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October 30, 2010

Green Chip Stocks' "Sunless Solar" Tease

Tom Konrad

Last week, Stock Gumshoe sleuthed out Jeff Seigel's recent tease of a "$0.62 Company [that] Just Perfected Sunless Solar.”  The company is New Energy Technologies (NENE.OB), which was trading at $1.20 after the close on Friday.  Here's what the Gumshoe has to say about the company:
And of course, maybe Siegel’s right, maybe these guys will be to First Solar what IBM was to Smith Corona … I’m just not holding my breath.

For more information on the company, which did stage a demonstration of the technology in Tampa last month, you can certainly visit their website and poke around a little — this solar product of theirs is called SolarWindow, and their other project is called MotionPower (that one somehow generates energy by collecting extra kinetic energy from vehicles who are stopping at drive-thru windows and tollbooths).

You can read the full article at Stock Gumshoe.  The quick rise of the stock probably has a lot more to do with all the attention for a tiny stock than the company's true prospects.  If you like this sort of technology play, you're probably better off waiting until the hoopla dies down and you can pick it up again around $0.60.

DISCLOSURE: No Position

October 29, 2010

Watching The EV Rose Wilt

John Petersen

October has been a fun month for me as JD Power and Associates rained on the electric vehicle parade with a new report "Green Drive 2020; More Hope than Reality?" that forecast a 1.8% global market penetration rate for cars with plugs in 2020; Maxwell Technologies (MXWL) announced a design win in the automotive stop-start market; Pike Research issued a new report on power systems for hybrid locomotives; Nanomarkets LLC reported that lead-carbon batteries will be a leading contender in the $1 billion wind-power storage market; Lux Research began advertising an upcoming webinar to introduce their new report on stop-start micro-hybrid systems that will be used in 34 million cars per year by mid-decade; and Johnson Controls (JCI) didn't even mention lithium in its fourth quarter earnings call. After a couple years of feeling like I was wandering alone in the wilderness, I'm glad for the company.

The JD Power report was based on detailed surveys of consumer attitudes in the US, Europe, Japan and China and concluded that there were seven major hurdles to market acceptance of electric vehicles:
  • Range anxiety;
  • Support infrastructure deficiencies;
  • Power and performance deficiencies;
  • Fuel economy concerns;
  • Limited battery life and replacement cost concerns;
  • Overall cost of ownership concerns; and
  • Charging requirements that will keep EVs out of service for several hours a day.
While the list is fairly comprehensive, it overlooks two overriding economic realities that strike me as even more important.

First, we're mired in the depths of the worst recession since the 1930s. While the economy is slowly recovering, consumers in all income brackets are getting more conservative in their spending and increasing their savings at rates not seen in decades. HEVs were introduced in 1999 and took ten years to achieve a 2% market penetration in a strong economy. That makes it very hard to swallow the suggestion that plug-in vehicles, which promise less simplicity, reliability and performance at a higher cost, will achieve comparable results in a weak economy.

Second, life is unpredictable, people are frequently careless and in a problem situation where a driver can blame himself or blame his car, it's a safe bet that the car will be portrayed as the villain. It won't matter how good the new generation of EVs are in reality. They will still suffer immense reputation damage as tales of users who forgot to recharge their batteries, who couldn't use their car in an emergency and who pressed their luck "just this once" begin to proliferate and compound. The inevitable horror stories can't be avoided and they can't help but dampen or even kill consumer demand.

I expect electric cars to be the great technological failure of the decade and am the first to admit that my views are extreme, but my reasons for those views are well documented in my other articles including "Alice in EVland; Six Impossible Things." The only thing that will prove me right or wrong is time.

Notwithstanding a cynical view of electric cars that need huge amounts of battery capacity and use it inefficiently, I believe there are tremendous opportunities in heavy applications like buses, commercial fleets and locomotives that are prodigious users of energy and represent cost-effective markets for conservation technologies. There are also tremendous opportunities for cost-effective storage to maximize the stability and usefulness of wind and solar power. Last but not least, the humble baby steps applications like stop-start idle elimination will surprise everyone with their growth and vitality.

Once you get beyond delusional visions of electric cars, nobody cares what kind of battery a device uses. There's a reason that 85% of the electric bikes in Asia use lead-acid batteries - they're good enough for the job and they're far cheaper than the alternatives. In all real battery markets, engineers and cost accountants are responsible for choosing the best energy storage device for a particular application. In applications where size and weight are mission critical constraints, the designers will choose lithium-ion batteries. In applications where size and weight don't matter, other technologies will frequently be a better choice. No matter how hard people beat the table, energy storage will never be cool; batteries will always be a grudge purchase; and we'll all keep using the adjective damned to modify the noun battery.

For a little over two years my consistent message has been that developers of gee-whiz battery technologies for electric vehicles are dangerously overpriced while established manufacturers of cheap and reliable batteries for the masses trade at bargain basement levels. That dynamic has not changed yet, but the mainstream is finally beginning to consider the vast gulf between technically feasible and economically sensible. As the EV rose wilts and more mundane applications like buses, commercial vehicles, hybrid locomotives, renewable power integration and stop-start idle elimination generate profits rather than losses, market expectations and capitalizations will adjust to business realities. Wayne Gretzky was great because he tried to play where the puck was going to be. Prudent investors will do the same thing.

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

October 26, 2010

Amyris' "Fene Economy"

by Debra Fiakas CFA

There are not many companies with the courage to stage an initial public offering, but renewable chemicals and materials producer Amyris, Inc. (AMRS:  Nasdaq) was undaunted.  The company sold 5.3 million shares at $16.00 earlier this month, raising $78.8 million in net proceeds. 

Amyris has done fairly well in raising capital.  In December 2009, the Department of Energy awarded Amyris a $25.0 million grant to build a pilot plant that will produce diesel and petrochemical substitutes through the fermentation of sweet sorghum.  Then Temasek Holdings invested $47.8 million into the company.

The Amyris vision is lofty  -  build a “fene economy.”  Investors might be scratching their heads over that one.  Amyris engineers microbes and has developed a molecule called farnesene.  The molecule can be the building block for a variety of products such as detergents, cosmetics, perfumes and industrial lubricants, and to transportation fuels like diesel.  The company has ubiquity in mind for farnesene-based products, replacing existing products that are derived from petroleum, plant or animal sources and that may be of lower quality or higher price.  While sweet sorghum is the feedstock for the diesel pilot project, the company plans to use Brazilian sugarcane for its ambitious farnesene production. 

Management claims commercialization is just around the corner and expects revenue streams to begin flowing in 2011.  Amyris has revenue from consulting and licensing, but development costs and other operating expenses have run high.  The company reported a net loss of $76.0 million in the twelve months ending June 2010.  For perspective we note that operations only used $45.9 million in cash during that period.

