petroleum demand and are expected to be the largest source of growth going forward, particularly in emerging markets. Consider, plastic consumption per capita in North America is 126kg, which is considerably higher than Latin America, Asia ex-China, and the Middle East and Africa which are all below 40kg and China which is less than 80kg. Besides plastic, petroleum is still an essential ingredient to the industrial economy – large-scale transportation modes (e.g., ships, rail, planes), steel mills, refineries, and petrochemical facilities are all powered by petroleum while alternative fuels have suboptimal and counterproductive energy density, distribution and availability, and reliability characteristics. “Improving living standards” is something to strive for but the term can be a vague target: more granularly, the benchmarks include sanitation, medical supplies, food security and safety, and commerce – all of which require petroleum to improve and make available.

Figure 3: Petroleum demand 2018-2035 by sector

Source: McKinsey – Global Energy Persepective, January 2019.

Figure 4: Plastic consumption per capita

Source: Morgan Stanley, Peak Plastic? We’re Not There Yet, January 2020.

Despite the growing necessity of plastics, solutions are needed for waste and disposal. Plastics in oceans, rivers, and landfills are certainly a major problem today and left unabated, the environmental harm will offset gains in living standards. Founded last year, The Alliance to End Plastic Waste (AEPW) is a non-profit consisting of 50 companies across the supply chain focused on finding sustainable solutions. Although alternative materials are being sought, the focus today from consumer companies and the industry is on recycling. Two key focus areas are (i) making goods and packaging more recyclable and (ii) increasing the recycled content in products and packaging. Anecdotally in the US, we see an increasing amount of consumer goods and e-commerce packaging made from recycled content, and we expect this trend to grow quickly. Potential innovations such as chemical recycling – taking mixed plastics and converting them back to their original materials – would provide another solution alongside mechanical recycling, which exists today but faces sorting bottlenecks. Ultimately, the industry is incentivized to find solutions, and we expect sustained investment in recycling infrastructure and sustainable packaging in the near and long term.

Though near-term uncertainties exist, midstream valuations remain compelling

A common concern from investors in the oil and gas sector is about the uncertain secular trends facing the industry. In our view, these uncertainties are driven by headlines and rhetoric. Consider, (i) the large and globally expanding non-transportation derived demand for hydrocarbons discussed here, (ii) the impediments and realities to rapid power generation conversion (to be discussed in a later blog), and (iii) the very slow and only partial transportation-fuel transition (see our blog Will electric vehicles muffle future oil demand?) mean global demand for hydrocarbons is unlikely to significantly deteriorate for the foreseeable future.

Acknowledging the uncertainty in today’s global economy, fundamentals remain strong for US midstream. For example, Enterprise Product Partners LP (NYSE: EPD) generated a second quarter 2020 earnings-before-interest-taxes-depreciation-and-amortization (EBITDA) run-rate of nearly $8 billion during an unprecedented commodity price and volume environment. EPD can sustain the business with an annual capital spend of approximately $1 billion, meaning the company can fully self-fund capital expenditures and have billions leftover to return to unitholders and further de-lever its already strong balance sheet. This free cash flow compares favorably to EPD’s total enterprise value of $68 billion and 10% yield.6 The broader midstream space looks similarly attractive – according to Wells Fargo’s fiscal year 2021 metrics, the average MLP EBITDA multiple is 8.2x, yield is 11%, and distribution coverage is 2.1x.

As the broader stock market looks past the near-term COVID-19 uncertainty and reaches new all-time highs, midstream equities are priced as if today’s uncertainty is the new normal. As discussed in this blog, US petroleum production is a vital component in today’s global economy and necessary in maintaining and improving global living standards, and although much uncertainty exists over the next year, we firmly believe that these truths remain constructive for the US midstream space over the long-term. 

