June 29, 2016

Amryris: Zombie With Attitude

Jim Lane

Zombies with attitude. New partnerships for making magic molecules and exploitin’ the heck out of ’em.

Zombies w attitude

These days, nothing in Hollywood beats a great zombie movie, more than 50 have been released in recent years. Zombies rise from the dead, and change everything around them. It’s not always pretty, or predictable, but they’re a disruptive force.

Well, Amyris (AMRS) is proving to be a zombie story these days — starting with being labeled a “zombie company” by The Motley Fool. TMF writes:

Amyris was a pioneering industrial biotech that went from darling of the field to a company now trading well below $1 per share thanks to a lack of market focus, a suffocating debt load, and management hubris. It’s likely on its way to bankruptcy or a much worse fate: becoming a zombie company that’s impossible to resurrect yet refuses to die. It also serves as a textbook case of the first-mover disadvantage.

Like a clip out of Thriller or Abraham Lincoln vs Zombies, the zombies appear to be awakening. In the past 24 hours, two signature announces put Amyris well outside of what would normally be considered the industrial biotech Zombieland.

The Givaudan deal

First, Amyris announced a collaboration with Givaudan (SIX:GIVN), a leading global flavors and fragrances company. The two companies have been engaged in the research and development of proprietary fragrance ingredients for several years, and the significantly expanded partnership reinforces the diversity and value of Amyris’s R&D platform and manufacturing capabilities to customers demanding high performance, cultured ingredients.

During the multiyear collaboration, Amyris will use its strain engineering platform to design cosmetic active targets, and scale them up for global commercialization at Amyris’s manufacturing facility in Brotas, Brazil. The companies anticipate the launch of the target products in the coming years will demonstrate significant performance, cost and sustainability advantages over existing ingredients.

More about Givaudan

The “global leader in flavors and fragrances”, its cosmetic portfolio comes under the Fragrances Division and earlier this spring was re-branded as Active Beauty. That’s where the Amyris-Givaudan partnership is focused.

The company explained it this way recently:

“Following the acquisition of French bio-sourced active cosmetic ingredients company Soliance in 2014 and science-based cosmetic ingredients firm Induchem in 2015, Givaudan now offers customers and consumers around the world a range of innovative products and technology under one single identity, Active Beauty. Establishing one unified identity is a key step towards our 2020 ambition to make Givaudan a significant player in the fast-growing active cosmetics business. Our customers remain at the heart of what we do and the new identity will enhance the proximity of our business relationship with customers and consumers alike.”

Key to all this? Well, it’s cosmetics, so there’s marketing to be done. But Maurizio Volpi, President of Givaudan’s Fragrance Division pointed to a “a strong R&D…platform to drive future development and innovation in the active cosmetics space.”

That’s where Amyris check in. Already Givaudan has a string of antioxidants, moisturizers, cooling agents, wrinkle reducers and skin firmers.


The Gingko Partnership

Ginkgo Bioworks, the organism company, announced a new partnership with Amyris, the industrial bioscience company. The partnership will enable the companies to develop products more efficiently, achieve scale, and accelerate time to market.

As part of the deal, Ginkgo Bioworks will expand Amyris’ strain engineering capability via access to its world-class foundry; Amyris will be responsible for bringing products to scale. Together, the two companies have a portfolio of more than 70 products under contract for delivery to the world’s leading brands across industrial, health and personal care markets.

Amyris has the leading track record in the industry of scaling engineered organisms and delivering breakthrough products to its customers. The company’s fermentation facility in Brazil is highly advantageous for the production of cultured ingredients such as flavors, fragrances, nutritional ingredients and sweeteners. Together, the two companies expect to deliver more than 20 new products over the next three years.

Ginkgo is currently building Bioworks2, a next-generation automated foundry where Ginkgo’s organism engineers can develop new designs at massive scale. The 25,000 square-foot automated facility is used to build and test prototypes of engineered microbes. It is the company’s second, representing a technology leap from Bioworks1, which opened in early 2015.

The bottom line

Zombie company? As The Zombies themselves put it in their anthemic 1964 hit, “Please don’t bother trying to find her, She’s not there.” Amyris struggled, but look at the deal flow. And the company continues to guide that it will reach revenues of $90 million -$105 million in 2016. And, a planned sale of “ non-core assets expected to generate approximately $40 million-$60 million in net proceeds.” We’ll have to see what those non-core assets exactly are.

$100M in revenues — that would be a milestone indeed. As The Zombies put it in 1968, “Now we’re there and we’ve only just begun /This will be our year / took a long time to come.”

Reaction from the stakeholders

And, there are some ‘pleased and delighteds’ to share from the principals.

“We are very pleased with our ongoing partnership with Amyris. As our company continues to look for innovative and sustainable solutions to availability and cost challenges, we are expanding the relationship to apply Amyris’s technology to a whole new field,” said Maurizio Volpi, President of Givaudan’s Fragrance Division.

“Ginkgo and Amyris working together sets the gold standard for the industrial biotechnology industry,” said Jason Kelly, CEO of Ginkgo Bioworks. “Each company was seeing more customer demand for partnerships than we could handle individually. By sharing our assets and experience we can offer more customers access to the industry-leading technology platform.”

“We are excited to be working with Givaudan to solve supply challenges and deliver sustainable innovation in cosmetic actives. We are very pleased with the Givaudan commitment to innovation and its leadership in delivering breakthrough advancements in Active Cosmetics,” said John Melo, Amyris President & Chief Executive Officer. ” He added with respect to Ginkgo, ““Our combined companies have the leading product and customer portfolio and we realized a need to find a faster and more predictable approach to deliver products to these customers and markets,” said John Melo, CEO of Amyris. “Amyris has successfully commercialized five products from highly engineered molecules, disrupting markets from skin care, fragrances, to industrial lubricants, tires and jet fuel. The flood of new products in the coming years will prove that industrial biotechnology’s time has arrived.”

Jim Lane is editor and publisher  of Biofuels Digest where  this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

June 27, 2016

Trex: While The Sun Shines

by Debra Fiakas CFA

It appears to be the ‘summer of the small-cap’ as performance in the sector outpaces other sectors on the first day of summer 2016.  In keeping with the adage “make hay while the sun shines”, we shifted into a higher gear to find promising small companies that might participate in the small-cap renaissance.  Trex Company (TREX:  Nasdaq) bubbled to the top of a couple different screens based on growth and return.  There is much to like in a company delivering strong growth.  A bargain price is just icing on the cake.  With a ratio of 0.77 in price/earnings to growth, Trex is well frosted.TREX+Decking[1].jpg

The company designs and manufactures outdoor decking, storage, fencing, stairs and railings, using wood waste and resin composites.  Outdoor lighting is a recent addition to the product line.  Its products are designed to be as aesthetically appealing and longer lasting than natural wood.  The company delivered $54 million in net income or $1.73 per share from $451.7 million in total sales in the most recently reported twelve months.  An impressive $59.2 million of sales were converted to operating cash flow.

The gaggle of analysts who follow Trex closely seem to think there is more of the same ahead.  The consensus estimate for the full year 2016 is $2.16 in earnings per share on $471.8 million in total sales.  Indeed, the group has been busy raising estimates in the last three months, with most of the incremental change weighted to the back end of the year.  If achieve the 2016 hurdle represents 24% year-over-year growth in earnings.  The 2017 consensus estimate of $2.46 in earnings per share suggests a slowing to about 13% annual growth.  Yet in an economy struggling to eke out low single digit expansion a double digit growth rate stands out.