After the offering, Amyris estimates there will be approximately $294 million in cash on the balance sheet.  The company has no debt so the cash kitty is available for further research and development work.  Amyris has not been working exclusively behind the research bench.  A stable of partners has been assembled that gives Amyris access to production and distribution capabilities and expertise.  The business model allows Amyris to remain focused on what they know best  -  chemistry  -  while partners and customers figure out how best to incorporate that chemistry into marketable products.

Investor enthusiasm is running strong for the company.  AMRS price rose in the days following the offering and have remained solidly above the offering price even if investors have not been treated to a “soaring” stock price.  We would like to see some seasoning of this stock before committing large amounts of capital.  Nonetheless, the company has an interesting business model that should earn strong margins as sales ramp.

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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  AMRS is included in the Crystal Equity Research Beach Boys Index in the Biofuel Group.


October 25, 2010

Why America Must Focus On Domestic Energy Solutions Instead of Imports

John Petersen

On September 17th, the White House released a report titled, 100 Recovery Act Projects That Are Changing America. Since the report included eight companies that were awarded a total of $1.1 billion in ARRA battery manufacturing and vehicle electrification grants in August 2009, I created the following table to summarize the first tier job creation impact.

10.25.10 Jobs.png

As I pondered over the relatively high cost per first tier manufacturing job, I decided it might be better to look at the overall value chain including second tier job creation impacts (new jobs in companies that make equipment for the ARRA funded factories) and the third tier job creation impacts (new jobs in companies that will sell raw materials and components to the ARRA funded factories). That process brought me back to the following table from a June 2010 report on the advanced battery sector from Goldman Sachs.

10.25.10 Value Chain.png

While the Goldman table is by no means definitive, it clearly shows that a substantial share of the initial funding will be used to buy imported equipment and a substantial share of the future material and component inputs will likewise be bought from foreign manufacturers. It's enough to make you wonder whether ARRA wasn't more effective at creating offshore jobs than domestic jobs.

While bloggers like me frequently note that current energy policies are merely substituting one dependence on imports for another dependence on imports, we usually focus on the reliability and stability of global supply chains rather than a fundamental economic issue that strikes me as far more important – stimulating domestic production as opposed to stimulating foreign production.

Most of us understand the concept of fiscal multipliers where $1 million in spending on a new factory turns into several million dollars of GDP as one company's capital investment becomes revenue to a contractor who then pays his employees who then buy goods from businesses that then pay their suppliers etc, etc. Most of us also understand that fiscal multipliers are stronger contributors to GDP when the second and third tier impacts create domestic jobs instead of overseas jobs. Frankly I have a hard time getting excited about energy policies that don't focus first and foremost on converting spending on imports into spending on domestic products.

The following chart comes from an Energy Perspectives Overview that the Energy Information Administration published as part of its Annual Energy Outlook 2009. It shows that the US was self-sufficient in energy until the 1950s when consumption began to outpace production. By 2009, net imported energy accounted for 24 percent of all energy consumed. The bulk of those imports, or roughly $200 billion per year, are imported crude oil.

10.25.10 Consumption.png

When I consider the massive annual outlay for imported oil, the first question that comes to mind is "Why aren't we doing more to shift consumption from imported oil that impoverishes the nation to domestic natural gas that would enrich the nation several times over through the fiscal multiplier effect?" While my calculus skills aren't strong enough to nail the analysis down to hard numbers, it doesn't take a lot of math to recognize that every dollar of energy consumption that we can shift from imported oil to domestic natural gas will reduce the import drain by a dollar and increase domestic economic activity by several dollars. While advocates argue that cost of shifting transportation from oil to natural gas is a compelling value proposition in its own right, by the time we account for fiscal multiplier differentials between imported oil and domestic natural gas there's simply no contest.

America's strengths are legion and it became a prominent global power by playing from its strengths instead of its weaknesses. The two strongest players on America's energy team are domestic natural gas production and the minimization of waste through energy efficiency. Truly smart energy policy must merge with the broader issue of truly smart economic policy by keeping energy spending at home instead of sending it overseas.

Disclosure: None

October 24, 2010

Buying Green Stocks Pays, but Finding Green in Brown Pays More

Tom Konrad CFA

Although green stocks did better than un-green (or brown) stocks since Newsweek's 2009 Green Rankings were published, the big winners were the greenest stocks in the brownest sectors.

Newsweek has released its 2010 Green Rankings for America's 500 largest corporations, and the companies at the top of the list are happily gloating about being greener than their rivals.  More important to investors is the question: Do the greenest companies beat the market?

Marc Gunther notes that the top 100 companies in the 2009 Green Rankings outperformed the S&P 500 by 6.8%

My experience is similar.  When last year's rankings came out, I suggested newsweekrankings.jpgthat investors might not just gain by looking for out performance among the greenest companies, but "turning the list upside down" and looking for under performance among the least green (or brownest) companies at the bottom of the list.  I picked five stocks that investors might short as a hedge for their other investments.  They were: Peabody Energy (BTU), Consol Energy (CNX), ConAgra Foods (CAG), Bunge (BG), and Vulcan Materials (VMC).  I highlighted Vulcan at the time as the stock I'd be most likely to short (I ended up shorting Peabody and Vulcan, although I've since closed out my Vulcan position.)

As a group, my short five picks ended up under performing the S&P 500 by 7.07% over the 13 months since I wrote that article.  Vulcan Materials (the one I said at the time I'd be most likely to short) in particular was down 31.56% over the last 13 months, again suggesting that green companies have an edge over brown ones.

Correlation and Causation

Marc Gunther asked Cary Krosinsky of Trucost if the out performance of sustainable stocks is part of a more general trend.  Trucost is one of the outfits Newsweek relies on to crunch the numbers behind the rankings.  No surprise, Mr. Krosinsky thinks this year's gains are part of a larger trend in which sustainability drives shareholder value.

While I agree with Mr. Krosinsky's conclusion, I wonder if the out performance of Newsweek's 100 greenest companies came because they are green, or because of some other factor.  Two other possible factors come to mind. 

First, although both Newsweek's list and the S&P 500 are drawn from the largest American companies, the lists are not quite the same.  One example I found was Boston Properties (BXP), which is in the S&P 500, but not in Newsweek's Green Rankings.  If the companies that are in the S&P but not in Newsweek's' list underperformed those companies in Newsweek's Rankings but not in the S&P, that would explain the out performance.  If we want to determine if Newsweek's Green Rankings are relevant to performance, we should only compare Ranked companies with other Ranked companies.

Second, industry biases may go a long way to explaining the out performance of the most green companies over the brownest ones.  The top echelon of the Green Rankings is stuffed with Technology companies (Eight of the top ten), while the bottom ranks are full of Basic Materials (3 of the bottom ten), Utilities (4/10), and Food and Beverage companies (3/10.)  Perhaps the reason that the 100 top ranked companies outperformed the S&P 500 and my five shorts underperformed it was simply that Technology had a good year, or Basic Materials, Food and Beverage, and Utilities had a bad year.