As of 6/30/2020, Enterprise Products Partners was a 12.24%, 0.00%, 4.96% and 12.57% weight in Invesco Oppenheimer SteelPath MLP Alpha, Invesco Oppenheimer SteelPath MLP Income, Invesco Oppenheimer SteelPath MLP Select 40 and Invesco Oppenheimer SteelPath MLP Alpha Plus Funds respectively. 

Footnotes

1. Defined as liquid hydrocarbon

2. Brookings Institute, Accelerating the low carbon transition, December 2019

3. World Health Organization, Household air pollution and health, May 2018

4. WLPGA, Substituting LPG for Wood: Carbon and Deforestation Impacts, July 2018

5. A 16-ounce bottle made of glass would weigh approximately 50 times more than one made of plastic

6. As of September 1, 2020

Important Information

Blog Header Image: VikramRaghuvanschi / Getty

Businesses in the energy sector may be adversely affected by foreign, federal or state regulations governing energy production, distribution and sale as well as supply-and-demand for energy resources. Short-term volatility in energy prices may cause share price fluctuations.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com.

The mention of specific companies does not constitute a recommendation by Invesco Distributors, Inc. Certain Invesco funds may hold the securities of the companies mentioned. A list of the top 10 holdings of each fund can be found by visiting invesco.com.

Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

The opinions expressed are those of Invesco SteelPath, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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Four burning questions about the future of the $16.5B Novo-Catalent deal

To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.
Beyond spending billions of dollars to expand…

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To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.

Beyond spending billions of dollars to expand its own production capacity for its weight loss drugs, the Danish drugmaker said Monday it will pay $11 billion to acquire three manufacturing plants from Catalent. It’s part of a broader $16.5 billion deal with Novo Holdings, the investment arm of the pharma’s parent group, which agreed to acquire the contract manufacturer and take it private.

It’s a big deal for all parties, with potential ripple effects across the biotech ecosystem. Here’s a look at some of the most pressing questions to watch after Monday’s announcement.

Why did Novo do this?

Novo Holdings isn’t the most obvious buyer for Catalent, particularly after last year’s on-and-off M&A interest from the serial acquirer Danaher. But the deal could benefit both Novo Holdings and Novo Nordisk.

Novo Nordisk’s biggest challenge has been simply making enough of the weight loss drug Wegovy and diabetes therapy Ozempic. On last week’s earnings call, Novo Nordisk CEO Lars Fruergaard Jørgensen said the company isn’t constrained by capital in its efforts to boost manufacturing. Rather, the main challenge is the limited amount of capabilities out there, he said.

“Most pharmaceutical companies in the world would be shopping among the same manufacturers,” he said. “There’s not an unlimited amount of machinery and people to build it.”

While Novo was already one of Catalent’s major customers, the manufacturer has been hamstrung by its own balance sheet. With roughly $5 billion in debt on its books, it’s had to juggle paying down debt with sufficiently investing in its facilities. That’s been particularly challenging in keeping pace with soaring demand for GLP-1 drugs.

Novo, on the other hand, has the balance sheet to funnel as much money as needed into the plants in Italy, Belgium, and Indiana. It’s also struggled to make enough of its popular GLP-1 drugs to meet their soaring demand, with documented shortages of both Ozempic and Wegovy.

The impact won’t be immediate. The parties expect the deal to close near the end of 2024. Novo Nordisk said it expects the three new sites to “gradually increase Novo Nordisk’s filling capacity from 2026 and onwards.”

As for the rest of Catalent — nearly 50 other sites employing thousands of workers — Novo Holdings will take control. The group previously acquired Altasciences in 2021 and Ritedose in 2022, so the Catalent deal builds on a core investing interest in biopharma services, Novo Holdings CEO Kasim Kutay told Endpoints News.

Kasim Kutay

When asked about possible site closures or layoffs, Kutay said the team hasn’t thought about that.

“That’s not our track record. Our track record is to invest in quality businesses and help them grow,” he said. “There’s always stuff to do with any asset you own, but we haven’t bought this company to do some of the stuff you’re talking about.”