With all this good news it is surprising to find the stock trading at 24.5 times trailing earnings and 17.2 times the consensus estimate.  Investors may be tempting their valuation of the stock because of the highly leveraged balance sheet.  Trex is weighted down with $141.5 million in debt, representing a debt-to-equity ratio of 161.6%.  The current ratio is 1.00, which may seem inadequate even if it has satisfied creditors.

It is also noteworthy that a long position in TREX presents some risk.  The beta measure of 2.40 suggests a volatility that might worry conservative investors.  There is no dividend that might otherwise provide a stipend during a period of price weakness.  Despite the blemishes TREX is a ‘sweet peach’ for the summer of small-caps.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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.

June 23, 2016

Tesla Considering Shanghai For New China Plant

Doug Young 

Bottom line: Tesla will announce a joint venture production facility in Shanghai within the next 1-2 months, and could see its China sales pick up sharply after its more affordable Model 3 reaches the market next year.

Just a week after Disney (NYSE: DIS) launched its newest theme park in Shanghai, media are saying that new energy car superstar Tesla (Nasdaq: TSLA) is also eyeing China’s commercial capital as the location for a new production base costing up to $9 billion. We should note from the start that the potential partner mentioned in the reports, the Shanghai government-owned Jinqiao Group, has denied the signing of a memorandum of understanding (MOU) for such a deal. But in this case I trust the source of the story, Bloomberg, more than the Chinese officials who have a track record of denying reports that later turn out to be true.

This particular investment plan has been in the headlines for much of this year, though Tesla has been quick to always say that it will only make such an investment if it can find the right partner and market conditions justify such a move. A major breakthrough appeared to be near last month, when a senior Tesla executive met with a high government official in charge of the new energy car sector and the pair later released photos of their meeting. (previous post)

All that said, let’s review the latest developments that include both details of the potential plan and also Jinqiao Group’s denial. According to the Bloomberg report, Tesla has signed an MOU to build a manufacturing plant in Shanghai’s Pudong New District, making the city the front-runner to host the long-discussed production base. (English article; Chinese article)

Under the plan, Tesla would provide half of the investment for the plant, or up to 30 billion yuan ($4.5 billion) of the total cost of around $9 billion. Jinqiao Group would provide the other half. Other places that are still vying for the plant include the interior city of Hefei in Anhui province, and the city of Suzhou about an hour’s drive from Shanghai.

The Bloomberg report cites a representative of one of Jinqiao’s listed units saying that the parent company hasn’t signed any MOU or other documents about a Tesla joint venture factory. (English article; Chinese article) The fact that Bloomberg decided to run its article despite the denial leads me to believe that a deal is really happening in Shanghai, though perhaps there’s no actual signed MOU just yet.

Aggressive Suitor

The fact of the matter is that Shanghai is quite aggressive when it comes to courting cutting-edge famous brands like Tesla. The city just opened its state-of-the-art Disneyland last week, and the latest reports are pointing out that the reported new Tesla factory would be worth nearly twice as much as the $5.5 billion price tag for the Disney resort.

Shanghai has also been working aggressively to build up a charging infrastructure for electric vehicles (EVs), in a bid to jump-start Beijing’s stalled program to promote the industry. That program includes not only building charging stations throughout the city, but also working aggressively to get residential property management companies to permit apartment dwellers to install such stations in their parking spaces at home.

Tesla zoomed into China 2 years ago on a flood of positive publicity, fueled by Beijing’s emphasis on the technology and also the celebrity power of company founder Elon Musk. But it stumbled badly after that due to lack of infrastructure, poor marketing and also problems with China’s broader incentive program to promote the sector.

This latest move to localize production, combined with Tesla’s recent introduction of a more affordable model priced at $35,000, seem to indicate the company may be regaining some of the momentum it lost after its fast start 2 years ago. Accordingly, I expect we could see a formal announcement of the new joint venture in the next month or two, and the company’s China sales could pick up sharply when the new more affordable Model 3 becomes available here next year.

Doug Young has lived and worked in China for 20 years, much of that as a journalist, writing about publicly listed Chinese companies. He currently lives in Shanghai where, in addition to his role as editor of Young’s China Business Blog, he teaches financial journalism at Fudan University, one of China’s top journalism programs.. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

June 22, 2016

Capstone Turbine: Not a Pretty Picture

by Debra Fiakas CFA

Last week microturbine manufacturer Capstone Turbine (CPST:  Nasdaq) reported financial results for the final quarter of its fiscal year ending March 2016.  Sales were $18.9 million in the quarter, bringing total sales for the year to $85.2 million.  FY2016 sales shrank 26.2% from the prior fiscal year for the second year in a row.  Some shareholders may be taking solace in the FY2016 net loss of $25.2 million or $1.39 per share in that it is an improvement over the even deeper loss in the year before.  That does not necessarily mean that operating performance has improved for Capstone.  The year-over-year comparison is muddied by a special charge in FY2015 for bad debt expense totaling $10.1 million.  Then in the more recently reported FY2016, $1.5 million in bad debt recovery worked in the company’s favor.

No one should be surprised at recent deep losses.  Capstone Turbine has been reporting operating and net losses since  -  well, since the beginning.  The continued deep losses beg the question:  will Capstone Turbine every turn a profit?

The company staged an initial public offering sixteen years ago this month in June 2000, disclosing losses as far back as 1998.  In that long-ago year, Capstone achieved the first commercial sale of its versatile Model C30 turbine.  This was followed close on in 2000 by the introduction of the Model C60 using natural gas as fuel.  Shareholders must have had high hopes for that second model, and sales initially popped to $36 million in FY2001 only to drop back to $19.5 million in 2002, well below sales achieved even by the first Model C30 turbine product.  In both years, cost of goods far exceeded sales.

This last metric provides a clue to what might be Capstone’s bottom line struggle.  Even as the product line expanded and unit production increased, cost of goods exceeded sales up through 2011.  In FY2012, the Company finally reported a positive gross margin of $5.4 million on $109.4 million in total sales.  Unfortunately, it was still far too small to cover $37.1 million in operation costs, leaving an astounding operating margin of negative 28.9%.

Fast forward to the most recently reported fiscal year, the gross profit margin has improved to 15%, allowing the company to pull out $12.8 million of sales to cover operating expenses.  Except that gross profits are not sufficient cover operating expenses.  Spending on research, development, selling general and administrative activities totaled $37.3 million.

Of course, this is a look at reported net losses, which presents only part of the picture of operating results.  Cash flow from operations brings the rest of the image into focus.  It is not any prettier.

Capstone Turbine has never reported positive operating cash flow, relying year after year on cash resources to support operations.  In FY2016, the Company used $22.5 million in cash resources for operations.  There was $11.7 million in cash on the balance at the end of March 2016.  At the recent spending rate the cash balance could last another six months.

Thus capital resources are an issue for Capstone Turbine.  Management has avoided debt, and at the end of March 2016, there were $435,000 in notes payable and lease obligations on the balance sheet.  The bias against debt has forced the company to go back to the equity capital markets every year for additional equity capital.  In May 2014, the company staged a negotiated offering of 900,000 shares of common stock at $34.00 per share to a single investor, bringing in $29.8 million in new capital.   Capstone has raised a total of $853.3 million in equity capital since inception, nearly all of which has been burned up by operations with losses totaling $827 million.

