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December 30, 2009

Pure Play Energy Storage Stocks Year-End Review And Outlook

John Petersen

With only a couple trading days left in 2009, this is as good a time as any for a performance review. The predictions I made at this time last year were pretty solid with an 80% accuracy rate on price direction. For the year, a $1,000 investment in each of my green star companies would have yielded a portfolio appreciation of 67%, which handily beat the broader market indices. That being said, my star and caution ratings were a good deal less prescient because I seriously underestimated the potential of both Maxwell Technologies (MXWL) and Active Power (ACPW), which appreciated by over 200%.

The following table identifies my current universe of pure play energy storage companies, reiterates my outlook at the beginning of this year, summarizes their performance during 2009 and offers my assessment of likely price performance during 2010. In the table, a single star signifies a neutral position.



Valence Technologies (VLNC) scares the hell out of me. It had a working capital deficit of ($10.8) million at September 30, 2009 and its stockholders were under water to the tune of ($74.7) million. Valence is currently surviving on life support financing from the open market re-sale of 650,000 shares every two weeks. The financing is enough to keep the doors open, but leaves little or no room to build a business. My experience with companies in comparable financial straits has not been good.

Ener1 (HEV) is in a better position than Valence, but not much. It had $2.4 million in working capital at September 30, 2009 and then raised $20 million by selling stock to an equipment vendor, so short-term operating cash does not seem to be a problem. Nevertheless, Ener1's September 30th balance sheet includes a $13.6 million investment that allowed Th!nk Motors to emerge from the Norwegian equivalent of a bankruptcy reorganization; $13.7 million of intangible assets; and $50.4 million in goodwill. Even after the $20 million cash infusion, Ener1 had a net tangible book value of roughly $0.54 per share before fourth quarter losses. Since Ener1 needs to come up with $118.5 million in matching funds for an ARRA battery manufacturing grant that was awarded in August and it also needs an indeterminate amount of working capital, I can't help but believe that the company will face substantial financial challenges over the next few months. Management may be able to pull off a miracle, but given market conditions I would expect any major financing to go off at a big discount to the current price.

I remain quite bullish on established battery manufacturers with a global presence that trade for mere pennies on the dollar of annual sales including C&D Technologies (CHP) where the market cap equals 11% of sales, Exide Technologies (XIDE) where the market cap equals 21% of sales, Ultralife (ULBI) where the market cap equals 43% of sales and Enersys (ENS) where the market cap equals 67% of sales. All these companies have been actively restructuring operations to improve profitability and when the fruits of those efforts become more obvious, I expect significant upside potential across the board. Since I don't fully understand the business culture or the market, I'm a bit more cautious when it comes to the Chinese companies.

My two favorite speculations are ZBB Energy (ZBB), which has an ultra-low market capitalization for an exchange listed public company, and Axion Power International (AXPW.OB). I'm far from objective when it comes to Axion because I poured four years of my life and a large chunk of my personal fortune into the company. However, Axion's tangible accomplishments since I stepped out of an active role are truly impressive. Now that the pain of a recent down round financing is largely history and Axion's short- to medium-term financial future is secure, it's all up to the PbC battery.

It will be fascinating to see whether my predictions can be generally right for another year. I’ll revisit this list at least quarterly over the next year and either gloat or eat crow as appropriate. In the meantime I would like to wish everyone a Happy New Year and a prosperous 2010. It should be a fascinating year for the energy storage sector.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Exide Technologies (XIDE), C&D Technologies (CHP), Active Power (ACPW) and ZBB Energy (ZBB).

December 28, 2009

Ten Clean Energy Stocks for 2010

Tom Konrad, CFA

A mini-portfolio of stocks that not only are green, but should outperform the market in an environment of increasing concern about climate change and peak oil.

This is the third annual list of green stocks I have published.  In 2008, it was a list of ten speculative alternative energy companies (in three parts) that I thought might catch public notice that year.  As we all now know, 2008 was a horrible year for speculative stocks, and my stocks were no exception, losing an average of 55% that year, although that still ended up being better than seven out of nine of the sector mutual funds and ETFs that I was then tracking.

In 2009, my ten green stock picks were more conservative, with a focus on profitable companies with good cash flow.  The results have been better than I hoped.  These 10 picks gained an average of 57%, beating my benchmarks by an even wider margin.  I'll be surprised if I do as well in 2010, but if there's one thing the stock market delivers reliably, it is surprises. 

10 for '10

In November, I wrote a series of articles for the beginning investor in clean energy, and I plan to follow my own advice with this list, putting emphasis on those clean energy sectors that most investors are not giving enough attention.  Once you've decided how much of your portfolio to put in clean energy, splitting that investment evenly between these ten stocks should give you exposure to the best clean energy sectors, as well as decent diversification.  In other words, these ten stocks are intended as a substitute for a clean energy Exchange Traded Fund (ETF).

In late 2008, when I was putting together my list for 2009, I had a relatively easy time.  Fear was rampant, and there were many great companies selling for single-digit multiples of earnings.  Today, complacency and greed have returned to the markets, and good values are very hard to come by.  The following 10 are mostly the result of culling through our Alternative Energy Stock lists for companies in my favored sectors that look ready for the premature end of the recovery: Companies with strong balance sheets, good cash flow and profitability at not-too-expensive multiples.

Electric Grid & Electricity Storage (30%)

-or-

Efficient/Clean Transportation (30%)

-or-

Energy Efficiency (30%)

Biomass, Waste to Energy, Recycling - 10%

Simplified Portfolio

I've provided an alternate, simplified portfolio by substituting the clean energy sector ETFs GRID and PTRP for the stocks in the Electric Grid/Storage and Efficient Transport sectors.  This simplified portfolio is better suited for investors who have smaller accounts and want to control transaction costs by making fewer trades.  Some investors may also find it difficult to buy London-traded FirstGroup PLC.  Such investors may choose to substitute PTRP for FGP.L or for all three efficient transport stocks.

Notes on Stocks

I plan to write about many of these stocks in more depth over the next few months, but here are some links to relatively recent articles for those who want more information before they invest:

Choice of Weights

I was roughly sticking to the sector breakdown I recommended in my Green Energy Investing Target Portfolio, shown here,

Target Portfolio

but I was constrained by only working with 10 stocks, and wanting to keep the weights equal for simplicity.  People who use the simplified version with the two ETFs substituting for six stocks may come closer to the target portfolio, because those ETFs (especially GRID) also contain significant numbers of companies which I would categorize as falling in other clean energy sectors.

Tax Considerations

New Flyer and Waterfurnace pay dividends and trade on Canadian exchanges.  Canada withholds 15% of such dividend payments to US-based investors, an amount which can usually be offset as "foreign tax paid" when filing US taxes.  Unfortunately, if the stock is held in a non-taxable US account, I don't believe that it is possible to claim this deduction.  In other words, most US based investors will probably do better by holding these stocks in taxable accounts, although you will probably want to consult a tax advisor if you are investing significant sums in these stocks, since your circumstances may not match my experience. 

Performance Updates and Benchmarks

As in previous years, I plan to monitor the performance of these stocks quarterly, and to do that, I need benchmarks.   An appropriate benchmark should be widely available, consist of the companies in the investment universe from which the portfolio is drawn, and be defined in advance.  Since I tend to take a broader view of clean energy than the designers of most clean energy indexes, I historically have used two benchmarks: one broad market benchmark, and one sector-specific benchmark.

In the past, I've used the S&P 500 index as my broad market index, but some readers have rightly criticized it because it is mostly composed of larger capitalization stocks than my picks, so this year I will use the Russell 3000 index. For in industry benchmark, I'll used the oldest and most widely held of the clean energy ETFs, the Powershares WilderHill Clean Energy Portfolio (PBW.)

Security (Ticker) Price 12/27/09 Shares* in a $10,000 10 for '10 Portfolio:

Shares* in the $10,000 Simplified Portfolio

General Cable (BGC)   $32 31.25

n/a

MasTec (MTZ)   $12.54 79.745
C&D Technologies (CHP $1.47 680.27

Smart Grid Infrastructure Index Fund (GRID)

$32.58

n/a

92.081

New Flyer Industries (NFI-UN.TO, NFYIF.PK)

$9.4853 105.43

n/a

Firstgroup PLC (FGP.L) (in US$) $6.6246 150.95
Portec Rail Products (PRPX) $10.21 97.943

Powershares Global Progressive Transport ETF (PTRP)

$27.1885

n/a

110.34
Waterfurnace, Inc. (WFI.TO, WFFIF.PK) $24.0335 41.609
Linear Technology Corp (LLTC) $30.77 32.499
Flir Systems, Inc. (FLIR) $32.24 31.017
Waste Management (WM) $33.76 29.621
Total   $10,000 $10,000
Russell 3000 (^RUA) 660.44 15.14142
Powershares WilderHill Clean Energy Portfolio (PBW) 11.15 896.861

*Fractional shares would not be used in a real portfolio, and there would of course be transaction costs reflected here as well.  These are simply the weights I'll be using to track my model portfolio.

DISCLOSURE: Long CHP, LLTC, NFYIF, WFIFF, PRPX, and WM.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

In Review: 10 Clean Energy Stocks for 2009

Tom Konrad, CFA

2009 was a banner year for my clean energy stock picks, which are up 57% over 12 months, greatly exceeding their benchmarks.

Over the last 12 months,  my ten green energy stocks for 2009 are up 57% vs. 29% for the S&P 500, and 12% for my clean energy benchmark, the iShares S&P Global Clean Energy Index (ICLN), the two indexes I specified for benchmarks when I published the list a year ago.

Below is a detailed rundown of the results.  

Company  Ticker

Change 12/27/08 to 12/27/09

Dividend & Interest

The Algonquin Power Income Trust AGQNF.PK 113.04% 13.13%
Cree, Inc. CREE 265.60%  
First Trust Global Wind Energy ETF FAN 26.86% 0.46%
General Electric GE -3.32% 5.13%
Johnson Controls JCI 64.64% 3.07%
New Flyer Industries NFYIF.PK 43.72% 16.21%
Ormat ORA 27.66% 0.84%
Trinity Industries TRN 7.24% 1.87%
Warterfurnace Renewable Energy WFIFF.PK 60.22% 4.37%
-2x  S&P Depository Receipts + 3x Cash (was SDS until Feb 13) 3x $ - 2x SPY  -72.44% -0.18%
Total Portfolio  57.15%

Benchmarks

Standard & Poors 500 Index (S&P500) 29.07%
iShares S&P Global Clean Energy Index (ICLN) 12.14%

The somewhat cryptic last pick, "3x $ - 2x SPY" is a hedge against a possible market decline.  Rather than using a pure short, I wanted to give it approximately equal weight to the other picks.  In order to have an initial investment of $1 in each pick, including the short, I sold a hypothetical $2 worth of SPY short, but kept the $2 cash proceeds, along with an extra $1 cash allocated to the pick.  Hence that pick is a combination of $2+$1 = $3 cash and -$2 short of SPY.  (I left out a few details here for simplicity.  All the gory detail is here.) 

Outlook for 2010

In the panic of late 2008, picking good companies at reasonable prices was like shooting fish in a barrel.  Today, the world is much different, with confidence back and many investors scouring the markets for relative (if not absolute) value stocks.  My soon-to-be-published list of ten clean energy stocks for 2010 was much harder to choose, so although I expect to beat the market for a third year running, I don't expect to do so by as much as I did in 2009.   Only two of these stocks, Waterfurnace and New Flyer, made it onto the 2010 list.

