Interior Plans to Loot Ecosystem, Puts Investors to Test

Several years ago this blog introduced the concept of ‘keystone species’ to its investor readers.  Naturalists have long known that some species are pivotal to a viable and stable environment.  Like the keystone of a doorway or arch, if this important species is removed, the ecosystem will change dramatically and eventually collapse.  It does not matter the cause:  disease, poisoning, poaching, or over-hunting.  The loss of a keystone species can trigger a domino effect in an ecosystem, leading to an environmental decline that ultimately impacts food and water sources for all animals, including humans.

Yes, the future of humans is intertwined with the fate of animals.  Why is that important for investors?

A couple of examples should help answer that question.  The entire savannah ecosystem in Africa is dependent upon the elephant population trimming acacia trees and preventing the transformation of the savannah into a forest or woodland.  As a dominant environmental feature the savannah plays a critical role in the evaporation and rain cycle that brings water to human population centers.

Need a ‘nationalist’ example?  Sea otters are one of the most important keystone species in the Pacific Northwest off the North American continent.  Sea otters feed on sea urchins, controlling their population and curbing sea urchin consumption of kelp.  Undersea kelp forests are vital sources of shelter and sustenance for several food fish species, crabs and geese.  Without sea otters in charge, the sea urchins would take over and destroy vital habitat for several human food sources.

Now investors will be put to the test by Ryan Zinke, Secretary of the Interior Department in the Trump Administration.  Zinke has moved to reduce the designated habitat for the sage grouse to 1.8 million acres, making 9 million acres of land available for drilling, mining and other development.

Zinke’s move appears to be politically motivated.  First, it provides Donald Trump with bragging rights for reversing the Obama-era set aside of protected habitat for the threatened sage grouse.  Trump has made little attempt to hide his contempt for Obama’s skin color, vowing during the 2016 campaign to rid the country of all Obama policies.  Second, the release of a majority of the protected lands will return to oil and gas developers with deep pockets of ready cash for campaign contributions.

Of course, we have seen this sort of move many times before.  This time though investors need to think long term  -  longer than the next few quarters when oil and gas concerns start talking up their stocks with plans for exploration and drilling among the sage hens.

The sage grouse is considered a important species for the entire sage brush ecosystem.  Today that pretty much covers Wyoming and Utah and includes southern Montana and Idaho.  However, there are sage brush areas in Nevada, Oregon and Washington as well. 

The sage grouse has been under pressure for some time as human population and human development has encroached on historic ranges.  The sage grouse once ranged as far north as Canada and as far south as Arizona and numbered near 16 million birds.  Today the population is closer to 400,000 as a consequence of habitat fragmentation frustrating reproduction. Unrestrained livestock grazing and oil and gas drilling encourages weed growth and wildfires that reduce natural food supplies.  Wind and solar power projects can also undermine sage grouse well-being by ruining ground cover and increasing dust and erosion.

How can this unusual bird be so important to the western ecosystem?  The sage grouse is an ‘umbrella species.’  The fate of the species is so very deeply intertwined with all other species in the same ecological community, its fate portends that of all others in the area  -  hence provides an 'umbrella' of protection.  The sage grouse plays a critical, sponsoring role for as many as 350 other species of wildlife that live in the sage brush system.  This includes elk, mule deer, pronghorn sheep, golden eagles, and, yes, humans engaged in livestock grazing and farming in sage ecosystems. 

The value of the umbrella species is tied to its geographic range.  As Zinke invites oil and gas developers into 9 million more acres of land that has been home to the sage grouse, he sends a direct threat to every other animal and bird in the neighborhood, including humans.

Many investors might consider Zinke’s move as a cue to pounce on publicly traded shares of oil and gas producers with interest in Wyoming.  In terms of active wells, Jonah Energy LLC, Hilcorp Energy Company, FDL Operating LLC and Exxon Mobile (XOM:  NYSE) are among the busiest oil and gas drillers already operating in Wyoming.  In terms of production, EOG Resources (EOG:  NYSE), Devon Energy (DVN:  NYSE) and Ultra Petroleum (UPL: NYSE) also among the dominant players in the area.

There would certainly be some appreciation in shares as management teams begin to talk up the opportunity to expand on cheap land.  The U.S. recently became a major fossil fuel producer and the industry appetite has been whetted to increase domestic production.    Higher earnings would likely follow, especially since the environmental consequences of their drilling and production activities will never be represented in the financial performance of these companies  -  unless, of course, investors finally come to their senses and demand a reform in accounting standards. 

The environmental costs will be borne exclusively by the sage grouse, its avian and animal neighbors, and ultimately by humans who are dependent upon the sage ecology for food and water.  Thus an investor poised to click the Buy icon for XOM or DVN must consider -  whether they find it politically palatable or not  -  the costs of providing capital to an operator that will ultimately take money out of their pockets in the form of higher food and water costs or higher insurance premiums.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.