In August 2015, a little more than a year after the follow-on offering, the Company entered into an at-the-market equity offering program to sell shares of its common stock.  By the end of March 2016, the Company had sold 6.9 million shares under this $30 million facility and took in another $12.7 million in new equity capital after expenses and fees.  I estimate the balance of the equity facility could provide support for Capstone’s operations for another eight months

Capstone shares are trading near $1.40 per share, which given the long history of weak results seems a bit dear.  Microturbines offer the promise of energy efficiency and for some investors the whiff of environmental benefit may be enough to put up with dismal operating performance.  I do like all things green, including money.  Unfortunately, Capstone does not appear to be able to deliver any of that kind of green to shareholders.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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.

June 20, 2016

Green Plains Primes The Pump

by Debra Fiakas CFA

Ethanol producer Green Plains Renewable Energy, Inc. (GPRE:  Nasdaq) announced today plans to build a fuel terminal point in Beaumont, Texas.  The terminal will be located at a facility owned by Green Plains’ partner in the venture, Jefferson Gulf Coast Energy Partners.    It will be helpful to have a friend in the project that is expected to cost $55 million to complete just ethanol storage and throughput capacity.  Planned storage capacity is equivalent to 500,000 barrels, with the potential to expand to 1.0 million barrels.  Capacity to handle biofuels or other hydrocarbon fuels will be added later.  The terminal should give Green Plains better access to world fuel markets through railroad, barge and ocean tankers connections at the terminal.

This is the second terminal project for Green Plains.  In November 2015, the company announced plans to build an ethanol terminal in Maumelle, Arkansas for access to the Union Pacific rail line.  The terminal will have the capacity to unload trains as long as 110 cars in one day and will be able to store as much as 4.2 million gallons of ethanol.  The price tag is projected to be $12 million, which will be split equally between Green Plains and a partner, Delek US Holdings.  A downstream refining and distribution company, Delek is experienced in fuel logistics and has connections to convenience stores.

The two projects should smooth the way for Green Plains to economically reach customers both in the U.S. and around the world.  Lower cost distribution can also give Green Plains a competitive edge in striking deals.  Now the company needs to ‘fill the pipe,’ so to speak.  The altered strategic plans of some competing ethanol producers may be giving Green Plains an opportunity to do just that.

Abengoa SA (ABG:  Madrid or ABGB:  Nasdaq) has debt issues back home and is putting its U.S. operation into bankruptcy.  Green Plains has offered $200 million in cash for Abengoa’s ethanol plants in Illinois and Indiana.  The deal will give Green Plains another 180 million gallons in production capacity and elevate it from fourth to third largest ethanol producer in the U.S., passing up Valero Energy (VLO:  NYSE).

Even top-dog Archer Daniels Midland (ADM:  NYSE), with its 1.7 billion gallon ethanol production capacity, is rethinking its ethanol priorities.  In February 2016, ADM announced its two dry mill ethanol plants that grind and crush corn feedstock were under scrutiny.  At that time ethanol prices had slumped to the $1.34 to $1.40 range and renewable fuels policy seemed unclear.  Since then the profit potential in ethanol has improved as prices have come back to the $1.65 to $1.70 price range.  ADM may ‘think’ its strategy right back to the starting point.  In the meantime, Green Plains management can still speculate about grabbing up even more capacity.

Acquiring production capacity during a market downturn, is a tactic well known by number two ethanol supplier Poet, LLC (private).  Based in Sioux Falls, SD, Poet has a long history of buying up bankrupt and otherwise beleaguered ethanol producers and then installing its own proprietary technologies to improve efficiency.  Poet itself might have an interest in ADM’s dry mill plants if either or both of them get put up on the auction block.  Poet has patented its proprietary dry mill process and is the largest ethanol producer in the country in terms of dry mill plant capacity.

Green Plains ambitions may be tempered by the condition of its balance sheet.  The company has not shied away from debt to finance its expansion in the ethanol sector.  At the end of March 2016, long-term debt and notes totaled $765.9 million, representing an 82.4% debt-to-equity ratio.  A look at assets helps put leverage into clear focus.  Book value of property, plant and equipment assets net of accumulated depreciation was $920.5 million in March 2016, representing a multiple of 1.2 times debt obligations.  A current ratio of 2.10 should also provide some comfort to shareholders and creditors.

The company had $383.4 million in cash on the balance sheet at the end of the last quarter, suggesting nice little treasure trove.  Unfortunately, during the period of weakened ethanol prices in late 2015 and early 2016, Green Plains was using cash to support operations  -  $259 million in the twelve months ending March 2016.  In my view, a company generating nearly $3.0 billion in annual sales needs as much as $450 million to $600 million in cash just for working capital purposes.  This is especially important when at the trough of the business cycle and profits have been reduced.  Against this ruler the treasure trove is more like a bare bones reserve.

Green Plains will need to come up with $33.5 million to support commitments to the two terminal joint ventures.  Then there is the $200 million bid for the Abengoa assets.  The company has some alternatives.  Green Plains Partners, LP (GPP:  NYSE), the holder of the company’s downstream assets, could use some of the $49 million in remaining credit on a revolving line of credit facility opened in 2015.  The parent company has a revolving line of credit as well.  However,  to be meaningful in the current investment scenario, the company would need to petition the agent to exercise the $75.0 million accordion feature that was built into the facility.   Of course, new common stock could be issued through either the parent (GPRE) or the downstream limited partnership (GPP).   GPRE current commands a multiple of 13.5 times projected earnings, while GPP is trading at 8.3 times expected earnings in 2017.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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.

June 16, 2016

Fossil Fuel Companies Should Be Issuing Green Bonds

by the Climate Bonds Team

     ‘Fossil fuel companies should not be issuing green bonds because they are not green businesses.’

Varying versions of this statement crops up often at green bond conferences and in articles. We disagree, and here is why:

It’s use of proceeds that matter

Green bonds are about use of proceeds. What matters is the green characteristics and features of the projects that are being invested in, the ‘use of proceeds’, not the balance sheet backing the bond. This is an accepted concept in the green bond market globally (and the first pillar of the Green Bond Principles).

The use of proceeds concept means a fossil fuel company could issue a green bond with proceeds allocated to qualifying green projects – offshore wind farms, for example – and that bond will be just as green as a green bond issued by a pure-play offshore wind company allocating proceeds to the very same type of projects.

It’s already happening

Engie, a largely gas energy company, has already done this with their green bond.

The oil-filled balance sheet backing the bond does not impact the green credentials of the bond - provided sufficiently strong management practices are in place to ensure proceeds are properly earmarked for green projects alone. We need trust in the process.

Now, to clarify, Climate Bonds does not support fossil fuel companies (or any other issuer) issuing green bonds for fossil fuel projects, such as "clean" coal (what a brilliant piece of disinformation that term has been).

To meet internationally accepted emission reduction targets, we need to shift away from fossil fuels, and ramp up the speed of that transition to clean energy sources dramatically.

Urgency of the climate challenge means we need the big players to change

The urgency of climate mitigation means we encourage fossil fuel companies that wish to issue green bonds for ambitious green projects and should welcome them with open arms to the green bond market. Those fossil fuel companies that embrace a transition from their high carbon business model, should garner institutional investor support.

We need the big companies with massive investment and capex budgets to put less into exploration and development and more and more into money into green projects. The urgency of the climate challenge requires a faster re-allocation of capital.

We simply don’t have the luxury of leaving all green investments to smaller, pure green companies, and wait for them to slowly displace fossil fuel companies in the energy supply mix.