I also expect the market as a whole to fall in 2010, although probably not so badly as it did in 2008.  I'll publish my list of ten clean energy stocks for 2010 in the next couple days in order to continue the tradition, despite my opinion that now is the wrong time to buy.  A better option might be to buy my list of ten clean energy stocks for 2010, but hedge the resulting market exposure with a selection of the short ideas in my Clean Energy Investing for Experts series.  For non-experts, you can simply wait in cash a few months for the market to fall.  In the stock market, avoiding the big losses is worth it even if you also miss out on the big gains.

DISCLOSURE: The author and/or his clients own AGQNF, CREE,  GE,  NFYIF, ORA, TRN, WFIFF.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

December 26, 2009

CBD Energy and SFC Smart Fuel Cell Look Promising

From Small Fries to Big Shots? (Pt. 2 of 2)

Bill Paul

Here now are two more small alternative energy companies, both of which look to be just starting to hit their stride. How far they'll go only time will tell, but each seems to warrant a closer look.

Take note: like the vast number of other pure-play alternative energy firms with intriguing growth prospects, neither of these is U.S.-based. Rule of thumb: whether you're a big institutional or small individual investor, to succeed in alternative energy, you must scour every corner of the earth.

First up: CBD Energy, an Australian renewable energy firm that trades on the Australian Stock Exchange under the symbol CBD (CBD.AX).

CBD looks to be starting down the road to becoming a fully-diversified renewable energy power producer with solar, wind and energy storage projects across Asia. It just got what the company called "strong" institutional support for a new round of capital that will go toward acquisitions, including the recently-announced purchase of eco-Kinetics Pty. Ltd., another Aussie firm that is involved in solar PV, solar thermal and wind installations, both residential and commercial. CBD also just signed to deliver wind turbines to a Chinese company, another first for the firm. CBD's share price has roughly tripled since last spring; however, it's still selling for only pennies per share. (No, CBD is not yet in the black.)

Next up: Germany's SFC Smart Fuel Cell AG (Symbol SSMFF.PK), which describes itself as the market leader in fuel cell technologies for mobile and off-grid power applications serving the leisure, industrial and defense markets.

In partnership with DuPont (Symbol DD), SFC just got a glowing preliminary review from the U.S. Defense Department for its lightweight portable power packs that soldiers can use in the field. The review isn't complete yet, but so far DOD believes that "This product and its technology could offer a significant advancement in the area of soldier portable power in the field."

SFC isn't in the black yet either, but its third-quarter loss did narrow by more than 50% vs. the year-earlier period.

Click here for Part 1 of this series - which discusses prospects for World Energy Solutions (Symbol: XWES) and Ram Power Corp. (Symbol: RPG.TO, RAMPF.PK).

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

December 24, 2009

The EIA Offers Another Reality Check For Energy Storage Investors

John Petersen On December 14th the U.S. Energy Information Administration, a policy-neutral statistics and analysis agency within the Department of Energy, announced the release of reference case statistics for its Annual Energy Outlook 2010, an exhaustive compendium of current data and expected trends that covers the entire spectrum of energy production, consumption and pricing at the regional and national level. For numbers freaks like me, the EIA worksheets are a bottomless well of fascinating minutiae. Since most investors would find the raw data mind numbing, I spent some time pouring through the EIA's data in an effort to wrap my arms around their current view of the automotive sector.

The core data for this article was taken from Table 57, which forecasts light-duty vehicle sales by drive technology type for the years 2007 through 2035. To simplify the presentation I've consolidated all data for passenger cars and light trucks into five broad classes and then prepared a simple stacked column graph to present a market forecast snapshot at five-year intervals.



What are not clear in the 2010 statistics are the changes from 2009. A detailed discussion of the individual changes would be too detailed for a blog, however the general overview is that the EIA increased market penetration for ethanol-flex fuel vehicles by almost 100%, reduced short- to medium-term penetration rates for plug-in vehicles by almost 50% and reduced long-term penetration rates for HEVs by a like amount. Apparently the EIA believes that budgets matter to most consumers and high-end electric assist vehicles will be priced out of the market for the foreseeable future. For those that are interested in tracking the specific changes, the archived workbook for the Annual Energy Outlook 2009 is available here.

Many people have invested in lithium-ion battery companies based on the widely publicized promise that plug-in hybrid electric vehicles and pure electric vehicles, which have recently been christened grid enabled vehicles, or GEVs, by the Electrification Coalition, would be the rising superstars of the automotive markets over the next 25 years. As of two weeks ago the EIA expected GEVs to represent 0.86% of the U.S. market in 2020 and a whopping 2.63% by 2035. Even this cynic was shocked. To drill down a bit further and attempt to translate the EIA's automotive market forecasts into revenue expectations for battery manufacturers I assumed:
  • Revenue of $250 per vehicle for advanced lead-acid starter batteries;
  • Revenue of $1,000 per kWh for automotive grade lithium-ion batteries;
  • A 1.5 kWh battery requirement for an HEV;
  • A 4 kWh battery requirement for a PHEV-10;
  • A 16 kWh battery requirement for a PHEV-40; and
  • A 24 kWh battery requirement for a pure electric vehicle.
Based on those assumptions and my Excel workbook, which you can download here, the following table shows the aggregate revenue to battery manufacturers, in millions of dollars, for each year shown in the graph.

2010 2015 2020 2025 2030 2035
GEV battery sales $2,012 $2,548 $2,951 $3,750 $4,662 $5,099
HEV battery sales $372 $967 $1,281 $1,595 $1,961 $2,215
Lead-acid battery sales $2,530 $3,904 $3,852 $3,864 $4,008 $4,189

While there are many EV advocates who will strenuously argue that a battery cost estimate of $1,000 per kWh for lithium-ion batteries is way too high, it's well within the price range cited by the National Research Council in its recent report titled "Transitions to Alternative Transportation Technologies – Plug-in Hybrid Electric Vehicles." While future lithium-ion battery prices may in fact decline significantly, I've always wondered how rapidly falling battery prices will be a good thing for the shareholders of battery manufacturing companies that presumably would rather make money from selling a reasonably priced product than struggle with the problems of selling a commodity product on paper thin margins. I guess some sophisticated business concepts are above my pay grade. In Joseph Heller's classic novel Catch 22, Milo Minderbinder planned to buy eggs for a dime, sell them for a nickel and make it up on volume. That's not a business plan I want to buy into.

Two of the three largest lead-acid battery manufacturers in the world are publicly held. Johnson Controls (JCI) is a diversified auto-parts manufacturer that derives roughly $3.9 billion per year, or roughly 16% of its total revenue, from the lead-acid battery business. Exide Technologies (XIDE) is a pure play lead-acid battery manufacturer with global revenues of roughly $2.5 billion. The industry newcomer is Axion Power International (AXPW.OB), a developer of advanced lead-carbon batteries for the micro and mild hybrid applications that entered into a global supply relationship with Exide in April, was selected with Exide to receive a $34.3 million ARRA battery manufacturing grant in August, and recently completed a $26 million private equity placement lead by Special Situation Funds, Manatuck Hill Partners and Narragansett Strategic Master Fund.

The leading publicly held companies that operate in the U.S. and plan to manufacture lithium-ion batteries for automotive applications are Johnson Controls (JCI), A123 Systems (AONE), Ener1 (HEV), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI).

The following table provides summary information on the stock price and market capitalizations of each company:

     Trading Last Mkt. Cap
Lead acid batteries only Symbol Price

(millions)

Exide Technologies XIDE $7.31 $552.58
Axion Power AXPW.OB $1.52 $125.67
Lithium ion batteries only
A123 Systems AONE $21.07 $2,159.61
Ener1 Inc HEV $6.70 $833.22
Valence Technology VLNC $0.95 $120.16
Altair Nanotechnologies ALTI $0.86 $90.63
Both lead-acid and lithium
Johnson Controls JCI $27.89 $18,716.43

I've always believed that successful investing requires a growth industry, a well-managed company, a good product, reasonable profit margins and an objectively low entry price based on current earnings or future potential. If the EIA forecast is even close, the market seriously underestimates the future potential of the lead acid group while fully valuing, if not overvaluing, the future potential of the lithium-ion group. The lead acid battery manufacturers also trade at far lower multiples of sales and book value than the lithium-ion manufacturers. Under the circumstances I think that substantial short-term appreciation is far more likely in low-priced stocks like Exide, Axion and Altair than it is in high-priced stocks like JCI, A123 and Ener1.

I got nothing but flack and disrespect in November of 2008 when I had the gall to suggest that cheap would beat cool. As my year-end review will show next week, the last 12 months have proven me right. The good news is that much of the valuation disparity that existed last year is still present and some very solid companies remain available at attractive prices.

DISCLOSURE: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock. He also holds a small long position in Exide Technologies (XIDE)

December 23, 2009

REDI-ing Your Portfolio for a Low-Carbon Economy

Tom Konrad, CFA

Colorado's recently released Renewable Energy Development Infrastructure (REDI) report looks at what the resource-rich state needs to do to accomplish the state goal of reducing CO2 emissions 20% from 2005 levels by 2020.  Investors who expect the developed world to attempt similar cuts in emissions should take note of the report's conclusions, and invest accordingly.

Since Colorado Governor Bill Ritter recruited my friend Morey Wolfson for the Colorado Governor's Energy Office (GEO) he's had a lot less time to socialize with the rest of us in the clean energy community, but we caught up over lunch during the International Peak Oil Conference in October where I was speaking on investing for a peak oil world, and he is on the advisory board of the sponsoring organization, ASPO-USA.

Morey told me he had spent the last few months working on a report for GEO on the improvements needed in Colorado's energy infrastructure.  Even though Colorado is in the top ten states for several renewable energy resources (Wind, Solar, and Geothermal,) it will be difficult to achieve significant emissions reductions in the fast-growing state, and I find government reports an excellent place to look for a clue to future government action.  

Anticipating government action is critical to any investor, so to the extent that government reports are likely to be used by political decision makers, they are also likely to be useful for investors as well. I've found useful nuggets in similar reports in the past, including The Arizona Renewable Enegy Assessment, and both the California Renewable Energy Transmission Initiative Phase 1A and Phase 2A.  These reports have been the source of the best unbiased assessments of the cost of clean energy I've been able to find.  I used a similar approach in developing the Model Clean Energy Portfolio included in my Green Energy Investing for Beginners series.  No portfolio should be static, however, and allocations should be adjusted to reflect changes in the investment environment and new information we glean from reports such as Colorado's recent REDI report.  The report is also the source of all the charts in this article.

REDI Recommendations

The REDI report has several recommendations to policymakers:

  1. Greatly increase investment in demand-side resources (energy efficiency, demand-side management, demand response, and conservation.)
  2. Greatly increase investment in Renewable Energy development, particularly utility-scale wind and solar generation.
  3. Accelerate the construction of high voltage electric power transmission to deliver renewable energy from Colorado's renewable resource generation areas to the state's major load centers.
  4. Strategically use natural gas-fired power generation to provide needed new power to the grid and to integrate naturally variable renewable resources.
  5. Consider decreasing the utilization factor of coal-fired generation and/or consider early retirement of the oldest and least efficient of the state's coal-fired generation stations.

What it Means for Investors

Recommendations 1 and 2 are not surprising, but they should be interesting to investors in that energy efficiency gets as much emphasis as renewable energy, even in a renewable-energy rich state such as Colorado.  On a national level, the implication is that energy efficiency should be given more emphasis than renewables if we are committed to achieving aggressive carbon reduction goals.  This conclusion is reinforced when you consider the energy productivity of demand side resources compared to supply side renewables: it takes a lot more energy to build the equipment to produce renewable energy than to install the equipment needed to save the same energy.

Recommendation 3 won't come as any great supply to long time readers; I've been advocating transmission investments practically as long as I've been writing about investing in renewable energy.  As you can see from the electricity cost chart to the right, transmission currently only accounts for 7% of our national electricity bill.  When critics decry the multi-million dollar expense of long range transmission in favor of local generation and distribution upgrades, they seldom put a cost to the upgrades they call for for the simple reason that local renewables without long range transmission will cost much more than building renewables along with transmission to support them and smooth out their natural variability.