What does it mean for Catalent’s customers? 

Until the deal closes, Catalent will operate as a standalone business. After it closes, Novo Nordisk said it will honor its customer obligations at the three sites, a spokesperson said. But they didn’t answer a question about what happens when those contracts expire.

The wrinkle is the long-term future of the three plants that Novo Nordisk is paying for. Those sites don’t exclusively pump out Wegovy, but that could be the logical long-term aim for the Danish drugmaker.

The ideal scenario is that pricing and timelines remain the same for customers, said Nicole Paulk, CEO of the gene therapy startup Siren Biotechnology.

Nicole Paulk

“The name of the group that you’re going to send your check to is now going to be Novo Holdings instead of Catalent, but otherwise everything remains the same,” Paulk told Endpoints. “That’s the best-case scenario.”

In a worst case, Paulk said she feared the new owners could wind up closing sites or laying off Catalent groups. That could create some uncertainty for customers looking for a long-term manufacturing partner.

Are shareholders and regulators happy? 

The pandemic was a wild ride for Catalent’s stock, with shares surging from about $40 to $140 and then crashing back to earth. The $63.50 share price for the takeover is a happy ending depending on the investor.

On that point, the investing giant Elliott Investment Management is satisfied. Marc Steinberg, a partner at Elliott, called the agreement “an outstanding outcome” that “clearly maximizes value for Catalent stockholders” in a statement.

Elliott helped kick off a strategic review last August that culminated in the sale agreement. Compared to Catalent’s stock price before that review started, the deal pays a nearly 40% premium.

Alessandro Maselli

But this is hardly a victory lap for CEO Alessandro Maselli, who took over in July 2022 when Catalent’s stock price was north of $100. Novo’s takeover is a tacit acknowledgment that Maselli could never fully right the ship, as operational problems plagued the company throughout 2023 while it was limited by its debt.

Additional regulatory filings in the next few weeks could give insight into just how competitive the sale process was. William Blair analysts said they don’t expect a competing bidder “given the organic investments already being pursued at other leading CDMOs and the breadth and scale of Catalent’s operations.”

The Blair analysts also noted the companies likely “expect to spend some time educating relevant government agencies” about the deal, given the lengthy closing timeline. Given Novo Nordisk’s ascent — it’s now one of Europe’s most valuable companies — paired with the limited number of large contract manufacturers, antitrust regulators could be interested in taking a close look.

Are Catalent’s problems finally a thing of the past?

Catalent ran into a mix of financial and operational problems over the past year that played no small part in attracting the interest of an activist like Elliott.

Now with a deal in place, how quickly can Novo rectify those problems? Some of the challenges were driven by the demands of being a publicly traded company, like failing to meet investors’ revenue expectations or even filing earnings reports on time.

But Catalent also struggled with its business at times, with a range of manufacturing delays, inspection reports and occasionally writing down acquisitions that didn’t pan out. Novo’s deep pockets will go a long way to a turnaround, but only the future will tell if all these issues are fixed.

Kutay said his team is excited by the opportunity and was satisfied with the due diligence it did on the company.

“We believe we’re buying a strong company with a good management team and good prospects,” Kutay said. “If that wasn’t the case, I don’t think we’d be here.”

Amber Tong and Reynald Castañeda contributed reporting.

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Petrina Kamya, Ph.D., Head of AI Platforms at Insilico Medicine, presents at BIO CEO & Investor Conference

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb….

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Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

Credit: Insilico Medicine

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

The session will look at how the latest artificial intelligence (AI) tools – including generative AI and large language models – are currently being used to advance the discovery and design of new drugs, and which technologies are still in development. 

The BIO CEO & Investor Conference brings together over 1,000 attendees and more than 700 companies across industry and institutional investment to discuss the future investment landscape of biotechnology. Sessions focus on topics such as therapeutic advancements, market outlook, and policy priorities.