We were reminded of the great urgency of climate action this week when reviewing reports of masses of methane – a greenhouse gas 20 times more potent than CO2 - being released from the arctic seabed. The quantities will only increase with a warming ocean.

Fossil fuel companies offer scale and existing internal capabilities to green projects

The green business units or divisions may still account for a relatively small share of any fossil fuel company’s balance sheet, but because of the vast scale of many fossil fuel giants, the green divisions are surprisingly large when pitted against other players in the renewable energy industry.

If the solar division of French oil company Total SA solar division were separated from its parent company, it would be one of the world’s largest solar businesses. Similarly, if Norwegian oil giant Statoil were to spin out its offshore wind business into a separate company, it would be one of the 15 largest companies listed on Oslo Stock Exchange – across all sectors.

Turning an oil tanker may be a slow process, but when it comes to shifting a fossil fuel company into renewable energy, it can be a surprisingly simple shift, since many of the technical and management skills needed are the same. Everyone in Statoil's wind energy department was recruited internally, as "not much is required to retrain an oil engineer to be an offshore wind engineer".

Dirty balance sheets backing clean energy – exactly what we need

The beauty of green bonds issued by the fossil fuel companies to finance these divisions is that they would be backed by the full balance sheets of these giants. Hence investors don’t need to take any renewable energy risk, but proceeds would be earmarked for the green business units alone. I.e. using brown balance sheets to build green.

No different from banks and energy giants issuing green bonds

Still not convinced fossil fuel companies have anything to do in the green bond market?

What about green bonds issued by banks and large energy companies? Both banks and large energy companies also have fossil fuel filled balance sheets, due to their lending and investments in the area. As BankWatch pointed out this week, the banks that created the Green Bond Principles still have quite large fossil fuel loan portfolios. So welcoming oil companies to issue green bonds is really no different from accepting banks with fossil fuel exposure issuing green bonds.

Simultaneously we can and should continue the push to have banks and institutional investors get out of fossil fuels.

Like encouraging good behaviour among children while chastising bad behaviour.

The Last Word

“What exactly is wrong if Total issues a corporate green bond to finance their solar division-one of the world's largest solar companies. That's using oil industry balance sheets and creditworthiness to finance (and reduce the cost of capital for) solar - exactly what we need, is it not?” – Sean Kidney, CEO Climate Bonds Initiative

——— The Climate Bonds Team includes Sean Kidney, Tess Olsen-Rong, Beate Sonerud, and Justine Leigh-Bell. 

 The Climate Bonds Initiative is an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

June 13, 2016

DAR the Rins Blow!

by Debra Fiakas CFA

Last week the management of  Darling Ingredients (DAR:  NYSE) staged a webinar on its opportunities in biofuels.  Darling produces biodiesel in Kentucky and Canada and is in a renewable diesel joint venture with Valero Energy (VLO:  NYSE) in Louisiana.  As a recycler of wastes and excess from the food production processes, the production of energy with organic feedstock is a logical extension of Darling’s collection and aggregation infrastructure.

The event did not do much for Darling’s share price, but the presentation triggered a few questions about RINs  -  shorthand for Renewable Identification Numbers.  These are a creation of the U.S. Environmental Protection Agency (EPA) to track renewable transportation fuels.  They come in handy for the EPA to monitor how well oil refiners and blenders are doing in meeting the Renewable Fuel Standard (RFS).  Those standards were set up by Congress through the Energy Policy Act of 2005, to promote the use of renewable transportation fuels.  On the simplest level, the standards require the use of a minimum amount of renewable fuel usage based on the amount of petroleum product sales.
Here is where the RINs really become important.  Of course, refiners and blenders can meet the RFS standards by buying ‘wet gallons’ of actual renewable fuels.  They can also buy RINs from other parties who have exceeded the requirements.  There is a market for RINs.  As with any other asset, the value of a RIN is dependent upon the number of RINs sloshing around and whether refiners and blenders can get enough ‘wet gallons’ to meet the standards.

Progressive Fuels Ltd. publishes weekly RINs trading data. For example, in the week ending June 2, 2015, D3 RINs for cellulosic biofuel produced in 2016 ranged from $1.77 to $1.79.   Generally, RINs prices for cellulosic biofuel produced in both 2015 and 2016 have traded down from prices in late 2015.    Corn ethanol (D6), biomass-based diesel (D4), cellulosic diesel (D7) and advanced biofuels (D5) each have their own RIN code.

It is a well-intentioned arrangement  -  support development of renewable fuels with a clever economic support system.  Indeed, the D6 RIN for corn ethanol increased in value during times of higher RFS target announcements or near the compliance deadlines.  However, more recently the D6 RIN price has been influenced by the decline in gasoline prices.

What might be as important for renewable fuel producers like Darling is the amount of gasoline demand in the country.  With prices at the pump at record lows (at least since 2009), gasoline consumption is expected to rise.  The U.S. Energy Information Administration (EIA) estimates that gasoline consumption could reach 9,530 million barrels per day in 2016.  This is 1.5% higher than consumption in 2015.  However, ethanol blended into gasoline is expected to reach 950 million barrels per day, an increase of 1.1% compared to last year.

Darling is looking at RINs also, but in terms of market opportunity.  Looking at the EPA’s new 2016 advanced biofuels mandate in terms of RINs, the company sees an opportunity to sell fuel worth 440 million RINs.  Put into ‘wet gallons’ it would be 288 million in 2016.  With a capacity to produce 18 million gallons of biodiesel and 160 million of renewable diesel per year, that is an attractive prospect.  

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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. Darling Ingredients is included in the Biofuel Group of the Beach Boys Index of alternative energy developers and producers.

June 08, 2016

High Income Green Investing For Small Investors

Tom Konrad Ph.D., CFA

Until recently, green income investing was an oxymoron.

Most companies people think of as green (think Tesla Motors (TSLA) or First Solar (FSLR)) are relatively new companies that are investing all of their profits (such as they are) back into the business.  Meanwhile traditional income sectors like utilities, oil and gas, and coal mining are deeply tied into fossil fuels.  Real Estate Income Trusts (REITs) are the sole exception.  A REIT is as green as the property it owns, and a few such companies are real leaders in sustainable buildings... but not nearly enough to build a diversified portfolio.

The Birth of the Global Green Equity Income Portfolio

In 2013, with the IPOs of Hannon Armstrong (HASI), NRG Yield (NYLD and NYLD/A), and Pattern Energy Group (PEGI), there were finally enough high-income green stocks (if you include international stocks) to build a diversified portfolio.  In December of 2013, I teamed up with Green Alpha Advisors to manage a green, fossil fuel free portfolio designed produce a high level of dividend income which we hoped to persuade Shelton Capital Management to use as the basis of a mutual fund, joining the growth-oriented Shelton Green Alpha Fund (NEXTX) as a natural complement.

Fossil Fuel Free, or Green?

We chose to make the portfolio fossil fuel free (FFF) because that is part of the Green Alpha brand.  They have one of the strictest definitions of FFF in the industry, and it is an important part of their identity.  My own definition of green is considerably broader.  For me, a company is 'green' because of its effect on the environment. If our economy would be doing more damage to the environment if the company did not exist, or if the environment benefits as the company grows, then the company is green. 

In 2014, I started to become frustrated with the difference between our definitions of green.  The pure fossil fuel free approach eliminated several of the most attractive green income stocks from the portfolio.  These included Brookfield Renewable Partners (BEP), TransAlta Renewables (TSX:RNW or OTC:TRSWF), Primary Energy Recycling, and Capstone Infrastructure.  The last two don't have stock tickers because they have been (profitably for investors) bought out since then.