If we want to know if green stocks (as measured by Newsweek) do better than brown stocks, we need to
  1. Only consider stocks ranked by Newsweek.
  2. Only compare stocks within sectors.
That is precisely what I did.

Comparing Green to Brown

Newsweek used fourteen different industry sectors: Banks and Insurance, Basic Materials, Consumer Products & Cars, Financial Services, Food and Beverage, General Industrials, Health Care, Industrial Goods, Media Travel & Leisure, Oil & Gas, Pharmaceuticals, Retail, Technology, Transport & Aerospace, and Utilities.  In the table below, I've ranked how green the industry is by looking at the Newsweek rankings of the greenest and brownest companies in each industry.  I also show the performance of the greenest and brownest companies in that industry from September 16, 2009 when the 2009 Green Rankings were published until October 21, 2010 when I compiled the table.

2009 Newsweek Green Rankings Performance by Industry

The amount by which the greenest company in each sector outperformed the brownest company is shown in the second-to-last column, labeled G-B.  My sector-by-sector analysis does not show as much green out performance as we saw when just looking at the 100 greenest companies, or at my five picks to short, but it was still there. 

The "Rank" column shows how green the sector is relative to other sectors.  The lowest ranked sectors have the most companies with the lowest green rankings.  This ranking of sectors leads to two surprises:
  • Brown Sectors Outperformed Green Sectors.  Although the greenest stocks outperformed the brownest stocks, the greenest sectors underperformed the browner sectors.  The G+B/2 column shows the average performance of the greenest and brownest company in each sector.  The twelve companies I looked at in the six greenest sectors lost, on average, 1% of their value, while the average change for all 30 stocks I looked at was +12%.  The twelve companies in the six brownest sectors gained, on average, 14%.
  • In green sectors, the brownest stocks outperformed the greenest stocks by a slight margin.
  • In brown sectors, the greenest stocks strongly outperformed the brownest stocks.
Any of these trends may be one-off, but if we believe that sustainability makes a difference in stock performance, it begins to make sense that the difference between stock performance would be greatest in the brownest sectors.  In a brown or "dirty" sector, there is a lot of scope for a company to change its ways to reduce its environmental impact.  On the other hand, the greenest sectors such as technology are inherently low-impact, and so there is much less scope for a company to differentiate itself by becoming more green to gain a competitive advantage.

2010 Green Rankngs logo

A Long-Short Portfolio From the 2010 Green Rankings


Since the top of Newsweek's rankings are dominated by the greenest companies from the greenest sectors, investors who just buy stocks from the top of the list are missing out on the most lucrative potential gains from green investing.  These gains are to be had by investors who buy the greenest stocks in the brownest sectors and short the brownest stocks in those sectors.

In the 2010 list, the bottom of the list is again dominated by Basic Materials, Utilities, and Food and Beverage.  I built a small long-short portfolio from the list by shorting the five lowest ranked companies (two each from Basic Materials and Food & Beverage) and one from Utilities, and buying equal numbers of the greenest companies in those same sectors.  

Here is the list:

Sector
Stock to Buy
Price 10/22/10
Stock to Short
Price 10/22/10
Basic Materials
Ecolab (ECL) # 26
$51.56
Peabody Energy (BTU) #500
$51.04
Food and Beverage
Coca-Cola Enterprises (CCE) #54
$24.63
Bunge (BG) #499
$61.74
Utilities
PG&E (PCG) #20
$47.66
Ameren (AEE) #498
$28.83
Food and Beverage H. J Heinz (HNZ) #84 $49.55 Monsanto (MON) #497 $57.15
Basic Materials
Praxair (PX) #92
$92.18
Consol Energy (CNX) #496
$39.03

Note that while all my green companies from brown sectors are among the 100 highest ranked firms, most are not even in the top 50.  Of the top 100 ranked companies in 2010, only seven are from these three brownest sectors where, if 2009 returns are any guide, the greatest benefts of greenery are to be had.

Will 2011 be a repeat of 2010?  I'll take a look at these to see how the portfolio has done when Newsweek publishes the 2011 rankings.

DISCLOSURE: Short BTU.

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.

October 21, 2010

Maxwell Announces An Important Stop-Start Design Win

John Petersen

On October 20th, Maxwell Technologies (MXWL) announced that it has commenced volume deliveries of BOOSTCAP® ultracapacitors to Continental AG (CTTAY.PK) for use in a new stop-start idle elimination system for diesel passenger cars made by PSA Peugeot-Citroen (PEUGY.PK). According to Continental, Peugeot-Citroen plans to sell about a million cars equipped with this technology over the next three years. While the Maxwell design win has been rumored for months, it's great to have confirmation that stop-start is here, it's now and it will become a major new energy storage market over the next three to five years. With an estimated three-year value in the $50 million range, the Continental contract should provide a significant boost for Maxwell's top-line revenue.

Stop-start systems are baby steps in vehicle electrification and the most reasonable concept you can imagine – if the car isn't moving turn the engine off to save fuel and reduce emissions. Under normal conditions, a stop-start system can boost fuel economy and reduce emissions by about 5%. The savings can be up to 15% if a lot of stop and go city driving is involved. While stop-start systems make a world of sense, they're not as sexy as cars with plugs. As a result, stop-start gets precious little media attention despite the fact that for the foreseeable future the fuel savings from stop-start will be an order of magnitude greater than the fuel savings from cars with plugs and the cost per gallon of fuel savings will be at least 50% less.

It's no secret that I believe cars with plugs are an impossible daydream that's been sold to the mathematically and economically challenged by environmental activists and other hucksters. They're no better than Prius-class HEVs when it comes to air pollution; they're wasteful users of batteries; they're suboptimal users of other scarce resources; they're largely untested when it comes to safety, reliability and performance; they're not recyclable in existing facilities; and they're expensive beyond reason – the intense pink diamonds of eco-bling. These are not minor technical issues, they're congenital birth defects. Despite the media hype and the occasional blistering comment on my work from EVangelicals quoting The Gospel According to Elon (TSLA), I'm convinced the next generation of cars with plugs will be stillborn, just like all the others.

Unlike cars with plugs that will depend on consumer choice to restore a dash of uncertainty and adventure to the driving experience, stop-start implementation is being forced by existing fuel economy and emissions standards in the EU and the US, and by proposed standards in Asia. In the simplest terms stop-start is destined to become a global standard on cars with internal combustion engines by the end of this decade.

Under new EU standards, the fleetwide CO2 emissions for passenger cars must be reduced to an average of 130 grams per kilometer according to the following timetable.