 

Recommendation 4 should be good for natural gas producers, pipelines, and suppliers of turbines.  Given the many opportunities in clean energy, I usually don't consider investments in fossil fuels, even relatively clean ones such as natural gas, but this should be a note of caution if you're considering shorting natural gas stocks.

Recommendation number 5 is bad for coal miners.  Either reducing utilization or shutting down of coal plants means less coal being burnt, hurting demand for coal.  Investors in public utilities with a lot of coal fired generation, however, might stand to benefit.  This is because old coal plants are mostly depreciated, and investors have already received the return of their capital.  In order for investors to earn a return from regulated utility operations, they have to invest in new generation or demand side resources.  New investments in demand- and supply-side resources will be higher if old coal plants are shut down or used less, providing more new investment opportunities for utilities.

Coal miners, on the other hand, are not likely to start supplying wind when the utilities buy less coal, so stay tuned for a future installment of my Green Energy Investing for Experts series that takes a look at the downside for coal miners.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

December 22, 2009

Why I'm Thrilled By Axion's Financing Transaction


John Petersen

This morning Axion Power International (AXPW.OB) announced the closing of a $26 million private placement of straight common stock that was sold to institutional and individual investors lead by Special Situation Funds, Manatuck Hill Partners and Narragansett Strategic Master Fund. While some current shareholders will no doubt complain that the private placement price of $0.57 per share represents a $1.01 discount from yesterday's close and seems pretty dilutive, I'm thrilled that my fondest wish has come true a couple days before Christmas. After several months of nagging doubt over whether Axion would be able to obtain required working capital in a difficult market, its financial future is now secure for at least a couple of years. More importantly, the financing will give Axion the ability to significantly expand production capacity for the carbon electrode assemblies that are the heart and soul of its revolutionary PbC™ battery technology, thereby resolving the age old dilemma of which came first, the production capacity or the purchase contract.

To my way of thinking, the most impressive aspect of Axion's financing is sheer size. Axion had roughly 37 million common share equivalents outstanding before the placement and sold 46 million additional shares. Selling 55% of a company without surrendering control is extremely rare. The more telling fact is that the cumulative reported trading volume in Axion's stock for 2009 has only been 6.6 million shares. In other words, these private placement investors bought roughly seven times the annual trading volume in a single transaction. Nobody in his right mind buys that kind of weight with the expectation that he'll be able to resell at a profit in an illiquid market. That tells me this group of investors is taking a long-term view and swinging for the fences with Axion's other large holders. I'm delighted to have the company, even if they did get a better price.

A less obvious aspect is the level of core stockholder support that was necessary to make the transaction happen. Prior to the financing Axion had two series of preferred stock that were beneficial to holders but a serious impediment to future financing. The principal holders of those preferred shares, including me, agreed to give up the benefit of holding preferred shares if it would mean the difference between mere survival and enough cash to take Axion's business to the next level. They were joined in the sacrifice by Axion's largest common stockholder, The Quercus Trust, which apparently made important concessions of its own.

Over the course of a 30-year legal career in small company finance I've been involved in billions of dollars in private placement transactions. While public stockholders can only rely on information presented in SEC disclosure documents, private placement purchasers are given a much freer hand to conduct their own legal, technical and financial due diligence; ask questions of management; engage in frank discussions with vendors, customers and potential customers; evaluate detailed market data and forecasts; and take other steps that will help them make an informed investment decision. When transactions get this large and the lead investors are investment funds that owe a fiduciary duty to their owners, experience tells me that the due diligence investigation is only a little more intrusive than a visit to the proctologist. I'll probably never know what the new investors learned in their due diligence investigations, but I know they learned enough to justify some very big checks and that fact alone gives me substantial comfort that development and testing activities on the PbC™ battery technology are proceeding apace.

I'm no different from other investors and all things being equal I would have preferred to see a higher price for the placement. But my personal preferences have no impact on market conditions during the worst recession in 80 years and when I consider the size of the financing, the level of core shareholder support, the class of investors and the level of due diligence and negotiation that a large private placement invariably entails, I can't help but conclude that it's all good and this transaction is the beginning of a new era in Axion's corporate development. After giving effect to the private placement and the preferred stock conversions, Axion has 82.7 million common shares outstanding and a market capitalization of roughly $130 million. If its capital spending to revenue ratios are comparable to its larger peers in the lead-acid sub-sector, the capital spending facilitated by the placement should represent revenue potential of $100 to $150 million per year within 18 to 24 months. In an industry where other advanced battery developers are considered fairly valued at 2.3x 2012 revenue, Axion's common stock seems attractively priced and I would view any pull back as a buying opportunity.

DISCLOSURE: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

December 21, 2009

When Airlines Run Out of Fuel

Green Energy Investing For Experts, Part IV

Tom Konrad, CFA

Mass air travel is incompatible with a sustainable economy.  Air travel is energy and capital intensive, creates a gigantic carbon footprint, and is likely to  remain dependant on the high energy density of fossil fuels much longer than surface transport.  As such, it is a prime candidate for the short side of a clean energy portfolio.

I'm writing this post on a United Airlines (UAUA) flight from Baltimore to Denver in a seat that cost me $99, plus $15 to check a bag.  One sign of the economic unsustainability of flying me and my luggage at 8 cents a mile is airlines increasingly undignified scramble for marginal revenue, like that charge for checked baggage.

My flight left a half hour late because of airlines' desperate attempt to raise more revenue without raising prices by charging for checked baggage.  This has the unintended but unsurprising consequence of encouraging people to bring larger and more carry-on baggage, and spend more time wrestling it into the overstuffed overhead bins.  

Because most airlines are now charging for checked bags, it will be difficult for an airline to switch to a more rational policy that does not encourage passengers to bring excess carry-on baggage causing needless delays without making their prices seem relatively more expensive than their competitors.  (It's interesting, if not statistically rigorous, to note that JetBlue (JBLU) does not charge for the first checked bag, and Southwest (LUV) does not charge for the first two. Both usually seem to be among the best airlines for on-time departure rates.)

Airlines blamed an increase in flight delays on weather in October. I blame it on the increase in passenger awareness of the increased cost of checking bags.  In the short term, dropping ticket prices and charging for baggage will probably create a boost for airlines bottom lines.  In the long term, delays and strained backs from packing fewer, heavier bags can only decrease demand for air travel, just as the indignities of airport security have already made many potential passengers think twice when considering air travel.

The Icarus Industry

The above rant about checked baggage is just an example.  Airlines' economic woes are longstanding.  Airlines' current pursuit of short term revenues at the expense of the industry's long-term viability is more a symptom than a cause of industry woes.  Rather, the problem is chronic over-investment (by both private investors and governments) in the airline sector.  Flight has a visceral emotional appeal to humans, and industries with emotional appeal attract both government support and investment dollars, even from investors and governments who should know better.

With nearly unparalleled emotional appeal, the airline industry has been in a state of chronic oversupply practically since its inception.  This deprives airlines of pricing power, and makes it impossible for the industry  to recoup its  true costs over the long term.  Over its entire 120 year existence, the airline industry has racked up a net loss.  I think the Financial Times aptly summarized the consequence of these horrible economics in the line: "Grown up investors avoid the airline industry."

Peak Oil

As bad as the history of the airline industry has been, I expect the situation to get worse over the next few years. As we've seen since 2008, air passenger demand is highly sensitive to the health of the economy.  Hopes of economic recovery are seen by industry insiders as key to a "return" to industry profitability.  But in the current era of tight oil supplies, economic recovery will boost demand for oil, and raise the price of jet fuel, airlines' single largest cost category.   The following slide is taken from a 2004 presentation by Dr. Chris Smith of SH&E, an airline consultancy [pdf.]  With oil prices now around $70 a barrel, we will have seen another increase in the fuel cost category almost as large again as the rise shown.

 

My $114 flight on a Boeing 757 from Baltimore to Denver alone used about 18 gallons jet fuel (using numbers from here).  Unlike motorists, airlines pay little or no tax on jet fuel, meaning that any increase in oil prices will cause a much larger percentage increase in airline operating costs than it does for ground transportation.  

In short, airlines are a major source of marginal demand for oil.  Since the realities of peak oil constrain the expansion of supply, increases in demand for oil fueled by economic growth or decreases in supply caused by depletion must be matched to decreases in demand somewhere in the economy.  Air travel's profligate use of oil and relative price sensitivity mean that the industry will continue to reduce consumption faster than other transport sectors.  Given slow turnover in the airline fleet and stagnant efficiency improvements, most of the decrease in oil use will have to come from a decrease in passenger miles traveled.

Substituting alternative fuels for oil is also unlikely to help the economics of aviation.  A recent Rand study states, "Early in our study, we recognized that certain fuels may be more appropriate for automotive applications than for aviation.  Moreover, supplies are limited for nearly all the alternative fuels we examined."  (Thanks to Jim at The Master Resource Report.)  In other words, alternative fuels don't solve the underlying problem of not enough liquid transportation fuel to go around.

There's also the real chance that airlines will not only have to deal with peak oil, but climate change legislation as well.  Even if a global tax on air travel does not come out of the Copenhagen summit, airlines are an easily identifiable target for lawmakers and other groups interested in reducing global warming emissions.

None of this will not be good for airline stocks, making the industry a prime candidate for the short side of a green portfolio, the focus of this series.  (So far, I've also looked at the Mexican economy, and Shale Gas.)

How to Short Airlines

There is an airline sector Exchange Traded Fund (ETF), the Claymore/NYSE Arca Airline ETF (FAA), but, as I found with the iShares MSCI Mexico Index Fund (EWW), it is not widely held, and shares are not available for shorting.  Like Mexico, but unlike shale gas, I expect peak oil to erode the economics of aviation over time, and I think this erosion is fairly likely.  Hence, my preferred instrument is to short a stock in combination with a long call on the same stock, and my second choice would be a short call spread.  (See the Mexico entry in this series for my reasoning.)

In the case of EWW, I chose to use a short call spread, because most of the EWW's holdings are not traded on US based exchanges, and so I would also have had trouble obtaining individual Mexican shares to short.  In contrast, many airline shares are widely traded and held, so, rather than selling a short call spread that might require me to cover in haste if an early exercise left me in a short position without available shares to borrow, and so I chose to short individual airline stocks.

Since I'm not an airline industry expert, I wanted to short a representative sample of the airline industry similar to what I would have found if I were to short FAA, so selecting airline stocks to short was as simple as picking the largest holdings of FAA.  

The top three holdings are Delta Air Lines (DAL) at 16.6%, AMR Corp (AMR) the parent of American Airlines at 16.3%, and Southwest Airlines (LUV) at 14.7%.  Beyond these three, the next largest holding is United Air Lines (UAUA) at only 4.4%. Since the top 3 holdings compose 47.6% of the ETF, shorting these three should provide most of the diversification benefits of shorting FAA, but with much better liquidity.  While FAA trades an average of 21 thousand shares a day, Delta, AMR, and LUV trade about 12, 18, and 9 million shares a day, respectively.   They are also all widely held, making it simple to borrow shares to short, and exchange traded options expiring in January 2012 are available.  In contrast, the longest-dated options available on FAA are for June 2010.

Since airlines are one of the least green and most energy intensive forms of transport, a green investor should seriously consider shorting DAL, AMR, and LUV (combined with appropriate out-of-the-money long calls) as an investment in efficient transport.

DISCLOSURE: Short EWW, UAUA, AMR, DAL, and LUV.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

December 19, 2009

World Energy Solutions (XWES) and Ram Power (RPG.TO) Appear Promising

From Small Fries to Big Shots? Part 1 of 2

by Bill Paul

Feel like rolling the dice on some small alternative energy stocks that appear to have big-time potential?