In order to hedge my bets in case Shelton decided to pass on the mutual fund, and because of this frustration, I started a second seed fund in May 2015.  This second fund used the same approach, but my own, broader, green criterion.  I call this second fund the Green Global Equity Income Fund GGEIP, and the fossil free version FFFGGEIP.

Performance

Both portfolios have built up strong track records, as you can see from the following (after fees) performance chart and table below.  In 2014, there was no index of high income green stocks, so I have used the SDY, SPDR S&P Dividend ETF of general high income stocks as a benchmark.  In May 2015, YLCO, the Global X YieldCo ETF, which does focus on high income green (but not fossil free) stocks as a benchmark from that point on.

GGEIP performance

Fund/Benchmark
2014 Total Return
2015 Total Return
1/1/2016 to 5/31/2016 Tot.Return
Annualized since inception
GGEIP
1.5%
11.6%
19.5%
12.9%
FFF-GGEIP
4.2%
12.2%
9.9%
10.6%
SDY
13.8%
-0.8%
11.2%
9.5%
YLCO


3.6%
-25.2%

Seeking Mutual Fund Companies


Despite the strong performance, Shelton decided to take a pass on either version of GGEIP last year, and I have been looking for a different mutual fund company to launch the fund since.  I'm currently speaking with two. 

Since this would be a new category of mutual fund, both are uncertain as to total demand.  To me, the need seems obvious.  The need for current income is common for retirees, as well as endowments and foundations.  A report from Bloomberg New Energy Finance identified the difficultly in replacing high income fossil fuel stocks as a sticking point for investors seeking to divest from fossil fuels.  So the demand for a high income green alternative will come from anyone who currently owns REITs and MLPs, but wants to divest from fossil fuels.

Why I Built The Green Equity Income Motif

While I was pondering how to demonstrate the demand for my fund, Jigar Shah, the President of private clean energy infrastructure investment fund Generate Capital suggested that I start a Motif on the Motif Investing platform.  Jigar was also a co-founder of SunEdison (SUNEQ), but he left long before the company got itself into its latest troubles.  He can also be heard weekly on my favorite podcast, The Energy Gang (Soundcloud, iTunes).

The Motif platform allows investors to essentially build baskets of stocks (Motifs) that they can buy and sell like exchange traded funds for a single $9.95 commission on a $3000 , but without the ongoing expenses of an ETF. 

I thought it was an excellent idea, and easy to implement, so I created the Green Equity Income Motif.

I can't replicate the GGEIP strategy on Motif for three reasons:
  1. Motifs only include stocks on US exchanges.
  2. Adjusting or rebalancing the holdings in a Motif requires additional trades.
  3. I use covered calls and cash covered puts in GGEIP to lower volatility and increase income.  Such option strategies are not available on the Motif platform.

Offsetting these disadvantages is the large advantage of cost- you can buy the entire Motif for a single commission.  And these disadvantages are also an advantage in that the people who may be interested in the Green Equity Income Motif are not likely to be the same ones who will want the mutual fund... but they can still help me demonstrate demand.

If there is significant demand for my Motif over time, I'll update it at least every year to add new green income stocks that go public and replace ones which get bought out.  I'll also re-weight the Motif towards the stocks that I think have the best chance of doing well in the coming year.  I called this first version the "Green Equity Income Motif 2016" to distinguish it from future versions, but I intend to update it more than once a year assuming there is demand and market conditions change.

How You Can Help (and get $100 for your efforts)

If you would like to help me start my fund, or just want a cheap, easy way to invest in my green dividend income ideas, here's how:

You can get $100 for opening a new Motif account now (I also get $100 for referring you.)  When someone buys the Green Equity Income Motif or future motifs I create, I'll get $1 as well.

Even if what you really want is the fund, the $100 bonus for signing up for the Motif account is a nice compensation for your trouble... you can always sell the Motif and use the money to buy the fund when it's available.

I know most of my readers are active investors and are more interested in investing their own money, rather than using a mutual fund or even a Motif.  If that is you, please consider this idea for that friend who has been asking you for advice.

Disclosure: Tom Konrad will receive $1 for each purchase of GEIM on the Motif platform, and $100 for each new Motif customer who signs up through the referral link.  Tom Konrad manages and invests in The Green Global equity Income Portfolio, which owns HASI, PEGI, NYLD/A, TRSWF and BEP, as well as most of the stocks in the Green Equity Income Motif.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

June 06, 2016

Ocean Power Nets A Discerning Buyer

by Debra Fiakas CFA

Earlier this week shares of Ocean Power Technologies (OPTT:  Nasdaq) soared as the company announced its first commercial order for its PowerBuoy hydrokinetic devices.  The order represents a modest $975,000 in potential revenue, but the customer, Mitsui Engineering and Shipbuilding Co. Ltd., provides extra value as a discerning buyer.  PowerBuoys are built to capture the energy in ocean waves to drive an electrical generator.  Power output can be delivered to nearby ocean or terrestrial installations.  With worldwide interests in the numerous marine markets, Mitsui could develop into a large and long-standing customer.

OPTT traded as high as $6.79 in the first hours following the earnings announcement, representing a fourfold increase from the closing price the day before.  Since that first frenzied day of trading with unprecedented volume, things have settled down a bit.  However, it is clear the Mitsui opportunity has resent investors’ views on Ocean Power.

Quick to take advantage of the newly kindled fervor, Ocean Power announced the pricing of a registered offering of common stock.  A total of 417,000 shares with a warrant attached to each will be sold at $4.60.  Each warrant buys about a third of a common stock share at $6.04 per share.  A fortuitously planned shelf registration statement facilitated the fast response.

Ocean Power will take in about $1.6 million in net proceeds after the investment bankers get paid.  This is not a large offering, but just enough to top off the bank account without diluting current shareholders more than necessary.  Management appears to have the view that, even after the dramatic price increase, the shares still do not reflect the long-term earnings potential in Ocean Power’s technology.

powerbouyMitsui is leasing the PB3 PowerBuoy which has the capacity to generate 350 watts of continuous power.  The structure floats on the ocean surface from a tethered attached to the ocean floor. As the wave move the direct drive generator, the electrical charge is stored in an on-board battery pack.  Power can be delivered to a nearby marine installation such as an off-shore oil rig or to coastal installations such as a communications network.

Ocean Power expects more to develop in its relationship with Mitsui Engineering & Shipbuilding.  Mitsui is among the largest construction companies in the world, with interests in energy and environmental projects as well as shipbuilding and infrastructure construction.  Mitsui is expected to be a strong advocate for the PowerBuoy if it begins designing the ocean-based power source into its assignments.  Mitsui has recently been trusted to address customer problems in a wide range of projects involving underwater inspection, marine position keeping and deep-sea remote observation.

Indeed, the range of potential applications that Ocean Power sees for the PowerBuoy is as wide as Mitsui’s business interests.  In a recent investor presentation, management outlined multiple addressable markets:  ocean observing, communications, off-shore oil and gas installations, and off-shore wind energy projects.  Likely, the new capital going into Ocean Power’s bank account this week, will be used to reach customers in these markets.