Calendar
Year
Percent
 of Fleet
CO2 Emission
Standard
MPG Equivalent
Gasoline
MPG Equivalent
Diesel
2012 65.00% 130 g/km ~ 42 ~ 48.2
2013 75.00% 130 g/km ~ 42 ~ 48.2
2014 80.00% 130 g/km ~ 42 ~ 48.2
2015 100.00% 130 g/km ~ 42 ~ 48.2

Similarly, under new US standards, the fleetwide average fuel economy for passenger cars and light trucks must meet the following targets.

Model Passenger Light Combined
Year Cars MPG
Trucks MPG
Fleet MPG
2012 33.3 25.4 29.7
2013 34.2 26.0 30.5
2014 34.9 26.6 31.3
2015 36.2 27.5 32.6
2016 37.8 28.8 34.1

While stop-start is not enough to satisfy all of the new regulatory requirements, it is the lowest hanging fruit on the vehicle efficiency tree and industry experts are predicting that it will be used in 20 million cars per year by 2015. If plans to make stop-start systems mandatory on all internal combustion vehicles in China are implemented, the number could be closer to 40 million cars per year by 2015.

The big drawback to stop-start is that the technology puts a lot of strain on starter batteries that need to start the engine several times during a commute and support lighting and accessory loads during engine-off intervals. Based on their experience with early stop-start models in Europe, the automakers have learned that conventional flooded lead-acid batteries are not robust enough. Therefore, most current stop-start vehicles have dual-battery systems that rely on more expensive valve regulated absorbed glass mat technology. While systems with dual VRLA batteries are a definite improvement, the rates of battery degradation are still unacceptably high and the automakers are actively evaluating alternatives.

At last month's 11th European Lead Battery Conference in Istanbul, BMW and Ford presented a joint paper that proposed a technology-agnostic testing protocol to assess the impact of battery aging under real world stop-start driving conditions. The protocol focuses on dynamic charge acceptance, or the amount of time required for a battery system to recover from the last engine-off event. The specific steps include:

1.
A 60 second discharge at 50 Amps to simulate accessory loads during engine-off intervals. 36,000 watt-seconds
2.
A one second discharge at 300 Amps to simulate the engine restart load. 3,600 watt-seconds
3.
A seven second rest period to avoid recharging the battery while the vehicle is accelerating; and
4.
Measurement of the time needed to recharge the battery for the next engine-off opportunity. 39,600 watt-seconds

The technical approach taken by Maxwell and Continental focuses on the second step, an intense discharge for a second or less when the engine restarts and the load on the vehicle's electrical system is heaviest. This interval is particularly important in the case of a diesel engine because higher compression ratios increase the starter load. The expectation is that shifting a portion of the heaviest loads to a BOOSTCAP will help protect the balance of the electrical system and extend battery life. Since Peugeot-Citroen was an innovator in the field of stop-start, I think the Maxwell-Continental system is an step in the right direction.

Regular readers know that I'm a former director of Axion Power International (AXPW.OB), a company that's developing a lead-carbon battery-supercapacitor hybrid that will undoubtedly compete with the Maxwell-Continental system for a share of the stop-start market. Unlike many who believe in the idea of a silver bullet energy storage technology, I'm delighted to know there will be a variety of competitive systems vying for a share of this emerging multi-billion dollar market. The inescapable reality is that that no single technology is likely to dominate and there will be plenty of room at the table for several successful companies. On balance, the biggest challenge I foresee will be ramping up production capacity fast enough to satisfy demand.

In addition to Maxwell and Axion, Johnson Controls (JCI) and Exide Technologies (XIDE) will be vigorous competitors for a share of the stop-start battery market. Their manufacturing expertise, global footprints and industry relationships must not be ignored.

The bottom line for investors is that a multi-billion market for advanced energy storage systems that can stand up to the demands of stop-start is developing in the real world while the media is distracted by the plug-in vehicle sideshow. Unless you're more knowledgeable than me, a diversified portfolio approach will be the safest way to play the automotive stop-start market.

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

October 19, 2010

Ormat Technologies (ORA): The 500-Pound Gorilla of Geothermal Power

Tom Konrad, CFA

 Ormat is the 500-pound gorilla of the geothermal power industry.  Should you buy the stock?

I've owned Ormat Technologies (NYSE:ORA) stock off and on since I first began to invest seriously in clean energy companies.  At one of the first renewable energy conferences I attended five years ago as part of my quest to understand the renewable energy investing landscape, I encountered a representative of the Geothermal Energy Association (GEA).  Here's how I recall our conversation:

Me: "What are a few of the leading geothermal power companies?"
GEA Rep: "Ormat."
Me: "Are they a leader in the technology, in development, or in running geothermal power plants?"
GEA Rep: "All three."
Me: "Wow.  But surely there are some other companies worth mentioning."
GEA Rep: "Not really."

I was stunned.  Shouldn't a geothermal industry representative make every effort to be even-handed when discussing companies in the industry?  Not in geothermal power, at least not five years ago: After this article was published, I was contacted by another GEA rep who wanted to make clear that the above is not the GEA's current position.

Ormat Technologies is a giant in an industry of pygmies.  Of the publicly traded geothermal stocks, only Calpine (CPN) comes close to matching Ormat as an independent power producer (IPP).   But that is the only way in which Calpine rivals Ormat.  As I discussed in my geothermal power sector overview, Calpine's main business is power production, and less than 1% of it comes from geothermal.  In contrast, Ormat's Ormat Energy Converters (ORC) are the gold standard for the Organic Rankin Cycle turbines used in electricity production from the most common lower temperature geothermal resources. 

The Ormat Energy Converter is the core technology around which the company was built.   Starting in 1972, when Ormat commercialized Organic Rankin Cycle technology for remote power solutions, ORCs have been tested, adapted and customized to a wide range of real world conditions, and have a multi-decade proven track record in geothermal power, waste heat recovery, and remote power.  According to Ormat's most recent quarterly report, OEC's account for over 90% of installed binary generation (which includes all Organic Rankin Cycle generators.)

Although this is a series about geothermal companies, the potential waste heat recovery, where an ORC is used to convert waste heat from industrial applications such as cement plants should not be underestimated.  Unlike geothermal, waste heat recovery is a very low risk source of reliable green power.  Developing a geothermal resource is always risky because of the geology of geothermal reservoirs, which is much more complex and usually occurs in hard (and hard to drill) volcanic rock formations than is typical of oil and natural gas, which occur in sedimentary basins. 

Scale

Ormat's large size and experience developing and managing geothermal reservoirs give the company several advantages over other geothermal firms.  In today's tight credit environment, Ormat is less dependent on Department of Energy loan guarantees in order to obtain financing for geothermal projects than the smaller players, although those guarantees make such projects more attractive.  They also have internal expertise for all stages of geothermal exploration, development, and operation that the smaller firms can generally only match by hiring outside contractors, one of which is often Ormat.  Their scale and large number of projects under development allows for a level of diversification, so the whole company is not invested in any one such risky development prospect.