Insilico Medicine is a leading, clinical stage AI-driven drug discovery company that has raised over $400m in investments since it was founded in 2014. Dr. Kamya leads the development of the Company’s end-to-end generative AI platform, Pharma.AI from Insilico’s AI R&D Center in Montreal. Using modern machine learning techniques in the context of chemistry and biology, the platform has driven the discovery and design of 30+ new therapies, with five in clinical stages – for cancer, fibrosis, inflammatory bowel disease (IBD), and COVID-19. The Company’s lead drug, for the chronic, rare lung condition idiopathic pulmonary fibrosis, is the first AI-designed drug for an AI-discovered target to reach Phase II clinical trials with patients. Nine of the top 20 pharmaceutical companies have used Insilico’s AI platform to advance their programs, and the Company has a number of major strategic licensing deals around its AI-designed therapeutic assets, including with Sanofi, Exelixis and Menarini. 

 

About Insilico Medicine

Insilico Medicine, a global clinical stage biotechnology company powered by generative AI, is connecting biology, chemistry, and clinical trials analysis using next-generation AI systems. The company has developed AI platforms that utilize deep generative models, reinforcement learning, transformers, and other modern machine learning techniques for novel target discovery and the generation of novel molecular structures with desired properties. Insilico Medicine is developing breakthrough solutions to discover and develop innovative drugs for cancer, fibrosis, immunity, central nervous system diseases, infectious diseases, autoimmune diseases, and aging-related diseases. www.insilico.com 


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Another country is getting ready to launch a visa for digital nomads

Early reports are saying Japan will soon have a digital nomad visa for high-earning foreigners.

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Over the last decade, the explosion of remote work that came as a result of improved technology and the pandemic has allowed an increasing number of people to become digital nomads. 

When looked at more broadly as anyone not required to come into a fixed office but instead moves between different locations such as the home and the coffee shop, the latest estimate shows that there were more than 35 million such workers in the world by the end of 2023 while over half of those come from the United States.

Related: There is a new list of cities that are best for digital nomads

While remote work has also allowed many to move to cheaper places and travel around the world while still bringing in income, working outside of one's home country requires either dual citizenship or work authorization — the global shift toward remote work has pushed many countries to launch specific digital nomad visas to boost their economies and bring in new residents.

Japan is a very popular destination for U.S. tourists. 

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This popular vacation destination will soon have a nomad visa

Spain, Portugal, Indonesia, Malaysia, Costa Rica, Brazil, Latvia and Malta are some of the countries currently offering specific visas for foreigners who want to live there while bringing in income from abroad.

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With the exception of a few, Asian countries generally have stricter immigration laws and were much slower to launch these types of visas that some of the countries with weaker economies had as far back as 2015. As first reported by the Japan Times, the country's Immigration Services Agency ended up making the leap toward a visa for those who can earn more than ¥10 million ($68,300 USD) with income from another country.

The Japanese government has not yet worked out the specifics of how long the visa will be valid for or how much it will cost — public comment on the proposal is being accepted throughout next week. 

That said, early reports say the visa will be shorter than the typical digital nomad option that allows foreigners to live in a country for several years. The visa will reportedly be valid for six months or slightly longer but still no more than a year — along with the ability to work, this allows some to stay beyond the 90-day tourist period typically afforded to those from countries with visa-free agreements.

'Not be given a residence card of residence certificate'

While one will be able to reapply for the visa after the time runs out, this can only be done by exiting the country and being away for six months before coming back again — becoming a permanent resident on the pathway to citizenship is an entirely different process with much more strict requirements.

"Those living in Japan with the digital nomad visa will not be given a residence card or a residence certificate, which provide access to certain government benefits," reports the news outlet. "The visa cannot be renewed and must be reapplied for, with this only possible six months after leaving the countr

The visa will reportedly start in March and also allow holders to bring their spouses and families with them. To start using the visa, holders will also need to purchase private health insurance from their home country while taxes on any money one earns will also need to be paid through one's home country.

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