It was impressive that Ocean Power was able to take in capital at a strong price  -  at least from the corporate perspective.  However, one lease to Mitsui  -  and it is a lease, not an outright sale  -  may not be sufficient to support the current price.  Effective execution on market penetration will be the key for OPTT valuation.  It is then important that Mitsui fulfills the promise so many have placed in that relationship  - bringing in a big catch of fish for Ocean Power.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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. 

June 02, 2016

Ten Clean Energy Stocks For 2016: Earnings Season

Tom Konrad CFA

May was a tough month for most clean energy stocks, even though the broad market was up slightly, but my Ten Clean Energy Stocks for 2016 model portfolio continued to out-perform, mostly because of strong earnings for several stocks.  The model portfolio was up 3.1% for the month and 3.8% for the year to date, even though its clean energy benchmark fell 2.0%, for a decline of 2.8% for the year through May 31st.  The broad market of small cap stocks also rose, and was up 2.2% for a total gain of 2.4% for the year to date.

Income and Growth Stocks

Clean energy income stocks continue to outperform growth stocks. with my income benchmark, YLCO down only 0.7% for the month compared to a 5.1% decline for my growth benchmark, PBW.  The seven income stocks in the model portfolio posted modest gains of 1.2%, comfortably ahead of their benchmarks decline, but were put to shame by the stellar performance of the three growth stocks, which advanced 7.6%.  The Green Global Equity Income Portfolio (GGEIP), an income-oriented clean energy strategy which I manage, continued to out-perform as well.  It rose 0.8% for the month, and is up 8.8% for the year to date.

performance chart

The chart above (larger version here) gives detailed performance for the individual stocks.  Significant news driving individual stocks is discussed below.

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/15 Price: $20.91.  Dec 31st Annual Dividend: $1.488 (7.1%).  Beta: 1.22.  Low Target: $18.  High Target: $35. 
5/31/16 Price:  $21.78.  YTD Dividend: $0.671. 
Expected 2016 Dividend:$1.56 (7.2%) YTD Total Return: 8.1%

At its first quarter conference call, wind Yieldco Pattern Energy increased its dividend from $0.371 to $0.39.  The 2.4% increase was the ninth consecutive quarterly increase since its IPO.  Wind speeds were lower than average at its farms in the first quarter because of El Nino, but they have a good chance of being higher than average towards the end of 2016.

The company has $100 to $150 million in liquidity to acquire additional projects, and has also put in an "At The Market" (ATM) facility to raise small amounts of additional equity if the stock price continues to recover (which it has since the announcement.)  This is part a growing trend of Yieldcos returning to the capital markets which I believe signals a return to normalcy.  I took an in-depth look at this trend here.

Enviva Partners, LP (NYSE:EVA)

12/31/15 Price: $18.15.  Dec 31st Annual Dividend: $1.76 (9.7%).  Low Target: $13.  High Target: $26. 
5/31/16 Price:  $22.88.  YTD Dividend: $0.97  Expected 2016 Dividend: $2.10 (9.2%) YTD Total Return: 31.9%

Wood pellet focused Master Limited Partnership (MLP) and Yieldco Enviva Partners raised its quarterly dividend from $0.46 to $0.51 per share, keeping it on track to meet its 2016 distribution guidance of $2.10 per unit for 2016.  That guidance would require $1.13 in distributions in the second half of the year, which could be accomplished with smaller increases of only 4 cents in each quarter.  I think it's likely that they will continue with larger increases of 5 or 6 cents and exceed the guidance.  The guidance does not include the effects of further acquisitions, which are looking increasingly likely as the stock price recovers.

The demand for wood pellets remains strong and growing.  Enviva's position as the industry leader allows it to continue to sign take-or-pay contracts with quality utility customers for its entire capacity.  One such potential contract was discussed on the quarterly conference call with the final deal announced on June 2nd.  Enviva will supply 800,000 metric tons of wood pellets per year until 2027 to a power plant in the UK.  The plant formerly generated power from coal, but is being converted to run on wood pellets in order to reduce net carbon emissions.

Green Plains Partners, LP (NYSE:GPP)

12/31/15 Price: $16.25. 
Dec 31st Annual Dividend: $1.60 (9.8%).  Low Target: $12.  High Target: $22. 
5/31/16 Price:  $14.40.  YTD Dividend: $0.8075.  Expected 2016 Dividend: $1.62 (11.3%) YTD Total Return: -6.0%

Ethanol production Yieldco Green Plains Partners continues to recover along with gas prices, but the partnerships earnings are not as closely linked to gas prices as is the price of ethanol.  It's contracts with its parent, Green Plains (GPRE) insulate it from the ethanol market, so a continued recovery does not depend on continued increases in oil. 

While its parent operated at a loss in the first quarter, the partnership was able to increase its quarterly distribution to $0.405 per unit while maintaining a coverage ratio of 102%.

Its parent, Green Plains, rallied strongly in May as projections for ethanol demand and margins have improved.  The improved market conditions are helping GPP's units as well, but I believe the units remain very attractively valued.

NRG Yield, A shares (NYSE:NYLD/A)

12/31/15 Price: $13.91.  Dec 31st Annual Dividend: $0.86 (6.2%). Beta: 1.02.  Low Target: $11.  High Target: $25. 
5/31/16 Price:  $14.50.  YTD Dividend: $0.455.  Expected 2016 Dividend: $0.94 (6.3%) YTD Total Return: -7.8%

Yieldco NRG Yield (NYLD and NYLD/A) also reiterated its dividend growth target of 15% year over year, which I expect will mean total dividends for 2016 of 94 or 95 cents.  Its May dividend of $0.23 was precisely 15% above the dividend of a year earlier.

The company is also making progress developing internal management, and appointed Chris Sotos as CEO.  Sotos was formerly Head of Strategy and Mergers and Acquisitions at NYLD's parent, NRG Energy (NRG), but will now be employed solely by NRG Yield.

Terraform Global (NASD: GLBL)

12/31/15 Price: $5.59.  Dec 31st Annual Dividend: $1.10 (19.7%). Beta: 1.22.  Low Target: $4.  High Target: $15. 
5/31/16 Price:  $2.78.  YTD Dividend: $0.275.  Expected 2016 Dividend: $0.50 (21%). YTD Total Return: -44.5%

Information on Yieldco Terraform Global remains scarce as the company attempts to file its 2015 annual report and first quarter 2016 reports and its former sponsor, SunEdison (SUNE), stumbles through bankruptcy.

The delay of the reports is due to the fact that Terraform Global relied on its parent for accounting and bookkeeping, and the parent's financial controls were inadequate.  Now the Yieldco needs to rebuild everything from scratch.  The company has delayed its second quarter dividend, which I do not expect to be paid until after its financial reports are filed and it can claim to understand its own financial position.  At that point, I expect the regular dividend to be cut dramatically, with the second quarter dividend paid in arrears. 

Goldman Sachs thinks the dividend will be cut from $1.10 to $0.64 annually, but I'm a little more conservative, and think it will fall somewhere between $0.40 and $0.75.  Other Yieldcos currently trade with yields in the 6% to 10% range, so if we're very conservative and expect a $0.40 annual dividend and a 10% yield, the stock is worth at least $4, or 44% above the current price.  If we use Goldman's dividend estimate of $0.64 and a 10% yield, the stock price would more than double.