Just remember: sometimes you roll snake eyes.

First up: World Energy Solutions Inc. (Symbol: XWES), which currently trades on NASDAQ for $3 and change per share.

Worcester, MA-based World Energy Solutions operates online exchanges for energy and green commodities, including the one administered by Regional Greenhouse Gas Initiative Inc. (RGGI), the regulatory scheme under which 10 Northeastern and Middle Atlantic states "cap" their power plants' emissions by requiring plant owners to buy permits for the gasses they emit.

World Energy Solutions is a poster child for how to run a cap-and-trade system. "RGGI auctions continue to run like clockwork," RGGI's chairman recently said, adding, "RGGI is showing that cap-and-trade works."

With Europe and Asia already well on the way to having full-blown cap-and-trade systems, it would seem only a matter of time before World Energy Solutions attracts far wider investor interest (and just maybe a corporate suitor). While the company is still in the red, last month it reported that third-quarter and nine-month losses had narrowed significantly from a year ago, on increased revenue.

Next up: geothermal power developer Ram Power Corp., which trades on the Toronto Stock Exchange under the symbol RPG (RPG.TO, RAMPF.PK). Nevada-based Ram shares also currently sell for $3 and change, although just two months ago they were selling for under $1. But then the World Bank's International Finance Corp. proposed to arrange $216 million in debt financing for the company's 72 megawatt geothermal project in Nicaragua, now due to come online in 2011.

Ram Power's chairman clearly believes this is the start of something big for his firm. Chris Thompson said this past week that "Ram Power's mission (is) to be the premier provider of geothermal energy in Central America. We see this region, especially Nicaragua, as an area where our company can develop stable, long-term energy supply relationships."

Unlike World Energy Solutions, Ram's third quarter and nine month losses widened - significantly so - from year-earlier results, though that clearly hasn't hampered its recent stock activity. The company has other geothermal interests in Nevada, California and Canada.

(Next Week: Two more small fries whose prospects appear promising.)

DISCLOSURE: None

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

Betting Against Shale Natural Gas Plays

Green Energy Investing For Experts, Part III

Tom Konrad, CFA

Controversy continues to grow about the economic viability of shale gas.  Investors who doubt the companies' claims should consider buying puts.

The Case for Gas

From the perspective of a green energy investor, natural gas is the most benign fossil fuel.  Natural gas emits less carbon than other fossil fuels (slightly more than half as much as coal, when used for electricity generation.)  Natural gas turbines also can quickly compensate for fluctuating supply and demand from other sources of electricity.  This quick response makes them a natural complement to variable electricity supply from wind and solar (along with better transmission, electricity storage, and demand response.)  Finally, natural gas will be key in making the transition away from fossil fuels, because building relatively cheap gas turbines can provide a bridge to an electric grid dominated by renewable energy, which has a high up-front cost in terms of both dollars and embedded energy.

The Case Against Shale Gas

With all this going for it, why is natural gas part of this series about sectors green investors should consider shorting? (See Part I, which made the case for shorting, and Part II, which looked at shorting Mexico country funds.)

The reasons are twofold:

  1. I think it would be unwise to short the natural gas industry as a whole... all the reasons laid out above will continue to be strong drivers for natural gas consumption.  This article is very specifically about shale gas players.
  2. There is a good chance (but not a certainty) that shale gas has been oversold.  
  3. The extensive use of fresh water in shale gas development makes shale gas development more environmentally damaging than the less-than benign conventional gas industry.

I wrote a short piece on Art Berman, the leading shale gas critic in October, outlining his views on why decline rates in shale gas wells are likely to be much faster than much of the industry says.  I'm no expert on gas, so here are some more authoritative sources for an overview of this controversy: The Financial Times, Art Berman himself, and industry defenders.

Sentiment

Most of this controversy is outside my area of competence.  However, that does not mean that it cannot be part of the investment decision process.  When making an investment decision, the key question to ask is: Are other investors more likely too optimistic, or too pessimistic about this company or industry?

The shale gas story, which I summarize: "New drilling techniques and discoveries have vastly expanded the available recoverable natural gas, expanding reserves so much that we no longer have to worry about running out, and we will even be able to increase sustainable production over the long term."  In other words, it sounds to good to be true.  In fact, it sounds like another version of the perennial paean, "Technology will save us," or, in another less pithy variant, "Technology will allow us to continue doing things the way we've always done them."

Technology may indeed save us from peaking fossil fuel supplies and climate change, in the sense that it may allow our society to adapt the quick loss of this massively energy intense resource that we've been completely reliant on for the last 150 years.  However, it is wishful thinking to hope that technology will allow us to keep on doing things the way we've been doing them for the last few decades.

Wishful thinking is very seductive, because it allows us to avoid confronting the present reality of our problems today.  As such, it's intensely popular, and I nearly always expect that a large number of investors, spurred on by happy-talk media, will buy it, both figuratively and literally in the form of shale gas company stock (and solar stocks for that matter.)

So, if there is a chance that shale gas companies are over hyping the potential and playing down the risks and costs of their technology, the herd of investors and analysts is most likely underestimating the probability of this chance.  I don't know what the probability is, but I do know that if I can buy insurance against the chance Art Berman is right, the premium for that insurance will probably be low enough to make the deal attractive.

Insurance for Shale Gas

In the stock market, puts are insurance against the chance that the underlying stock will fall below the strike price.  If shale gas has been over hyped, the most exposed shale gas players will see large falls in their stock prices when the truth becomes accepted wisdom.  If shale gas actually holds as much promise as the companies are saying, such puts will expire worthless, but investor losses will be limited to the price (or "premium") paid for those puts.

In Mexico, I felt a traditional short was the best way to play the country's exposure to peak oil.  Mexico is exposed to a nearly inevitable decline in oil production, which will take a continuing and growing toll on the economy.  The only real question with Mexico is how much and how quickly declining oil production will have its effect on the Mexican economy.   In contrast, shale gas companies are facing an unknown chance of a catastrophic risk to their entire business model. The question here is not "how much and how fast" but "will it happen and how soon?"  In such a case, choosing an out-of the money put is the best way to place a bet.  If the chance that shale gas companies' business models are fatally flawed and will be recognized fairly quickly is higher than is currently implied by market prices, then it makes sense to buy the put.

Which Companies are Most Exposed?

I have not decided if a bet against shale gas is for me, so I have not done an analysis of which companies are most exposed.  Here are the factors to consider if you care to do your own analysis:

  1. Which companies have the largest exposure to shale gas as a percentage of their business?
  2. Are there exchange traded puts (LEAPS) available on the company's stock that expire in 2011 or 2012?
  3. How liquid are these puts?  
  4. What is the Put/Call ratio of the stock?

We only want to buy puts on companies that have nearly 100% of their business in shale gas.  Otherwise, good news in other parts of the company's business might overwhelm the damage done by bad economics in shale gas plays, and we might not profit even if shale gas turns out to be over hyped.

We also want to make sure that we can buy long term puts, because it often takes longer than skeptics expect for bad news to be recognized in the market.

Most exchange traded options are rather illiquid, meaning that you are either going to pay a high transaction cost in the form of the spread, or you will need to use a limit order and hope that the market moves to you.  I tend to prefer the latter tactic, but it means that not all of my intended trades ever execute.  A quick measure of liquidity is the spread between the bid and the ask as a percentage of the option price.  The smaller the spread, the better.

The Put/Call ratio is a rough measure of the relative demand for downside insurance (puts) compared to upside speculative interest (calls.)  Generally, the higher the Put/Call ratio, the more demand there is for downside insurance.  Since we are contemplating an essentially contrarian downside bet, we are more likely to be find puts at reasonable prices when the put/call ratio is low, indicating that there is relatively little interest from other investors in buying protection against declines in the stock price.

Company Response

A final sign that a shale gas company may be overstating its reserves is the strength of management's response to Dr. Berman's criticism.  I feel that a company with little to lose if Dr. Berman is correct will have little incentive to dispute his findings.  A company with a lot to lose is more likely to take an active approach to refuting his claims, possibly even taking legal action in the attempt to silence him.

Berman's top detractors are Devon Energy Corp. (DVN) and Chesapeake (CHK), so those two would also be at the top of my list when considering possible puts.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

December 17, 2009

National Research Council Report – Grid-Enabled Vehicles Are Not Ready For Prime Time


John Petersen

On December 14th the National Research Council of the National Academy of Sciences issued a new report sponsored by the U.S. Department of Energy titled "Transitions to Alternative Transportation Technologies – Plug-in Hybrid Electric Vehicles." The press release headline announcing the report proclaims, "PLUG-IN HYBRID VEHICLE COSTS LIKELY TO REMAIN HIGH, BENEFITS MODEST FOR DECADES." In other words, grid-enabled vehicles, or GEVs, are nowhere near ready for prime time and investors that buy into the GEV hype can look forward to decades of pain and suffering. Serious investors who want to understand the electric vehicle space and the energy storage sector must make the time to read the entire 140 page report or be prepared to suffer the consequences. You can read a free online version here or download a PDF copy for $30.

The report considered plug-in hybrid electric vehicles with both a 10-mile electric only range (PHEV-10) and a 40-mile electric only range (PHEV-40). The summary results and conclusions from pages 7 through 9 of the report are:
  1. Lithium-ion battery technology has been developing rapidly, especially at the cell level, but costs are still high, and the potential for dramatic reductions appears limited. ... Assembled battery packs currently cost about $1,700/kWh of usable energy.  ... Costs are expected to decline by about 35 percent by 2020 but more slowly thereafter. ...
  2. Costs to a vehicle manufacturer for a PHEV-40 built in 2010 are likely to be about $18,000 more than an equivalent conventional vehicle, including a $14,000 battery pack. The incremental cost of a PHEV-10 would be about $6,300, including a $3,300 battery pack. In addition, some homes will require electrical system upgrades, which might cost more than $1,000. In comparison, the incremental cost of an HEV might be $3,000.
  3. PHEV-40s are unlikely to achieve cost-effectiveness before 2040 at gasoline prices below $4.00 per gallon, but PHEV-10s may get there before 2030. PHEVs will recoup some of their incremental cost, because a mile driven on electricity will be cheaper than a mile on gasoline, but it is likely to be several decades before lifetime fuel savings start to balance the higher first cost of the vehicles.  Subsidies of tens to hundreds of billions of dollars will be needed for the transition to cost effectiveness.  Higher oil prices or rapid reductions in battery costs could reduce the time and subsidies required to attain cost-effectiveness.
  4. At the maximum practical rate, as many as 40 million PHEVs could be on the road by 2030, but various factors (e.g., high costs of batteries, modest gasoline savings, limited availability of places to plug in, competition from other vehicles, and consumer resistance to plugging in virtually every day) are likely to keep the number lower. ...
  5. PHEVs will have little impact on oil consumption before 2030 because there will not be enough of them in the fleet. More substantial reductions could be achieved by 2050. PHEV-10s will reduce oil consumption only slightly more than can be achieved by HEVs. ...
  6. PHEV-10s will emit less carbon dioxide than nonhybrid vehicles, but more than HEVs after accounting for emissions at the generating stations that supply the electric power. PHEV-40s are more effective than PHEV-10s, but the GHG  [greenhouse gas] benefits are small unless the grid is decarbonized with renewable energy, nuclear plants, or fossil fuel fired plants equipped with carbon capture and storage systems.
  7. No major problems are likely to be encountered for several decades in supplying the power to charge PHEVs, as long as most vehicles are charged at night. ...
  8. A portfolio approach to research, development, demonstration, and, perhaps, market transition support is essential. ...
The only other point I would have included in the summary is:

"It is the committee’s opinion that [the DOE's battery price goals] beyond 2012 are extremely aggressive and are unlikely to be reached by the target date or even for a significant time beyond." (Page 22 of the report)

Overall, I applaud the report's frank and unbiased discussion of the challenges inherent in the commercialization of GEVs and the decades it will take before GEV technologies can make a meaningful difference in either oil imports or CO2 emissions. Its two big shortcomings were (1) the failure to consider natural gas vehicles, or NGVs as an alternative, and (2) the failure to consider critical raw material supply issues; most notably the availability of heavy rare earth metals for the permanent magnet motors that will drive a wholly or partly electrified transportation system.