Conversely, Ormat's large size, prominence in the industry, and NYSE listing mean that any gains in the stock price are not likely to come from the company being "discovered" by a new class of investors.  Future gains will have to come from internal growth rather than rising investor awareness.

Valuation

Below is a brief summary of some important share statistics.

Share Price 10/6/10
$29.93
TTM Income Yield
2.8%
Price/Earnings (TTM)
35.3
TTM Free Cash Flow
-$159M
Cash on Hand
$54M
Dividend Yield
0.7%
Debt/Equity
77.5%
Current Ratio
1.25
Consensus 5 year expected growth (p.a.)
29%
Past Five Year's Growth (p.a.)
-0.5%

The very high P/E ratio of over 35 is enough to fully discount analysts' projected five year growth rate of 29%.  From just those two statistics, Ormat would appear to be fairly valued.  However, the company's aggressive expansion of its geothermal projects has led to heavy investment far in excess of operating cash flow, leading to negative free cash flow.  My reading of the most recent quarterly report and investor presentations leads me to believe that management intends to continue this high level of investment for some time to come. 

Without enough cash on hand to fund this level of investment, the company will have to raise significant additional debt or equity to proceed with it's investment plans.  Given the current availability of generous DOE cash grants and ARRA loan guarantees for geothermal projects, Ormat should not have too much trouble raising the necessary funds, but this need for external funding is still likely to impact Ormats' future stock performance.  If funds are obtained by issuing equity, earnings per share will not grow as fast as revenues.  If funds are raised as debt (as has been recently the case) the company's Debt/Equity ratio will increase, along with the riskiness of the company's earnings.  In either case, the extreme P/E ratio seems unlikely to be justified.

Conclusion

Although I think Ormat is a great company with great technology in a market segment enjoying strong and growing government support, I find it impossible to justify the company's $30 stock price.  I sold my most recent holding in the company at around $30 in mid-2009, and I am waiting for income to increase or the share price to fall significantly before I'd consider buying this stock again.  Nevertheless, given Ormat's domination of one of my favorite sectors, geothermal stocks, I'll buy it as soon as I can at a more favorable valuation.

DISCLOSURE: None.
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.

October 17, 2010

The Rodney Dangerfield of Cleantech

David Gold

Wind turbines stand tall and mesmerize with their motion. Solar cells bask in the sparkling sun.  Meanwhile, hidden down in the dark dirty underworld, a compelling technology sits quietly and gets no respect.  Once installed it largely goes unseen and, it seems, it’s equally invisible in the world of clean technology press, venture funding and government R&D funding.  Yet this technology provides some of the most intriguing economic returns available for reducing a building’s net energy consumption and I would welcome the right opportunity to fund an exciting business in this category.

What is this Rodney Dangerfield of cleantech?  Geothermal heat pumps, also referred to as ground source heat pumps or geoexchange.  Anyone who has gone down a hundred feet or so in a cave on a hot day probably noticed how nice and cool it was down there.  That is because in most geology, a zone of nearly constant 55-degree Fahrenheit temperature exists 50-200 feet below the ground we walk on.  Even at shallower depths the temperature hovers within a much narrower range than on the surface. Geoexchange is technology that uses the constant temperature and huge heat sink that the earth represents to generate heat in the wintertime and to cool in the summer time.  They leverage technology inside the house that has similarities to your refrigerator (which is, itself, a heat pump).  (more detailed explanation of geoexchange here).  

Much like solar and wind, this is not a new technology; it’s been around and used for decades.  Although the economics of a geoexchange system vary from location to location based on geology, local energy rates, and the need for heating/cooling, in most places the payback on a geoexchange system for a home or commercial building beats solar or small-scale wind -- usually sizably.  Whereas solar or wind generate electricity, geoexchange reduces the consumption of energy for space heating and cooling and also can be utilized to generate hot water. It has near year-round benefit, working when the sun doesn’t shine and when the wind doesn’t blow.  It is “base load” energy savings for a building.  A $1,000-$2,500 annual savings in energy costs for a middle class home is fairly typical, and the CO2 reduction is roughly equal to taking two cars off the road – permanently.


(Table from Climate Master)

In many markets, a geoexchange system can be installed with paybacks of 10-15 years without any government incentives. By comparison, except in the best markets (high sun, high electricity cost and high state tax incentives on top of federal incentives), solar still struggles today to provide 10-15 year paybacks with government subsidies. 

And here’s where it get’s really exciting:  The cost of installing the technology can pay itself back in as little as three years.  A geoexchange system isn’t like that of a solar or small-scale wind system, which almost always has a 100% incremental cost because no existing system is being replaced.  In most climates, buildings need either heat or air conditioning to be usable 365 days a year, and in many climates they need both.  Those systems age and need to be replaced (a 20-year lifetime is typical).  So for a building needing new HVAC equipment, the relevant cost is the incremental cost of the geoexchange system.  Netting out the cost that would have been spent on traditional HVAC replacement equipment in most cases drops the payback calculation down to six-12 years.  Add the current federal 30% tax rebate off the full system cost, and the buyers payback can be an incredible three to six years. 


 (Source: Cleantech Consulting Services)



27 Case Studies of Residential Ground Source Heat Pump Paybacks

(Oregon Institute of Technology)

So why is it that solar has received about 33% of all venture capital investment in cleantech and around $1B in government R&D funding over the past ten years while virtually no federal funding or venture capital has gone to geoexchange?  There are several contributing factors:

·      Each geoexchange installation is an “art” project. This is a challenge that the solar industry used to face, when every system required fairly extensive design, engineering and coordination of a potpourri of vendors.  Solar has largely overcome this by better productizing their offerings and streamlining installation; at the same time, the number of solar-focused installation companies has proliferated. Geoexchange has yet to mature in this manner, and many of the companies in the space are largely traditional HVAC vendors that can do geoexchange. 

·      Out of sight, out of mind.  One might think this is a good thing, but I suspect that it hurts geoexchange.  Your neighbor who spent $25k on his solar system is proud to have it on his roof, advertising that he’s green.  But no one knows about the neighbor who invested in a geoexchange; after the drilling rigs leave, nobody can see the good deed being done for the environment. 

·      Fragmented, unfocused installers.  Geoexchange systems are installed by a hodgepodge of mostly small HVAC contractors.  Because most don’t focus exclusively on geoexchange, there isn’t a strong marketing and sales engine to streamline the sales and installation process. 

·      A misconception that geoexchange is “low tech.” What technology advancement could there be in putting pipes into trenches or holes to capture or dissipate heat?  The common view is “not much.”  But the process of heat transfer is a complex engineering challenge that could include advanced materials, fluids and designs to enable increased efficiencies, reduced materials and reduced installation costs for a given performance level.  I believe that technological advancements and economies of scale could result in a reduction in geoexchange system costs of 20-50% with a directly corresponding drop in payback time. 