For me, the bottom line on Terraform Global is that there is much we don't know, but if we focus on the big picture and the little we do know, we have a stock trading far below its fair value because of all the uncertainty.  Eventually we'll have a better picture of GLBL's financials, and the stock market seems to be valuing it below the worst case scenario.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/15 Price: $18.92.  Dec 31st Annual Dividend: $1.20 (6.3%).  Beta: 1.22.  Low Target: $17.  High Target: $27. 
5/31/16 Price:  $20.33.  YTD Dividend: $0.30.  Expected 2016 Dividend: $1.25  (6.1%). YTD Total Return: 9.1%

Clean energy financier and REIT Hannon Armstrong had a very strong first quarter, with core earnings of $0.32 per share, a 19% increase on the previous year, and already in excess of the $0.30 quarterly dividend.  My previous estimate for the next dividend increase in December was 4 cents, to $0.34, but after this strong quarter, I expect the new dividend will be $0.35 or $0.36.

Like Pattern discussed above, Hannon Armstrong has put an ATM facility in place, and has said that it may raise something less than $200 million in new equity this way.  The difference between core earnings and the dividend will also flow back into new investments, all of which should contribute to per share earnings growth.

TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/15 Price: C$10.37.  Dec 31st Annual Dividend: C$0.84 (8.1%).   Low Target: C$10.  High Target: C$15. 
5/31/16 Price:  C$12.86.  YTD Dividend: C$0.293  Expected 2016 Dividend: C$0.88 (7.1%) YTD Total Return (US$): 33.9%

Canadian listed Yieldco TransAlta Renewables also had a strong first quarter, and continues on-schedule and on budget with its South Hedland Project in Australia.  The company has signaled that it will further increase its dividend when the project is complete in mid-2017.

The company also secured financing on its 68.7MW New Richmond wind facility which it will use to finance other projects, most likely including South Hedland.

Growth Stocks

Renewable Energy Group (NASD:REGI)

12/31/15 Price: $9.29.  Annual Dividend: $0. Beta: 1.01.  Low Target: $7.  High Target: $25. 
5/31/16 Price:  $9.21.    YTD Total Return: -0.9%

Advanced biofuel producer Renewable Energy Group also reported a strong quarter.  The company sold 64% more gallons of biomass based diesel than during the same period a year ago, although spreads were thin due to high commodity prices. They have also been making significant progress expanding their business through both internal growth ans acquisitions.  I expect these investments to show large benefits as the advanced biofuel and biodiesel markets recover due to the new climate of regulatory certainty.

At the end of the month, REGI sold $125 million of convertible notes due in 2036, with the proceeds to be used to redeem similar notes which would have matured in 2019, as well as for stock buybacks.  This caused the market to irrationally sell off for about a week or so, but it should have a positive effect on the share price in the long term.  I took the opportunity of the selloff to add to my position.

MiX Telematics Limited (NASD:MIXT; JSE:MIX).
12/31/15 Price: $4.22 / R2.80. Dec 31st Annual Dividend: R0.08 (2.9%).  Beta:  -0.13.  Low Target: $4.  High Target: $15.
5/31/16 Price:  $5.03 / R3.10.  YTD Dividend: R0.02/$0.12  Expected 2016 Dividend: R0.08 (3.6%)  YTD Total Return: 20.3%

Software as a service fleet management provider MiX Telematics shot up on the news that the company would be buying back about 25% of its shares at R2.36 per share using cash on hand.  This should result directly in increased earning per share (EPS) of approximately 30%.  After the sale is finalized and the effect starts boosting EPS, I expect the stock to continue its upward trajectory.

Operationally, the first quarter was also solid and exceeded market expectations, with year over year subscription growth of 11% despite many of the company's customers in the oil and gas industry reducing the size of their fleets.  I remain extremely bullish about the company's long term prospects.

Ameresco, Inc. (NASD:AMRC).
Current Price: $6.25
Annual Dividend: $0.  Beta: 1.1.  Low Target: $5.  High Target: $15. 
5/31/16 Price:  $4.68.  YTD Total Return: -21.7%

Energy service contractor Ameresco reported a strong first quarter, with revenue up 16% and rising margins.  The improvement was driven mostly by Federal government projects, while sales of integrated PV solar systems continued to lag.  The latter was due to the weakness in oil and gas, since many of these customers are in that sector.

Last month, I wrote that I was beginning to question my faith in company management.  This quarter has helped, but I'd like to see a few more quarters of strong execution before I put my doubts completely to rest.

Final Thoughts

The first quarter was almost uniformly good for my stock picks.  I continue to think Green Plains Partners and Terraform Global are two of the best values, but recent news has me adding Renewable Energy Group and MiX Telematics to the mix. 

Although MIXT stock was up 23% for the month, it remains greatly undervalued, especially in light of the expected 30% per share EPS increase due to the stock buyback.  As for REGI, I've been growing more confident that this stock is set for explosive earnings growth this year and next.

Disclosure: Long HASI, AMRC, MIXT,,  RNW/TRSWF, PEGI, EVA, GPP, NYLD/A, REGI, GLBL

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

May 26, 2016

Yieldcos: Boom, Bust, and (Now) Beyond

The Yieldco model is not broken. But investor expectations have changed.

by Tom Konrad Ph.D., CFA

The Yieldco bubble popped almost exactly a year ago after a virtuous cycle turned vicious.

Last May, I explained how these public companies (which own solar farms, wind farms and similar assets) could grow their dividends at double-digit rates despite no internal growth or retained earnings. This “weird trick” can work so long as the Yieldco’s stock price is rising, allowing it to sell stock at higher valuations and increase the amount of money invested per share.

As long as investors expected dividends to continue to rise rapidly, they fed this virtuous cycle by bidding the stock price up, which in turn increased the expected dividend growth. Many Yieldcos increased their dividend increase projections in 2014 and early 2015, when the bubble was at its height.

Yieldco boom and bust

Then the Yieldcos got greedy. 

In the spring of 2015, new Yieldco IPOs and secondary offerings reached a crescendo, with every Yieldco raising new money over a three-month period. There were two IPOS: 8point3 Energy Partners’ (CAFD) for $420 million in June and TerraForm Global (GLBL) for $675 million in July. 

In addition, TransAlta Renewables (TSX:RNW) raised $226 million in April; Abengoa (now Atlantica) Yield (ABY) raised $670 million in May; NextEra Energy Partners (NEP) raised $109 million in May; NRG Yield (NYLD) raised $540 million in June; Hannon Armstrong (HASI) raised $18 million in June; TerraForm Power (TERP) raised $689 million in June; and Pattern Energy Group (PEGI) raised $225 million in July. 

Before that flurry of new offerings, the existing seven Yieldcos had raised only $12.5 billion in total capital. The additional $3.5 billion flooded the market and halted the rise of most stocks. Investors began to scale back their estimates of future dividend increases accordingly. Lower dividend estimates led to lower demand for the stocks, even lower stock prices, and the cycle began to feed on itself in reverse. 

Over the next few months, the departing tide of Yieldco shares deprived sponsors of an important source of cheap finance for over-leveraged business models. It soon became clear which sponsors had been swimming naked: SunEdison (SUNEQ) and Abengoa (ABGB).

Mostly unbroken

SunEdison’s downfall in particular led many to ask if the Yieldco model is broken. Reporters (not to mention investors) have asked me this question on multiple occasions. My answer has always been "No -- except..."

The exception is the double-digit dividend per share growth that Yieldcos led investors to expect during the bubble. With the Yieldco bust in the rearview mirror, I don’t think that investors are likely to bid up stock prices to the point where Yieldcos can restart the virtuous cycle of secondary offerings at higher and higher prices feeding back to rapid dividend increases.