The introduction starts by noting, "transportation is responsible for more than two-thirds of U.S. oil consumption, and about 60 percent of the oil we use must be imported." The rough parity between these two figures leads to the inescapable conclusion that we could pretty much eliminate oil imports if we could eliminate the use of gasoline and diesel fuel for transportation. While the eco-religious among us insist that GEVs are the only way to achieve this laudable goal, the fact is a simple combination of HEV and NGV technologies can get us to the same point faster, cheaper and cleaner because:

  • HEVs slash fuel consumption and CO2 emissions by up to 40% for less than half the expected cost of a PHEV-10;
  • America is blessed with enormous natural gas reserves that could be used in transportation;
  • Natural gas is much cheaper than oil when you run a basic thermal equivalency comparison;
  • A natural gas powered engine produces 30% less CO2 per mile than a comparable gasoline powered engine;
  • Each gallon of gasoline or diesel replaced by natural gas will reduce oil imports by a like amount;
  • Money spent on natural gas helps the domestic economy while money spent on oil imports benefits foreign powers;
  • The current cost of an NGV is roughly equivalent to the expected cost of a basic PHEV-10;
  • NGV technologies offer significant opportunities for real economies of scale where GEVs don't; and
  • Using a combination of NGV and HEV technologies will be cleaner than plugging a GEV into an average utility.
There are several good reasons why 20% of all new light vehicle purchases in Italy are NGVs. The technology is available today, readily scalable, relatively inexpensive and very cost-effective. It's exactly what the consumer is looking for, particularly in recessionary times when splashing out a 50% to 100% premium for eco-bling seems fiscally imprudent.

For a detailed discussion of the rare earth metals supply constraints that will almost certainly make a cruel joke of the current GEV hype, readers should review the work of Seeking Alpha contributor Jack Lifton who has forgotten more about that topic than I'll ever learn. The quick and dirty summary is that 95% of the global market for rare earth metals is controlled by China which expects to use substantially all of its rare earth metal production to satisfy domestic demand within a few years.

I'm an oddball among alternative energy bloggers because I believe that green in my wallet is more important than green in my philosophy. My biggest worry is that six billion people want a small piece of the lifestyle that 500 million of us have and usually take for granted. While the teeming masses once toiled in poverty and ignorance and accepted the inevitability of their misery, the information and communications technology revolution changed all that. For the first time in human history the mass of the world's poor know that there is something better than mere subsistence and they're working very hard to earn a place at the table. The trick will be finding a way to raise the standard of living in developing economies without crushing the standard of living in developed economies. For that to happen without catastrophic conflict and horrific environmental consequences, the world must find relevant scale solutions for persistent shortages of water, food, energy and virtually every commodity you can imagine. In other words, the cardinal sins of extravagance and gluttony can no longer be tolerated in any of their pernicious forms.

I’m also an incurable optimist who believes that “In America we get up in the morning, we go to work and we solve our problems." (From The Lost Constitution by William Martin) We can’t solve persistent global shortages of water, food, energy and commodities without first minimizing waste. We also can’t wait for miraculous GEV technologies to eventually solve basic transportation problems that become more pressing with each passing day. We have to go to work today with the toolbox we own and be ready to replace our tools with better ones when they become available.

When we back away from the GEV hype and rationally analyze the myriad technical, economic and environmental issues that must be solved before GEVs can be cost-effective, it becomes clear that the baby steps including stop-start engine  systems, HEVs and NGVs are where the business growth will lie for the next decade. The principal beneficiaries of the short-term trends will be established automotive battery manufacturers like Exide Technologies (XIDE) and Johnson Controls (JCI), advanced lead-acid battery developers like Axion Power International (AXPW.OB), HEV technology leaders like Toyota (TM) and NGV technology leaders like Fuel Systems Solutions (FSYS). In a decade or two when long promised advances in battery technology are historical fact rather than forecast and GEVs have moved away from technology's bleeding edge, the best investment choices may be different. But I plan to be retired by then and living off my fixed income investments.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds a small long position in Exide Technologies (XIDE).

December 16, 2009

EnerNOC Broadens Scope in Smart Grid Sector

Demand Responder Eyes New Growth Areas as Key Market Prices Dip 

by Joyce Pellino Crane

EnerNOC, Inc., announced its acquisition of Cogent Energy, Inc., on December 9, signaling a strategic move into the energy efficiency sector that is designed to help it capitalize on the Smart Grid’s growth potential.

But the company was launched in 2004 as one solution to the country’s burgeoning demand for energy, and has grown into a leader among a handful of competitors in the demand response market.  

Boston-based EnerNOC (Nasdaq: ENOC) helps businesses and grid operators reduce electricity consumption when demand is peaking and capacity strained. The business model is designed to prevent regional blackouts and reduce the need to build more power plants.

Expectations for growth over the next few years are mixed and dependent on whether the company can successfully penetrate the energy efficiency and other ancillary markets, say some observers.

But so far, the company derives about 96 percent of its revenues from demand response customers. A demand response company, such as EnerNOC, uses technology to cut electricity usage among commercial, industrial, and institutional customers during periods--heat waves and frigid temperatures--when energy demand surges or supply falls suddenly. It can also be useful if changing weather conditions cause supply from wind or solar to fall suddenly.  EnerNOC’s platform inserts a layer of technology between commercial businesses and grid operators to ensure that there is enough power supply for all consumers during peak demand.

The company has shown significant growth in the sector, but it’s uncertain whether EnerNOC can sustain the pattern on a long-term basis.

Ben Schuman, senior research analyst for Pacific Crest Securities in Portland, Ore., said he foresees growth decelerating in EnerNOC’s largest demand response market after 2010.

“The growth in that market after 2010 is going to decelerate mainly because the capacity prices are declining,” he said.

Capacity is an industry term that refers to the energy resources needed to meet the industry’s highest electricity demand.
 
The country's power grid is operated by seven regional transmission organizations and independent system operators. The largest market among them belongs to PJM Interconnection of Valley Forge, Penn., which sends electricity to utility companies in all or part of 13 states from Northern Illinois to the Atlantic Ocean, including Washington, D.C. PJM pays EnerNOC and other demand response providers to cut the use of electricity among an aggregated pool of customers. It also pays a monthly fee to keep demand responders like EnerNOC on standby for a cutback when peak demand requires it. The demand responders are then contractually obligated to ensure that electricity usage decreases.

EnerNOC procures capacity obligations through PJM-administered auctions that are three years in advance, giving a clear line of vision to a large portion of its future revenues.

Prices in much of the PJM market are slated to drop each year through June 2012 from the current price of $102 per megawatt day. By mid-2012, some PJM regions will see prices plunge to as low as $16.47 per megawatt day, while others with less capacity will command as much as $222.30.

But the pricing volatility could have an impact, say some industry observers.

Although EnerNOC is committed to managing 2,500 megawatts in PJM territory from 2012-13, the revenues it will derive from its largest customer are projected to be flat. In May, the company announced it had secured about $100 million in future revenues from PJM—roughly the same as reported for the third quarter of 2009, ending September 30. In contrast, noted Schuman, between 2008 and 2009, revenues from the PJM region had more than tripled.

“So what has been a growth market for them flattens out,” Schuman said. “…That isn’t to say there aren’t other markets that they can break into, but I think it will be more difficult for them to grow after 2010 than it was in the past.”

But Shawn Lockman, a senior associate at Ardour Capital Investments in New York, said the company will compensate for the price drop by building a megawatt profile over the next five years that makes up for the difference.

“As they start to advocate for megawatts nationally outside the PJM territory,” he said, “you’re going to see the impact of that price drop be more dissipated.”

Lockman is optimistic about the company’s ancillary services, including monitoring-based commissioning solutions, energy procurement, energy efficiency, and carbon management, “but demand response systems is going to be their base for the foreseeable future,” he said.

Lockman gave EnerNOC’s stock a buy rating in contrast to Schuman’s recommendation to hold.

“This company is strong and they’re well-managed and they have a lot of opportunity out there,” Lockman said. “We don’t see anything that would put a dent in that on a regulatory basis.”

In fact, a recent federal order gave demand response companies a big boost. In October, the Federal Energy Regulatory Commission finalized regulations that strengthen the operation and improve the competitiveness of organized wholesale electric markets through the use of demand response. EnerNOC has leapt ahead of its competitor, Comverge, Inc., (Nasdaq: COMV) of East Hanover, NJ, according to Lockman, in the $5.2 billion US market. The privately-held CPower, Inc., of New York, NY, another competitor in the market, announced a $10.7 million round of financing in April.

EnerNOC’s initial price offering on May 18, 2007 closed at $31.13 per share. Five months later on October 18, share prices peaked at $50.50. Since then, the price has been volatile, dipping to as low as $4.80 on November 21, 2008, and closing on Monday at $28.55.

Third quarter revenues jumped 134 percent to $103 million from $44 million. Net income rose to $26.6 million from a loss of $3 million during the third quarter of 2008. Year-end revenues are projected to be between $187-9 million, according to Tim Weller, chief financial officer. EnerNOC lost $23.5 million in 2007, and $36.6 million in 2008. But today it has about $130 million in cash and marketable securities and about $4.5 million in long-term debt. It is on track to reach $250 million in projected revenues for 2010, said Weller.

“The Wall Street expectation was around $257 million,” said Schuman. “The company has done a good job of exceeding expectations for the past year.”

But warned Schuman, “growth will slow down unless they can do a really good job of penetrating other markets or some of their other services take off.”

The recent acquisition of Cogent Energy is a step in that direction. The company’s solutions will enable EnerNOC to service smaller facilities equipped with less sophisticated control systems, according to a company announcement. The acquisition significantly increases the size of EnerNOC’s application to perform detailed analysis on a business’ energy usage. Cogent gives EnerNOC “utility relationships and a customer footprint in California, and experienced head count resources in the area of energy consulting service,” Schuman wrote in a December 10 report. Cogent is expected to deliver about $5 million in revenues in 2010, he added.

Tim Healy, EnerNOC’s chairman and CEO, is determined to change how the world interacts with energy.

“We believe we’re ahead of the pack,” he said. “We envision a world in which energy management is as integral to energy accounting as every other operation.”

Joyce Pellino Crane writes at wordtrope.com/blog. She is a Boston Globe correspondent and a business technology analyst for Trender Research. Follow her on Twitter: JoyPellinoCrane.
She can be reached at joyce pellino crane at gmail period com no spaces

DISCLOSURE: No position.
DISCLAIMER: Joyce is not a registered investment advisor. The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

December 15, 2009

Why I'm Buying C&D Technologies


John Petersen

Baron Rothschild, an 18th century British nobleman, is credited with saying, "Buy when there's blood in the streets, even if the blood is your own." Later this week I expect a blood in the streets buying opportunity in the stock of C&D Technologies (CHP) and intend to take advantage of it. It's unquestionably a contrarian investment, but one that could pay off handsomely. I want to thank Ben S, a regular reader, for bringing this opportunity to my attention in an e-mail last weekend.