On the last point, it is truly a shame that there isn’t any federal R&D spending going to innovative technologies in this area.  I would love to find an innovative geoexchange company with compelling technology advantages, innovative financing tools and a great management team that could build a large national business to invest in.  If you know of any, send them my way.  I promise I’ll show them some respect even if I can’t promise that we’ll invest in them.



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.

Related Article:  Geothermal Heat Pump Stocks

October 14, 2010

Understanding Implementation Timelines for Energy Storage Applications

John Petersen

I've been writing this blog on pure-play energy storage companies for a little over two years. Initially I focused on broad themes like the importance of price and performance and the fact that every industry must master the baby steps before it can try to run. Over time the analysis got increasingly granular as I focused on individual applications instead of the industry as a whole. While I occasionally revisit basic themes like I did in last fall's Battery Investing for Beginners series, I worry that overly technical discussions of applications are not as useful for investors as they could be.

My readership base has grown exponentially over the last year, which tells me that interest in the storage sector is booming. Since many investors seem to be having a hard time separating the wheat from the chaff, now seems like a good time to revisit the basics for investors who are considering this old-line industrial sector for the first time.

The oil industry and the battery industry are both celebrating sesquicentennials. Colonel Edwin Drake drilled the first commercial oil well in 1858. A year later on the other side of the Atlantic Gaston Planté invented the first rechargeable lead-acid battery. For the last 150 years, oil has been the primary driver of global industrial and economic growth and batteries have been little more than a grudge purchase, devices that nobody wanted but everybody needed. As the world slowly comes to grips with issues like peak cheap oil, climate change and rapid industrialization in Asia and South America, investors are beginning to realize that energy storage will be the beating heart of the cleantech revolution; an enabling technology for more efficient wind and solar power, more efficient transportation and a more efficient and reliable electric grid.

This is not a case of simple evolution;  it's a new industrial revolution where energy storage applications that didn't exist a decade ago will become hundred billion dollar opportunities over the next 20 years.

The mainstream media is full of stories about gee-whiz energy storage applications that scientists and companies are developing for new markets. The articles usually wax poetic on the benefits while downplaying if not ignoring the risks and costs. They almost never talk about the period of time that will pass between the launch of a technological marvel and the happy day when its manufacturer will turn the corner from hemorrhaging cash to breakeven; or the happier day when it will turn the corner from breakeven to sustained profitability.

Since the fair value of an investment is always equal to the risk-adjusted discounted present value of expected future returns, successful investing is all about timing. Being right too early is no better than being wrong. Investing at the wrong point in the hype cycle can be a grave mistake. In the final analysis knowing what will happen is useless if you don't have a reasonable feel for when it will happen.

Since 1988 I've been convinced that Apple (AAPL) had the best technology for the majority who want to use computers without having to understand their inner workings. Since 2004 the market has agreed with me. From 1988 through 2004, however, I'd have been better off owning Microsoft (MSFT). A true financial genius would have owned Microsoft from 1988 to 2004 and then shifted his portfolio to Apple. I wasn't that smart.

Most investors are accustomed to IT where Steve Jobs can introduce the iPad in April and Apple can plan on first year sales of 13 million units. Comparable uptake rates are simply not possible in cleantech. The following graph of a generic technology adoption lifecycle is the single most useful image an energy storage investor can sear into his consciousness.

Technology-Adoption-Lifecycle.png

The next graph from hybidcars.com is a close second because it tracks the increase in HEV sales from 1999 through 2009. The important lesson in this graph is that it took HEVs 10 years to advance from the starting point on the Technology Adoption Lifecycle curve to a point where they’re finally approaching 'The Chasm.' I'm one of many cheerleaders who believe HEVs should cross 'The Chasm' and become mainstream products, but even my optimism is tempered by reports that HEVs are losing market share while clean diesel sales are soaring.

HEV Growth.png

Once an investor understands these two charts, it becomes relatively easy to answer the $64,000 Question:

"When are emerging energy storage applications likely to transition from the bleeding edge to the leading edge, and from the leading edge to sustained profitability?"

Electric Bikes and Scooters. Americans tend to think of cars when the subject is personal transportation, but electric bikes and scooters are immensely successful in Asia and rapidly becoming mainstream products in Europe. According to Pike Research, electric two-wheeled vehicle, or E2W, sales are currently in the 25 million unit per year range and sales are expected to grow to 80 million units per year by 2016. In Asia, E2W is the Microsoft analog in vehicle electrification; a cheap solution for the masses that has already attained 'Early Majority' status.

Stop-start Idle Elimination. Stop-start idle elimination is a baby step toward vehicle electrification that's been largely ignored by the media. The technology is simple - it turns the engine off when a car is stopped and turns it back on when the driver takes his foot off the brake. Since stop-start systems are extremely hard on batteries, current offerings use two VRLA batteries instead of one flooded battery. Even with dual batteries, automakers have had tremendous problems with battery degradation. To solve the problems, they are actively evaluating a variety of advanced energy storage technologies that promise better performance. Unlike the complex vehicle electrification plans that will depend on uncertain consumer acceptance rates, stop-start is being driven into the market by new fuel economy and CO2 emission regulations. Forecasts predict very rapid stop-start implementation in cars with internal combustion engines. The consensus calls for market penetrations in the 40% range by 2015 with near-universal implementation by 2020. The bottom line is that stop-start is the current Microsoft analog in vehicle electrification; an affordable solution for the masses that has already crossed 'The Chasm' and will attain 'Early Majority' status within five years.

Hybrid and Electric Buses. In recent years a huge amount of work has focused on improving the fuel economy of transit buses. The technical approaches range from hybrids that use supercapacitors or batteries to reduce waste to full electric vehicles. The economics seem to be working for transit system operators and order sizes are increasing rapidly. I believe that hybrid and electric transit buses have recently crossed 'The Chasm.' The future is looking very bright and I believe hybrid and electric buses will become mainstream public transit products in the next five years and dominant technologies by the end of the decade.

Plug-in Vehicles. Despite deceptive acronyms and PR claims that tend to confuse rather than enlighten, plug-in vehicles are not an evolutionary development in HEV technology. HEVs use a small battery to minimize wasted energy and improve fuel economy. Plug-in vehicles use a huge battery to replace a fuel tank and substitute electricity from coal for gasoline from oil. So despite the happy talk, plug-in vehicles are at the starting point on the Technology Adoption Lifecycle curve and must overcome six impossible challenges before they can approach 'The Chasm.' If those challenges can be overcome, plug-ins may become mainstream products by 2020. For the next decade, however, companies that make plug-in vehicles and the batteries that power them are likely to perform like Apple did in the 1990s.