What isn’t broken is the idea of funding clean energy projects with (relatively) cheap stock market capital. When Yieldco stocks were near their bottom, solar and wind developers were openly talking about private equity being a more cost-effective form of capital than the public markets and Yieldcos. 

That situation is inherently unsustainable. The liquidity, better information, and broader spectrum of participants in the public markets ensure that private capital will not remain cheaper than public equity permanently. Private\-market participants have the ability to operate in public markets as well. When the prices are better in the public markets, that is where they will go. 

The opposite is not true for most public market investors: Regulations, lack of knowledge, and the need for liquidity keep them in publicly traded stocks and bonds, even when the returns are better elsewhere. It was only investor hesitancy in the wake of a crash that kept Yieldco stock prices so low for as long as it did. Now Yieldco prices are rising, and these entities can once again think about raising new equity on reasonable terms.

Pulling out the ATM cards

While clouds of uncertainty remain over the TerraForms because of SunEdison’s bankruptcy, other Yieldco stocks have begun to recover, and many are returning to the capital markets to issue new equity.

The strongest (and lowest yielding) Yieldco, NextEra Energy Partners, announced an “At The Market” -- or ATM program -- to sell small amounts of equity during its third-quarter 2015 conference call. Subsequently, NEP raised $26 million in the fourth quarter and approximately $40 million in the first quarter by issuing equity via the ATM. It also closed a $252 million secondary offering in the first quarter.

Toronto-listed Yieldco TransAlta Renewables has also returned to the capital markets by selling CAN $172 million of new equity in December. Unlike American Yieldcos, it never promised double-digit dividend growth, did not see its stock price spike during the bubble, and did not suffer a severe decline when the bubble burst. What decline it did see has now been completely erased by its recent stock rally. 

In their first-quarter conference calls, both Pattern Energy Group and Hannon Armstrong put ATM sales agreements in place to enable more flexibility depending on market conditions.

"We view this ATM as one tool in a broader toolkit, and we intend to use it judiciously for future project-related investments that are accretive and other corporate purposes. Again, to be clear, we do not plan on issuing under the ATM at this time, and at the current stock price. The ATM is only an option for the future," said Pattern CEO Mike Garland.

Hannon Armstrong seems a little closer to using its ATM than Pattern. Hannon CFO Brendan Herron described it as a “filler to help us increase leverage as the larger equity raises result in a lower leverage until we can reinvest and de-lever. We believe...the ATM will benefit shareholders and do not expect it to be a primary source of equity.”

Clearly, neither Hannon nor Pattern is planning on issuing large amounts of equity with this mechanism. But it's a positive signal that they are getting ready to tap the public equity markets.

Most Yieldcos have rallied significantly from their post-bubble lows, but are still far below their highs a year ago. This recovery has allowed several to once again begin to tap the markets for new equity, an early sign of the return to normalcy.

Because of the Yieldcos’ lower share prices and the relatively small size of these new equity offerings, they will not increase the investable funds per share nearly as much as previous offerings. Hence, despite better prices available for the clean energy assets Yieldcos buy, the investments made with the funds will have more modest effects on the Yieldcos’ dividends per share.

Yieldcos are returning to normalcy. We are no longer in the bubble.

***

Disclosure: Tom Konrad manages and has a stake in the Green Global Equity Income Portfolio (GGEIP), a private fund which invests in Yieldcos and other high-income green stocks. GGEIP holdings currently include CAFD, GLBL,TSX:RNW, ABY,  NYLD/A, HASI, TERP and PEGI.

May 20, 2016

FutureFuel: Still Future, Less Fuel

by Debra Fiakas CFA

The last post “From Fuel to Fudge” discussed how the old Solazyme developer of algal-based renewable fuel has been transformed into a new company called TerraVia, (TVIA) which is pursing algal-based food and personal care products.  Solazyme is not the only renewable fuel company to make an about face.  Granted FutureFuel Corporation (FF:  NYSE) has not changed its name or stock symbol like Solazyme.  However, its ability to produce specialty chemicals has given FutureFuel an alternative to biofuels and its early plans to build a plant that could eventually produce 160 million gallons of biodiesel each year.

It took very little time from the company’s inception for FutureFuel strategists to pull back the biodiesel plant to a 40 million gallon name plate capacity.  Even as the company was getting started in the 2006 and 2007 time frame, margins on biodiesel began to shrink.  Management was worried.  The plant finally ended up with a capacity to produce 58 million gallons of biofuels per year.

FutureFuel was already keeping the lights on by selling performance chemicals.  As much as two-thirds of revenue in the early years was generated by the sale of specialty chemicals, including a bleach activator that was sold to a detergent manufacturer and a proprietary herbicide for a life sciences company.  Biofuels accounted for only about a quarter of revenue.  Fast forward to the year 2015, biofuels are providing the majority of sales and specialty chemicals have taken a back seat.  

Fact of the matter is sales of BOTH specialty chemicals and biofuels have declined.  Biofuel sales peaked in the year 2013, but have since declined on lower selling prices and volumes.  Specialty chemicals sales peaked that year as well.  The herbicide producer has stopped buying the herbicide additive and FutureFuel has had to accept a lower selling price for its bleach activator in order to keep its detergent manufacturer customer through the year 2018.

Rebuilding the specialty chemicals segment is a largely a matter of finding new customers.  It is a situation over which the company has some control.  It is a matter of marketing, branding and messaging.  Then again it could be just a matter of salesmanship and good old fashion shoe leather.  

Unfortunately, in its biofuel segment FutureFuel is experiencing plenty of difficulties  -  none of which are so easily resolved.  Protecting profit margins from costly feedstock is just one of them.  FutureFuel appears to have little latitude on feedstock even as other biodiesel and renewable diesel products have found success. 

There are numerous biodiesel producers, some also using the transesterification process that FutureFuel uses.  An increasing number are using less expensive feedstock, such as waste oils.  For example, Diamond Green Diesel, the joint venture of Darling Ingredients (DAR:  NYSE) and Valero Energy (VLO:  NYSE) uses the waste oils that Darling collects from meat processing plants and restaurants around the country.  Diamond Green just announced plans to expand production capacity.  Another 125 million gallon capacity will be added by the end of 2017, bringing to total capacity to 275 million gallons per year.

Renewable Energy Group (REGI:  Nasdaq) is also expanding storage capacity for both its waste oil feedstocks as well as finished biodiesel at its Danville, Illinois facility.  The storage capacity is pivotal in allowing REG the flexibility of timing its sales at peak or at least better pricing.  The ability to delay sales to wait for better prices is one of the keys to building profits in the fuel production industry.  REG now has 45 million in annual biodiesel production and 12 million gallons in biodiesel storage capacity in Danville.  This facility is only one of a dozen active biorefineries REG has in operation around the country.

In the most recently reported twelve months FutureFuel delivered $48.6 million in net income or $1.11 in earnings per share on $292.2 million in total sales.  The company remains profitable, but comparisons to the previous twelve months are not favorable. Even in the most recently reported quarter ending March 2016, the company reported sales 10% lower than the previous year period.  Earnings we well above expectations, but only because the company benefited from reinstatement of the blenders tax credit.

FutureFuel has tried to break free from its biofuel origins, finding new products and new customers.  It seems investors might be doing the same.  After a brief recovery, the stock has sold off, leaving FF priced at ten times expected earnings for the year 2016.  We note that the stock was nearly at the same value about two years ago.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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.  Crystal Equity Research has a buy rating on Darling Ingredients and a Hold rating on FutureFuel.

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