Most investors know that the addition of a company's stock to a major market index creates significant upward price pressure as ETFs move to add the stock to their portfolios. A similar phenomenon occurs when a stock is removed from a major index, which will happen on Friday when C&D is removed from the S&P 600 Smallcap Index (^SML). Recent examples of other companies that have gone through similar index removals include Sterling Financial (STSA) effective November 18, 2009, Independent Bank Corporation (IBCP) and Central Pacific Financial (CPF) effective November 10, 2009 and Wabash National Corporation (WNC) effective July 16, 2009. It will almost certainly be an ugly time for C&D's existing stockholders, but it can be a great buying opportunity for contrarian investors who are actively looking for companies in transition that are reinventing themselves in preparation for a brighter future.

The energy storage sector is one that doesn't make sense to a lot of investors because there are huge disparities in the relative market valuations of old-line companies and new entrants. In general the old-line companies trade at rust belt discounts while the newcomers trade at premium prices. Since I'm a great believer in the idea that age and experience have a clear advantage over youth and optimism when it comes to hard core manufacturing, I expect the established companies to adapt to emerging business realities and appreciate significantly as they maintain or improve their market position in coming years. Conversely, I expect the new entrants to trade in fairly narrow bands as they struggle to complete their product development, prove their manufacturing competence and earn a share of developing energy storage markets that are potentially massive.

C&D and its predecessors have been engaged in the battery manufacturing business for over 50 years. It operates plants in the U.S., Mexico and China, and sells its products globally for use in UPS systems, wired and wireless telecommunications, CATV systems, utilities and other applications. Its revenues increased from $253 million in the year ended January 31, 2005 to $365 million in the year ended January 31, 2009. While C&D suffered a 12% revenue decline for the nine month period ended October 31, 2009 because of the recession, the magnitude of its revenue decline compares favorably with the 37% revenue decline suffered by the industry leader Enersys (ENS).

The scariest things about C&D are a balance sheet that includes far too much debt for my taste and a six year string of operating losses. On a more positive note, the debt seems to be well-structured and manageable, and the operating losses are declining at rates that make management's forward looking statements about turning the corner in the first quarter of next year appear reasonable. While I see a number of potential problems that need to be resolved, I also see tremendous opportunity.

Some of the more intriguing aspects of C&D's business that are not readily apparent to a casual observer include:
  • New facilities in China that were commissioned in early 2008 and have roughly $75 million per year in unused capacity;
  • A commitment to research that has consistently maintained R&D spending in the $6 to $7 million  range despite cost cutting efforts in the rest of the business;
  • A $19 million Department of Defense contract to develop large format lithium-ion batteries for military applications; and
  • A manufacturing partnership for a new class of advanced lead-acid battery based on Firefly Energy's composite foam electrode technology.
C&D is not an old-line battery manufacturer that's stuck in another era. It is a visionary manufacturer with substantial sales that has already paid the costs of moving into the high-growth Asian markets and energy storage solutions for the future. The DoD contract would have had a huge impact on a pure-play lithium-ion company, but because of the source it barely caused a ripple.

It would be grave understatement to suggest that C&D's stockholders have had a tough time over the past few years, as evidenced by its 5-year stock price chart.



At yesterday's closing price of $1.31, C&D had a market capitalization of $34.46 million, a price to book ratio of 0.81 and a price to sales ratio of 0.10. If the removal of C&D from the ^SML causes further price erosion, which certainly appears likely, today's rock bottom market metrics will only become more attractive. On balance, I think that C&D has a very attractive risk reward profile that merits further study by experienced investors who have a relatively high risk tolerance. It's not entirely clear whether the ETF liquidations will happen on Thursday or Friday, but one of the two is certain to have far higher volume than normal and with a week to go before Christmas, the short-term price impact could be substantial.

Over the last year I've had pretty fair luck calling the bottom in energy storage stocks. I bought Enersys (ENS) in the $5.90 range and sold it for $23.50. I bought Active Power (ACPW) at $0.26 and Exide (XIDE) for under $2.00 and am up almost 300% on both companies. I've recently quintupled my position in ZBB Energy (ZBB) and still have great expectations for Axion Power International (AXPW.OB). By the end of this week I'll be adding C&D to my personal portfolio. I'm not a trader and I plan to hold C&D for a minimum of 12 to 18 months, but I expect the ^SML removal to give rise to opportunities for both short-term traders and long-term investors alike.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Active Power (ACPW), ZBB Energy (ZBB) and Exide Technologies (XIDE).

December 13, 2009

Shorting Mexico's Peak Oil Economy

Green Energy Investing for Experts, Part II

Tom Konrad, CFA

The next Tequila Crisis will be a peak oil crisis.  Mexico's government is dependant on revenues from declining oil fields.  The prospects for replacing these revenues look slim.  Shorting Mexico Country ETFs looks like a good way to hedge market exposure.

In Green Energy Investing For Experts, Part I, I discussed why it makes sense to use companies and sectors that may be hurt by peak oil or climate change as a hedge against the market exposure in a green portfolio.  In Mexico, peak oil is already a reality.  Production has already declined , but, because most investors do not understand the irreversible nature of declines in oil output, the Mexican stock market had not yet discounted the damage that peaking oil production is likely to do to the Mexican economy.

Below is a quote from the Oil Drum about Mexican oil production:

The President just changed the head of Petroleos Mexicanos (Pemex) as the revenues that the state gets from sale of its oil (making up nearly 40% of the federal budget) dropped 30% in the first half of the year. Current Mexican Government predictions that overall Mexican production will stabilize at 2.5 mbd over next year don’t reflect the collapse of Cantarell, and also fail to recognize that the promised increases in production from other fields are not reaching the goals set. It is only a few days since the production at Chicontepec was “evaluated” after falling some 12,000 bd short of target. This field is still in development, with ultimate production targeted at 550,000 to 700,000 bd by 2017, but as it is already 16% behind the mark that does not augur well for that future.

As Euan Mearns pointed out the fields at Ku-Maloob-Zaap (KMZ) which lie adjacent to Cantarell are being produced in the same way as Cantarell, and thus production has recently risen dramatically.

That means the Mexican Federal revenues dropped 12% in the first half of 2009 because of falling oil production.  This is not a one-time hit to the budget, but part of an ongoing decline.  That means that Mexican government revenues are permanently 12% lower, and likely to decline further as oil production declines further.  

I can't think of any good way to make up for the large and growing budget gap.  Raising taxes would flatten an economy already hurting from the financial crisis.  Cutting spending would do the same.  Cutting funding to museums is painful but insufficient.  Debt  is currently at 44% of GNP, a high level, but possibly manageable if the decline in revenues were cyclical, rather than permanent and ongoing.  With declining revenues, default and/or devaluation seems almost inevitable.  No option would be good for Mexican companies.  

Shorting Mexico

If the Mexican Governments' fiscal situation is so dire, it makes sense to short Mexican companies, especially if the short is part of a hedge against exposure to world financial markets.  With a hedge, the investor only needs to be confident that things are liable to get worse in Mexico more rapidly than elsewhere, or not get better as quickly.

That seems like a very good bet to me, so I looked for Mexican Country ETFs or closed-end funds to short.  I found 

The first two are closed-end funds with limited liquidity.  The iShares ETF, however, is widely traded and liquid.  It also has a good number of exchange traded options with decent liquidity, including long term LEAPS with maturities of over a year.

In terms of the hedging strategies I discussed in Part I, I prefer buying puts when I am anticipating a not-very-likely but potentially drastic event to affect the security.  As I discussed above, in Mexico's case we are dealing with a harmful event (declining oil revenues) that is already underway, and is likely to have harmful, if not disastrous effects.  

Because the effects of declining oil production could be disastrous for Mexican stocks, I would prefer to short EWW, rather than selling an in-the-money call.  An in-the-money call will cease producing gains once EWW has declined to its strike price; a short can be used to take advantage of declines all the way to zero.  

To protect against unforeseen positive events, I usually combine such a short with a long dated out-of-the-money call, or with an in-the-money short call.  In addition to liquidity, the availability of EWW LEAPS makes the ETF particularly attractive for this sort of hedging.

Unfortunately, as with many specialty ETFs, I found that shares of EWW were not available for shorting.  Because of this lack, I chose to use a short call spread instead of a short position combined with a long call.  This means that I will only be able to take advantage of large drops in the ETF by selling new with lower strike prices when the EWW share price falls below the strike price of my short call, which increases the cost of the overall transaction.

Conclusion

The profitability of this short position depends on either

  1. A general world stock market decline or
  2. The decline in Mexico's oil revenues being more drastic than most investors are anticipating.

I personally expect both, but if I'm wrong about one, there's a good chance the other will work in my favor.  There's always a chance I'm wrong about both, and that's why I buy the calls.  This series will continue with more short ideas that may benefit from peak oil or climate change regulation: Diversification makes a much sense on the short side as it does on the long side.

DISCLOSURE: Short EWW.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

December 11, 2009

Hidden Gems? Why Green Investors Should Look at Daewoo Shipbuilding and Ener1

Part 2 of 2

Bill Paul

Neither Daewoo Shipbuilding & Marine Engineering Co. Ltd., which trades OTC under the symbol DWOTF, nor Ener1 Inc., which trades on NASDAQ under the symbol HEV, is an obvious candidate for having hidden potential.

Heck, Daewoo isn’t even a green energy stock. Or is it?

Lost in the hubbub of Copenhagen and Congress, there’s been important news about both these companies that strongly suggests – at least to me – that each has plenty of undiscovered potential that will really start paying off over the next 18 to 24 months.

South Korea’s Daewoo Shipbuilding was just awarded a contract by German utility RWE AG’s (Symbol: RWEOY) renewable energy unit for up to three vessels specially designed to install offshore wind farms. The contract reportedly could be worth upwards of half a billion dollars, depending on whether RWE picks up the option on the second and third ships. The first ship is scheduled to be completed in 2011.

A couple things: at present, offshore wind power is going gangbusters thanks to healthy project returns that one European investment bank puts at around 15%. But installing the new large wind turbines under often harsh conditions requires a special kind of vessel. Daewoo’s reportedly will be the first – quite possibly the first of many. (Simultaneously, Daewoo just said it may build a wind power equipment plant in China.)

As for Ener1, seasoned green investors may think they know everything about this lithium-ion battery manufacturer. If Pike Research is correct, the future is bright for all li-ion battery manufacturers, Pike having just forecast that the global li-ion transportation battery market will total nearly $8 billion by 2015, compared with $878 million in 2010.

But the big li-ion winners should be those companies whose batteries also meet the critical need of providing energy storage for power grids. The really big winners should be those companies whose li-ion batteries also go into cars whose manufacturers can provide the rapid recharging infrastructure that consumers have indicated they want.

Tuck this away: Ener1 is the battery supplier in the world’s first project linking grid storage, electric vehicles, rapid recharging infrastructure and solar power. Other participants in the just-announced Japanese project include Mazda Motor Corp. (Symbol MZDAY) and Kyushu Electric Power, which trades in Tokyo under the symbol 9508.

Footnote: in Part 1 of this series, we explored the undiscovered potential of PFB Corp. (Symbol PFB), Vodafone Group (Symbol VOD), and Telefonica S.A. (Symbol TEF). For more please see: http://energytechstocks.com/wp/?p=2194.

Bill Paul is Managing Editor of EnergyTechStocks.com

DISCLOSURE: None

DISCLAIMER: This is a news article. Please read terms and policy.

December 10, 2009

Feel-Good Government Grants Leading Cleantech Astray

David Gold

Grants for smart grid projects. Grants for battery manufacturing lines. Loan guarantees for renewable energy project development. Grants to private companies for energy efficiency projects. And with each it seems that the cleantech world cheers. Yet for all our desire to create sustainability in our consumption and use of energy, this model of getting us there is not only unsustainable but is of questionable value.