Grid-connected Storage. The most exciting emerging energy storage applications are grid-connected systems for frequency regulation, short-duration wind and solar power integration and improved power quality. Many believe grid-connected storage markets will be immense once the new systems prove their worth. Like plug-in vehicles, however, grid-connected storage is at the starting point on the Technology Adoption Lifecycle curve. To complicate matters the potential buyers of grid-connected systems are the most heavily regulated and fiscally conservative companies on the planet. Utilities will need years if not decades of demonstration projects and performance testing before they'll be able to justify implementation decisions to a powerful array of Federal, state and local regulators. The next ten to fifteen years will undoubtedly be a time of intense testing and analysis, but grid-connected systems are unlikely to become mainstream products for another 15 to 20 years

The following graphic is my attempt to put the emerging energy storage markets into perspective in terms of when those markets will hit their stride and transition from the bleeding edge to the leading edge, and from the leading edge to the mundane.

10.14.10 Technology Timeline.png

The E2W market is here, its now and its booming. The two best pure plays in that sector are Advanced Battery Technologies (ABAT) and China Ritar Power (CRTP). While Valence Technology (VLNC) has a toehold in the E2W space because of its contracts with Segway and Oxygen SpA, Valence is not currently active in Asia where the bulk of the E2W sales originate.

The stop-start idle elimination market has been flying under most investors' radar to date but its visibility will ramp rapidly over the next three years as companies like Johnson Controls (JCI), Exide Technologies (XIDE) and Axion Power International (AXPW.OB) begin posting revenue gains from higher per vehicle battery content and higher gross margins on advanced battery systems. While Maxwell Technologies (MXWL) has a toehold in the stop-start market, its supercapacitor-based solution cannot eliminate the engine-off accessory load issues that are the principal cause of start-stop battery degradation.

The hybrid and electric bus market will be fascinating to watch over the next five years. Maxwell Technologies has seen a rapid ramp in its order flow for hybrid transit buses and lithium-ion battery manufacturers including A123 Systems (AONE) and Ener1 (HEV) have experienced similar increases in demand. Other contenders include Valence Technology and Altair Nanotechnologies (ALTI). While my guess is that Maxwell and A123 are likely to be the sector heavyweights, I’d have a hard time picking a clear technology winner today.

Since my crystal ball gets pretty foggy if I try to look more than five years out, I'd rather focus on the bird-in-the-hand investments today and turn my attention to the wild geese categories of plug-in electric vehicles and grid-connected storage in 2020 through 2025 when their futures will be clearer and their valuation premiums more reasonable.

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

October 13, 2010

Ten Green Gambles for 2010: Q3 Update

Tom Konrad CFA

To my surprise, the market came back in the 3rd Quarter, and my portfolio of put options designed to hedge a market decline is predictably down.  However, my benchmark (a put against the Dow Jones Industrials has performed even worse than my picks.)

I don't have a lot to say about the performance of my Ten Green Gambles for 2010 so far this year.  These gambles were a bet on a market decline in 2010.  Since we're now into the 4th quarter and the market is still basically flat for the year, it's no surprise that they are down.

performance chart
The chart above shows the performance of this hedging portfolio over the nine months since it was published.

Overall, the original portfolio is down 73% for the first 3 quarters.  Also shown in the graph below is "Portfolio 2" which is what would have happened to your money if read the second update, and agreed with my suggestion that "if you want to maintain your hedge, it makes sense to add to it now with some more puts on some of the higher-flying travel and transport stocks, such as Starwood Hotels (HOT), Southwest Airlines (LUV) and JB Hunt (JBHT) at strike prices closer to the current stock price.

Portfolio 2 is only down 70% so far this year, since my short-term timing on that was good.  (Unlike my overall timing in calling for a likely a market decline.)

Picking Hedging Strategies

Like my last performance update for my Ten Clean Energy Stocks for 2010, I don't expect this article to draw in a bunch of readers who are impressed by my stock picking abilities or performance. 

Although both of these portfolios have beaten their benchmarks so far this year, they are also both down, which is what most investors (as opposed to money mangers) care about.   Hedging strategies based on equity puts, like this one, have the advantage that the cost is capped in the event of a strong bull market, but they have the disadvantage that they lose money when markets are flat.  In the accounts I manage, I choose the hedging strategy based on the level of options and margin allowed in the account.  Put-based hedges are the best strategy available in retirement accounts such as IRAs, so that is the one I use for IRAs.  In accounts with full option privileges, I use a mix of short call spreads and puts, a strategy which can cost more in the case of a upward trending market, but is more likely to break even in a flat market.

In retrospect, the best choice would have been to not hedge at all this year.  However, if we could make our investment decisions after the fact, we'd never need to hedge at all.

DISCLOSURE: Short LUV, HOT, JBHT.

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.

October 11, 2010

Geothermal Stocks Overview

Tom Konrad CFA

Geothermal power generation has several advantages over higher profile alternative energy such as wind and solar, but gets much less attention. 

Part of the lack of recognition for Geothermal power arises from a confusion with the technology variously called Geoexchange, Ground Source Heat Pump, or Geothermal Heat Pumps.  Geoexchange uses the near constant temperature of the soil a few feet to a few hundred feet below the ground to heat and cool a building.  According to the Environmental Protection Agency, Geoexchange is the most efficient way to heat and cool a building, and is a very interesting energy efficiency technology (and investment opportunity) in its own right, but it has little in common with Geothermal power.

In contrast, Geothermal power involves using much higher temperature heat from hot springs or wells much deeper into the earth to generate electric power.  Unlike Geoexchange, current Geothermal power technology requires an existing geothermal resource where natural geologic forces have brought an unusual amount of hot liquids into permeable formations relatively near the Earth's crust.  There is currently a great deal of research going into Enhanced Geothermal Systems (EGS) which use modern drilling and fracking technology to recreate the natural conditions that make Geothermal power generation possible, but EGS technology needs more development to become commercially competitive.

In contrast, Geothermal Power with a good resource can produce electricity for pennies per kWh.  Electricity from one of the world's best geothermal resources, The Geysers in Northern California, is sold for 3 to 3.5 cents per kWh, although many the lower grade resources being exploited today need prices between six and twelve cents, depending on who you ask.  These prices are comparable to natural gas fired generation and wind, and are considerably less expensive than solar photovoltaic.  Unlike natural gas, the operating costs of running geothermal plants are very low, and they produce minimal emissions of any kind.  Unlike wind, geothermal power is available in all weather conditions, and geothermal plants generally run more than 95% of the time, which makes them more reliable even than coal power plants, which typically only produce power 80-90% of the time.

Geothermal Power also has a small footprint, requiring only 7.5 km2 per TW*hr/year, less than Coal (9.7 km2 per TW*hr/year), Natural Gas (18.6 km2 per TW*hr/year) and all other Renewable Electricity generation technologies. This small footprint and lack of emissions mean that geothermal power plants can even be located inside cities without disturbing the neighbors... if there is a geothermal resource available. 