I want to emphasize that I am speaking about government grants to the private sector where the government is not the end customer and where the grants are for implementation of projects that businesses may (or may not) have done otherwise as opposed to grants to conduct basic R&D. Projects like smart grid implementations, battery manufacturing lines, biofuels plants or industrial energy efficiency implementations that have represented the bulk of cleantech grants to the private sector this year. Instead of focusing on cultivating businesses that can sustain themselves via customers, government handouts have focused company time and money on lobbyists and grant writers. And if you haven’t noticed, the handouts are huge, with many in the tens of millions and even hundreds of millions of dollars for a single award. Some award winners, like ECOtality, are honest enough to admit that their efforts to secure government funding directly attributed to a drop in their revenues. For every company that wins a cleantech grant, there are as many as 10 times the companies that applied and lost. All those losers spent significant time and money chasing those funds and, in the process, neglecting their real business and real customers. Lately the discussion in board rooms often has concentrated more on how to win the next government grant and which lobbyist to hire than on how to build a successful and sustainable business.

At the most basic level, the goal of current U.S. energy policy should be to speed our transition to sustainable domestic energy consumption – a transition that would occur naturally as carbon-based energy sources declined but likely too slowly to avoid the environmental, economic and national security implications. Presumably, the concept behind hundreds of billions of dollars in grants to the private sector is to enable and encourage acceleration of this change. As such, it also must presume that government employees can select winners better than the private sector, do so without political influence, and that the projects being funded are absolutely ones that would not have occurred without government funding. Finally, those same government employees; 1) must be able to select projects that will help accomplish our goal and; 2) must either be able to continue to fund those projects or have effectively analyzed that a one-time grant will be sufficient to incentivize the private sector to take over from there.

My Democratic friends may scream at me, but those are an awful lot of largely unrealistic presumptions that defy the history of government grant programs to the private sector. (Synfuels and the National Institute of Standards and Technology’s Advanced Technology Program are just two examples.) And to add insult to injury, large amounts of the recent cleantech grant money handed will help the competitiveness of foreign corporations as it was awarded to U.S. subsidiaries or joint ventures of those companies (for example, hundreds of millions in battery grants involving LG Chem, Kokam, Itochu Corporation, BASF and Saft). While the government has long had a role in advancing basic R&D, the concept that the U.S. will jump-start, let alone build, a sustainable energy economy through government handouts for implementation of manufacturing plants, production facilities or enhanced utility grids is, quite simply, ludicrous.

Government grants to the private sector are great PR and make the cleantech public feel good. But they don’t provide quick economic stimulus to the economy (see Cleantech Stimulus Not Very Stimulating) and will not provide meaningful acceleration on the path to sustainable domestic energy consumption. In the end, the only way to have sustainable change is to have a change in the fundamental economics of energy – both in the cost of non-sustainable sources and in the regulatory infrastructure through which carbon based energy companies and utilities earn money. We all saw how quickly things began to change when oil hit $100 a barrel and how quickly they reverted when prices went back down. Reform the regulatory environment so that utilities can profit from conserving energy instead of from building power plants and watch how things change.

In my home state of Colorado, wind turbine manufacturer Vestas just announced it is furloughing all 500 workers at the plant it built not long ago. Why? Vestas notes the challenge of natural gas prices being so low that wind turbines can’t compete. I guess we need to borrow more money from the Chinese and other foreign governments to further increase our grants to the wind turbine market…or, we can focus on a sustainable solution.

Nothing can provoke an economic transformation more quickly than the free market appropriately motivated by profit. That, in fact, is largely how we got to where we are today with our reliance on carbon-based energy sources. And the most sweeping and powerful thing the government can do is to influence the profit motive for the private sector by changing energy economics. But that is a topic for another blog post. (And now my Republican friends can scream).

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com). This article was first published on his blog, www.greengoldblog.com.

December 08, 2009

EnviroStar: A Clean Laundry Stock For Your Portfolio

Saj Karsan

EnviroStar (EVI) is a distributor of laundry equipment that has developed a proprietary dry-wet-cleaning machine that avoids the use of perchloroethylene (Perc), a harmful chemical that the International Agency for Research on Cancer has deemed a carcinogen. Perc is also classified as a hazardous air contaminant by the US Environment Protection Agency, and its use will become illegal in the state of California in the year 2023. EnviroStar's patented Green-Jet process uses an environmentally-friendly, water-based solution that is both non-toxic and requires less energy consumption than traditional dry-cleaning methods.

This is currently a tiny company, with a market cap of just $7 million. But for value investors who simply focus on buying businesses that trade at discounts to their intrinsic values (instead of trying to apply small-cap or illiquidity discounts), some of this company's numbers are appealing.

The company's market cap is not much higher than its net cash position of $6 million. Often, a stock with a high cash to market cap ratio is one that is a perennial money-loser. But not in this case. Operating income over the last 7 years stands above the company's current market cap! Demand for heavy-duty equipment has, of course, waned through this recession, but there are two important attributes of this company that reduce its risk: its customers and its suppliers.

The company is not reliant on any one customer, as it distributes its products to over 1700 customers in various industries (hotel/motel, dry cleaners, hospitals etc). A diversified customer base reduces a company's risk, as its revenues/earnings are not reliant on a potential single point of failure.

Furthermore, the company is not burdened with the fixed costs associated with manufacturing this equipment. Instead, the company outsources the manufacturing to various suppliers. By acting solely as a distributor, the company has a more flexible cost structure, allowing it to react quickly to a lower demand environment. As a result, the company should be able to restore margins to previous levels with ease, relative to fixed-cost manufacturers.

The biggest risk to this company may be the way its controlling (and managing) shareholders appear to view public stockholders: as opponents rather than partners. Last December, the controlling shareholders tried to take advantage of a misbehaving market by making a bid for the remainder of the company. The bid, which valued the entire company at $6 million, likely so undervalued the company's assets that it was withdrawn just six days later. Consummation of the deal required a fairness opinion that the price offered was fair for the public stockholders, an opinion no financial advisor could likely offer with a straight face.

Despite this issue, the managing shareholders have done a great job with the company itself. Returns on equity have been commendable over the last few years, despite the fact that the company keeps a fairly sizable cash buffer around. As a result, Mr. Market appears to offer an excellent entry point at these price levels.

Saj Karsan is a guest contributor on AltEnergyStocks.com. Saj manages Karsan Value Funds, and regularly writes for Barel Karsan.

DISCLOSURE: Author has a long position in shares of EVI

December 06, 2009

The Short Side of Clean Energy

Green Energy Investing For Experts, Part I

Tom Konrad, CFA

You don't have to be long Renewable Energy stocks to have a green portfolio.  Shorting, selling calls, or buying puts on companies and industries which are heavily dependent on dirty and finite fossil fuels not only makes a portfolio greener, it can protect against the effects of a permanent global decline caused by peak oil.

Nate Hagens presented this slide at the 2009 International Peak Oil Conference:

 

It shows his conception of the different schools of thought among those of us who understand peak oil.  Those represented in the top two green circles believe that the economy can continue to grow, either through Alternative Energy or the more efficient use of resources, or both.  The bottom two groups think our economy has grown so far beyond a sustainable level that it must shrink or collapse.

Nate thinks that any of these outcomes could happen, with differing probabilities.  I agree, with the caveat that the chances of renewable energy technologies being effective enough to allow us to continue on our current growth path (the Alternative Energy/Environment option) is exceedingly unlikely due to limits in energy productivity (EROI and EIRR).  

Market Consequences of No Growth

There are many speakers and writers far more eloquent than I who discuss the reasons and possible shape of a steady state, declining or collapsing economy.  I'm not going to try to convince anyone that we're near the end of economic growth.  If you think it's a possibility, you should consider what it will mean for your investments.  If you still need convincing, try watching Chris Martensen's Crash Course

If the economy ceases to grow, or even declines or collapses, the stock market will do the same, only in an amplified fashion.  The most concrete advice on what to do with your money usually involves taking some cash out of the banking system, and perhaps acquiring some physical gold.  If there is a genuine financial system collapse, it probably does not matter what you did with your portfolio: what I'm going to talk about here is preparation for the Technology/Efficiency or Anti Growth/Steady State scenarios above.  

If we do have a shrinking economy but our financial system does not totally collapse, it will be very important not to have a net-long position in the stock market.  While I expect my favorite sectors to do relatively well in no-growth scenarios, even the most promising companies see earnings multiple contractions when markets fall as a whole.  For centuries, stock markets have been priced under the implicit assumption of continuing economic growth.  If investors begin to re-evaluate their investments under a new assumption of no growth or negative growth, we are likely to see average P/E ratios fall from the high teens where they are today well into the single digits.  Even promising sectors will have to fall in sympathy to the lot, because they will need to attract capital that has many other suddenly more attractive opportunities.

 How to Protect Yourself

If you see a substantial market decline as a real possibility, it makes sense to reduce your exposure.  This is true even if you run the risk of missing out on substantial upside gains.  The easiest way to do this is to sell stocks. While selling stocks is an excellent way to avoid losses, it will prevent you from profiting from your insights.  The most valuable insights are those that are not yet widely shared.  If you see changes in the economy coming, but most investors do not yet see them, you have a profit opportunity that need not be wasted even if it means that the stock market is headed down.

Instead, you can hedge your market exposure.  By buying companies and sectors that are likely to do well during the transition, and taking short positions in companies that will probably be hurt, you should be able to profit if your predictions are correct.  In future articles in this Green Energy Investing for Experts series, I will take a look at specific sectors and stocks that I expect to fare particularly badly.  

In September, I wrote an article on hedging strategies, which included a simple technique for using a spreadsheet to monitor your overall market exposure, using only daily values and market index data.  This technique is rough, and will only tell you your approximate exposure to market moves, but precise measurements of market exposure are unlikely to be much better.  Markets tend to change over time, as do the relationships between them.  Hence more sophisticated techniques are likely to give you more precise measures of your market exposure, but they are not likely to be much more accurate especially in times of market turmoil when you need them the most.  Worse, the precision of such calculations can lend them an air of mystique, leading us to trust their accuracy much more than we should.  In other words, to quote Warren Buffett, "It is better to be approximately right than precisely wrong."

Hedging Instruments

In the same article, I discuss a variety of ways to hedge.  I'm not a great fan of pure shorts on individual companies because unexpected news events can cause any company to leap in price when you least expect it.  My preferred approaches are:

  • Buying puts.  This is the only option in retirement accounts such as IRAs, and has the advantage that losses are capped at the amount of money you pay for the put.  Buying puts is especially useful if you feel a company could be badly hurt in some future scenario, but may do quite well (or at least not badly) if that scenario does not materialize.  Unfortunately, the hedging technique I mentioned above does not work very well with out-of the money puts, because the protection given by such puts is much higher than would be implied by their Beta.
  • Short stock plus long call.  By buying a long term, out-of the money call when you short a stock, you are protecting yourself against unforeseen large price rises.  This technique is most appropriate if you expect the value of a company to erode slowly over time.  New calls should be bought when old ones expire.
  • Short call spread.  This technique is similar to the short stock + long call option, but has the advantage that both positions can be chosen to expire on the same date.  Further, if the short leg of you call spread is near the money, and the long leg is far out of the money, you will end up making money even if the stock does not fall.  You still will lose money if the stock goes up, however.

I tend to use a mixture of all three of these, depending on my expectation of the probability distribution for the particular underlying security.  I will go into this in more detail when I discuss specific sectors.

About the Jargon

If you got lost in the jargon of the last section, please recall that you're reading a series called "Green Energy Investing for Experts."  None of these techniques are for the casual investor.  If you got lost, and still think you want to try these techniques, you will need to get options trading authority from your broker, as well as learn the ins and outs of your chosen option strategy.  The safest and easiest strategy to start with is buying puts.

To learn more, get yourself a comprehensive book on options and option strategies, or commit to spending a good chunk of time with several of the web option primers.  If you are just learning, start small.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

December 04, 2009

Hidden Gems? Why Green Investors Should Look at PFB, Vodafone And Telefonica

Part 1 of 2

Bill Paul

Looking for alternative energy stocks with undiscovered potential?

Who isn't?

Here are three possibilities (with three more to come next week). You can decide for yourself whether they are worth further investigation.

First up: PFB Corporation, which trades on the Toronto Stock Exchange under the symbol PFB. Calgary-based PFB is an energy efficiency play. The company makes insulating building products that it sells under branded names in commercial and residential markets in North America and Japan.

The company most recently reported third quarter net income of $1.6 million or 24 cents vs. $1.1 million or 16 cents, and nine months net of $2.5 million or 38 cents compared $1.1 million or 17 cents. Earnings rose significantly despite lower sales, a reflection of the difficult economy faced by all construction-related businesses.

What would seem to make PFB a hidden gem is management's demonstrated ability to control costs (and maintain the regular 6-cent-a-share divided payout) in tough economic times. With energy efficiency - especially in buildings - increasingly being recognized as by far the most cost-effective way to start greening the economy, PFB has hidden potential that might really blossom as the overall economy improves.

Next up: Vodafone Group Plc, whose ADRs trade on NASDAQ under the symbol VOD, and Telefonica S.A., whose ADRs trade on the Big Board under the symbol TEF.

Although they're already telecom giants, what gives Vodafone and Telefonica hidden potential is the role they appear destined to play in Europe's smart grid build-out.

By 2020 the British government plans to have a smart meter in every home under a program whose cost is expected to top $11.5 billion. (The rest of Europe may not be far behind.) This will require enormous amounts of data to be wirelessly transmitted from those smart meters back to Britain's energy companies. Vodafone and Telefonica (through its O2 unit) reportedly are negotiating to be the carriers of all that data, quite possibly through a new joint-venture firm.

While the payoff for investors won't be immediate, Vodafone and Telefonica could become huge long-term beneficiaries of the smart grid, which a number of communications experts now think will become as big as or bigger than the Internet.

DISCLOSURE: None

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

December 01, 2009

Green Energy Investing for Beginners: A Small Investor's Perspective

This is a guest post by Brad Wright, who felt that my "Beginners" series was a too high level to really live up to the name.  He's probably right about that, so here is his effort to bring it down to basics for the small Canadian investor.  The links and section headers are mine.   Tom Konrad.

Motivation

The goal of this article is to assist with your future investments by explaining investment options, how they work and potential alternatives that may be of interest to you. The take away I’m looking for is with a little research you can empower yourself to make more socially and environmentally responsible investment decisions.

There are long term financial advantages to investors who identify and invest in current and future clean and green companies. Recent developments in technology and the world we live in have allowed opportunities for us to invest in companies that can make a difference – and make a profit for themselves and their shareholders. For most people, the stock market is a foreign concept, but a little research can alleviate most concerns. Here are a couple of stories that may help to see where we’re trying to go.

In a recent book I read, the author described this interesting story: He and his friend ran into a ‘biker’ at a bar. The biker asked what they did for a living. They replied that they were investors. The biker elaborated on how he once received some advice on stocks, invested and lost all his money. The author went on to say how this is such as typical notion of the stock market – people get bad advice and lose their money. The author went on to say that the biker should have purchased stock in a company that he actually knew something about such as Harley Davidson. It turns out that assuming the biker had purchased stock in Harley Davidson 5 years ago, his investment would have multiplied by 5 times.

Another example is my friend who went to speak to her registered retirement savings plan (RRSP) manager. When she went in to discuss her investments, she asked what the top 3 holdings of her portfolio were. The manager replied that he didn’t know but that he could find out. A few minutes later he returned with news – the top 3 companies were oil, diamond and uranium companies. Now, this may be commonplace considering the resource extraction based economy known as Canada. When you look at the companies that are listed on the Toronto Stock Exchange the majority are mining companies. Anyways, my friend who is environmentally conscious didn’t feel comfortable that she was investing in these companies. The next question is how she can invest in companies that are more inline with her ethics.

Investment Options

Well, first let’s just provide a quick overview of the investment options that are out there. First off, there are bonds and GIC’s that are generally fixed interest rates that may or not be locked in for long term investing. They are generally around a 4% annual interest rate and can be held either inside or outside of an RRSP.

The "Registered" part of RRSP means you have agreed with the (Canadian) government that you will leave your money in the account and not take it out until you retire. This is similar to a US 401(k) plan. The government in turn does not tax you on those investments until you make a withdrawal. Now the most common entities held within RRSP are mutual funds. A mutual fund is a conglomeration of numerous companies (let’s say about 50) that the fund invests in. These mutual funds are generally invested in larger companies and may give personal rates of return of less than 0 to more than 20% per year, depending on the volatility of your mutual fund. In general, it is assumed that mutual funds provide a 10% annual rate of return. You can talk to your investment manager and select conservative, balanced or aggressive mutual funds depending on your situation, age and comfort with investing – or more specifically, comfort with fluctuating annual rates of return. My last point with RRSP’s and mutual funds is that they come with a manager who monitors and adjusts the fund over time. They generally charge 2-3% per year for this management.

An investment vehicle which takes a further step into the stock market is called an exchange traded fund (ETF). It is identical to a mutual fund in that there are normally 50 to 100 companies you can invest in. The differences are that you purchase the ETF like you would for a stock, not just sign some papers that your investment manager gives you for a mutual fund. Also, the management fee is less, usually less than 1%. Finally, some have said that the advantages of ETF’s are that they are actively traded when the markets are open while mutual funds are adjusted when the markets are closed. The advantage is that the ETF may get better deals during the day. The disadvantage of ETF’s could be that they are more closely linked to the stock market and may depreciate more when the market is doing poorly. [Note: You can find a list of the available Clean Energy ETFs here, and a discussion of the relative merits of each ETF here.]

The final investment vehicle is buying stock from one company at a time. When you do this, the only fee is to a broker, either in person, over the phone or over the internet. In person and over the phone is generally $50 to $100 to buy or sell stocks, whereas competition on the internet lowers these broker fees to the $10-$30 range. With respect to fees, the advantage of stocks, especially if they are held for 5-10 years is that you may have to pay a total of $100 to buy and sell a stock, you don’t pay a 3% management fee over that time period. For example, with $10,000 in RRSP’s over a 5 year period with a management fee of 3% would cost you $1500!

Investment Goals

So, that is a summary of common investment vehicles. [Note: this series also discussed the choice between stocks, mutual funds, and ETFs in Part I.] Other factors that you need to consider when investing are: what are you saving for, how much can you save or allocate, and how comfortable are you with risk?

So the next couple paragraphs will deal with steps to help you move away from investing in oil, diamond and uranium companies.

It just so happens that the first step is to say, hey, what if I just invest in the best or most environmentally or socially responsible oil, diamond and uranium companies. Well, you can.

The first step towards making more ethical investment decisions is researching and finding more ‘ethical’ mutual funds. Some mutual funds use social, economic and environmental criteria to select companies for their fund. For example, ethical mutual fund companies are quite similar to Environment Canada’s EcoLogo program (which is an environmental criteria program which provides its logo on approved products, for example, green cleaning products) in which the top 20% best performing companies that meet the criteria are selected for the fund. For example, most ethical mutual funds invest in PetroCanada, Royal Bank and Research in Motion. It just so happens that these are some of the largest companies in Canada, so first, your investments are relatively safe, and second, you will likely have a good rate of return.

With exchange traded funds, the exact same principles apply. For example, the Jantzi social index (JSI)is traded on the Toronto Stock Exchange and invests in companies like Royal Bank, PetroCanada and Research in Motion. Also interesting, if you visit the Jantzi website, they list companies that are included in the ETF and mention companies that were kicked off the list because of bad company practices such as buying-out other companies with poor performance. The issue with Canadian ETF’s is that there are very few or are relatively new. For example, the Jantzi social index just came out this summer.

What I find problematic of both ethical mutual funds and socially responsible exchange traded funds is that they still invest in large companies. Large companies in every industry sector, even sectors that you may not want to invest in such as oil and gas exploration. These investment vehicles need to provide investors with a sense of security and competitive rates of return compared to the traditional investment types. So for most people, these options are definitely a step in the right direction.

Finding Companies You Believe In

There is one final option where you can invest directly in an organization that you believe in, such as buying stock in an individual company. This is where, with a little research you can find an organization doing interesting things that you can truly get behind. The reason more people don’t do this is because of the word diversification. Most are not willing to invest in one organization or one industry sector. If you are a small investor (< $10,000), most experts say that you are unable to diversify your portfolio enough and you are at greater risk when there are fluctuations in the stock market. This is why many like the idea of mutual funds or ETF’s – the work is done for you, and you don’t really have to worry.

But what if you did a little work, what’s the advantage, what would you need to do and what could you find out? The best place to start is the Toronto Stock Exchange. There are lots of companies in many different industry sectors. Here are a few industry sectors that might be of interest to you:

This is just an initial list of the types of industries where there are Canadian companies that are publicly traded on the Toronto Stock Exchange. Personally, I was originally interested in wind, solar and hydro power, but realized that I needed to diversify from the renewable energy field. For example, what if the Canadian government decided not to give tax incentives to the renewable energy industry or what if oil prices drastically reduced? What would be the repercussions to a stock portfolio based on just renewable energy companies? You could take the chance, but it would probably be best to diversify. Therefore, although the above list is mostly renewable energy fields, organic food or energy efficiency and other industry sectors could add to your portfolio. Also, there are likely many socially responsible companies in other industry sectors that I have not listed above.

Risk and Reward

Now the risk here is that the majority of companies in these industry sectors are small, new or not making any money. Most invest in companies that are large cap or blue chip companies (i.e., Microsoft, Apple, Google, etc.,) – these are generally large companies. There are really three types of companies on stock exchanges – large, mid and small cap. The word cap means market capitalization and it is calculated by multiplying the price of the stock by the number of shares that are available to be purchased. Large cap companies are generally over 1 billion dollars, medium cap range from several hundred million dollars to 1 billion dollars, and small cap are generally less than 500 million.

Most stock investors like the idea of small cap companies because of growth and that they could be the next Microsoft company. Also, once companies such as Research in Motion mature, there is less growth over time. However, most people shy away from small cap companies since there is more risk involved.

My answer to this is that depending on your age you are able to allow for more risk because if you do lose your money you can still make it back over time. For example, most retired people are very conservative with their investments since they are dependent on those savings. Also, as I’ve mentioned previously, with the world we live in and the rate of developing technologies it’s possibly a very good time to risk investing in clean and green companies.

So where do you start looking? I started with internet searches. I find companies that sound interesting or have a neat product and I check to see if they are publicly traded. You can also order investment magazine subscriptions or find investment advice websites.

These interesting companies that I look at are ones that are providing a new product or is in a new field, has a market advantage, has a vision for the future and is generally making the world greener or cleaner with their work. In additional it’s good to see the experience of their board of directors, overall financials, and the outlook for the industry, etc.

So I hope this has helped provide some insight into the crazy field of investing. There are some interesting companies out there. It is easy to find out what is going on and see for yourself what you think that your hard earned dollars should be invested in. After all, these companies use your money invested in stock to do things like build solar panel plants or buy land to build wind farms. Wouldn’t it be great if you could invest in a company that was doing good things for the planet while making you some money? Sounds crazy, but it just might work. Maybe I’m optimistic, or maybe I just want to be smart with my investments.

Brad Wright holds an Environmental Science degree from the University of Guelph and a Masters of Environmental Planning from the University of Waterloo.  He is currently a municipal stormwater planner and has an interest in sustainability issues.  He has been researching and investing in green companies for the past three years.


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