All these factors mean that a good Geothermal resource located near transmission can be very valuable to a company that can tap it.  Unlike wind and sun, such geothermal resources are as rare as they are valuable, since they only occur in areas with tectonic or volcanic activity.  This rarity is one of the factors keeping geothermal a relatively undiscovered technology among investors interested in renewable energy, but it also means that the rights to develop these resources are valuable, in much the same way as a good mineral deposit is valuable to a mining company. 

Perhaps most importantly, Geothermal power enjoys support from both Republican and Democrats, with the recently proposed Geothermal Investment Act of 2010 receiving bipartisan support.  Perhaps one factor in this support is that relatively small size of the industry means that government incentives can make a large difference for the industry with only a tiny budgetary impact.

Here is a previous article where I take a deeper look at the business of geothermal power.

Geothermal Stocks

Geothermal stocks fall neatly into two categories: Large cap companies and junior exploration and development companies.  The large-cap companies are:

  • Ormat (NYSE: ORA): Ormat is the leading vertically integrated geothermal power giant, involved in exploration, development, power production and maintenance both for themselves and as a contractor almost everywhere geothermal resources are found in the world.  Ormat is as close as you can get to a one-stop shop for exposure to the geothermal power sector. 
  • Calpine (NYSE:CPN): Calpine is the largest independent power producer (IPP), owning 19 of 21 generation stations in the world-class Geysers geothermal field near Santa Rosa, CA.  Despite producing one-fourth of the non-hydro renewable power produced in California, Calpine should not be analyzed as a renewable energy IPP, since renewable generation accounts for less than 3% of total generation capacity.  The vast majority of Calpine's capacity comes from natural gas fired units, so investors in Calpine are really getting a natural gas IPP with some expertise in geothermal power production.  In the context of this article, Calpine is  most interesting as a possible acquirer of the small geothermal exploration and production companies, as it acquired its interest The Geysers in 1999 and 2000.
  • United Technologies (NYSE:UTX): Like Calpine, United Technologies is a diversified industrial giant included here because of the modular PureCycle geothermal and heat recovery engine from its Pratt&Whitney unit.  While not a significant contributor to the results of a giant corporation like United Technologies, PureCycle might open up low temperature geothermal resources that cannot produce enough power to justify the cost of a custom Ormat Power Converter, but may be productive enough for an off-the-shelf generator such as PureCycle.
Junior Geothermal Exploration and Development Companies

None of these companies are currently profitable, but all own geothermal resources in various stages of development, including producing plants.  With substantially all the cost of geothermal development coming up-front, investors in these companies need to consider the availability of funding for development as well as the riskiness and time line for developing each company's geothermal assets.  There has been a recent trend of consolidation in the industry which is likely to continue in the current difficult financing environment, despite growing government support for geothermal.

These small micro cap companies include:
If you know of any other geothermal stocks missing from this list, please let me know in the comments.  I plan to take a closer look at each of the exploration and development companies in coming weeks, and I'll add your suggestions to the list.

DISCLOSURE: Long HTM, NGLPF.OB.

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.

October 08, 2010

Battery Manufacturers, Burger Joints and Secret Sauce

John Petersen

In September I received an e-mail from France Innovation Scientifique & Transfert SA advertising their new IP Overview of Lithium Metal Phosphate Batteries - 2010/04. While I don't usually pay attention to e-mail pitches for costly reports, the FIST solicitation caught my eye because the abstract explained that roughly 1,100 patent applications have been filed for lithium metal phosphate chemistry since Dr. Goodenough's key patent issued in 1996. It's enough to give a guy a whole new perspective on this T-shirt from EV World.

10.8.10 SS T-shirt.png

It also raises a couple critical issues that many battery investors don't understand. There are only a few ways to make a lithium-ion battery and the basic manufacturing technology has been in the public domain for decades. That means manufacturers who trumpet their gee-whiz technologies are invariably talking about their particular recipes for the standard chemical coatings they put on the standard aluminum and copper foils that are used as current collectors in all lithium-ion batteries. So while there are differences between the LiFePO4 batteries made by A123 Systems (AONE), Valence Technologies (VLNC), BYD (BYDDY.PK) and others, the differences are kissing cousins of the secret sauce recipes flogged by competing burger joints. This cartoon from Hugh McLeod says it better than I ever could.

10.8.10 Secret Sauce.png

The unpleasant truth does not change with different flavors of lithium-ion chemistry. There are five basic anode coatings, seven basic cathode coatings and a variety of organic electrolytes. Once a manufacturer chooses his preferred combination and develops his secret recipe, the differences in manufacturing steps, equipment and device performance are, in most cases, inconsequential. The same is true for lead-acid batteries and there's not really much difference between batteries made by Enersys (ENS), Exide Technologies (XIDE) and Johnson Controls (JCI). Everybody does things a little differently to better serve the needs of their target markets and everybody talks about his unique technology, but in the final analysis the ability to efficiently manufacture a consistent, high-quality product that meets the required specifications is the only thing that matters.

In a presentation at this week's The Battery Show in San Jose, Quallion's president Paul Beach reportedly put everything into perspective when he explained that lithium-ion battery development is all about optimization and incremental gains, rather than quantum leaps. He emphasized, "There is no Moore's law for batteries" and said if we want exponential performance gains or cost savings, we'll need to "go to an asteroid and come back with some new materials." Batteries will continue to improve slowly, but the big gains will come from generational changes in chemistry and in manufacturing methods, rather than secret sauce refinements.

In June 2009 I wrote "Understanding the Development Path for Li-ion Battery Technologies," an article that focused on an unpublished "pre-decisional draft" of a DOE report titled National Battery Collaborative (NBC) Roadmap, December 9, 2008. The roadmap was a high-level white paper that discussed the merits, risks and expected costs of an eight-year plan to foster the development and commercialization of lithium-ion batteries. While the roadmap was created during the waning days of the Bush administration and has not been released or for that matter sanctioned by the DOE, it bears an uncanny resemblance to policy initiatives implemented by the Obama administration. For investors who are cautious about walking down dark alleys, the roadmap is sobering. After all, who wants an investment that will be obsolete before it becomes profitable?

While most energy storage devices are me-too products and most energy storage investments are manufacturing plays rather than technology plays, there are a couple of exceptions.

Beacon Power (BCON) is deploying a frequency regulation system for utilities that uses high-speed flywheels to store modest amounts of power for brief periods and return that power to the grid in milliseconds. Active Power (ACPW) is commercializing a similar system for computer datacenters that uses low speed flywheels to ensure consistent power quality. The systems can't keep the lights on for days or even hours, but they can smooth out the minute-to-minute variability that plays havoc with electronics and highly automated manufacturing. They're also based on physics rather than chemistry, which leaves open the possibility that performance can be doubled and redoubled as the technologies mature.

Beacon faces a number of daunting challenges including a feeble balance sheet and the need for substantial additional capital to continue the implementation of its merchant power business model, but when it finishes the installation of 60 MW of planned facilities and emerges from the development stage, it should have a dominant intellectual property position in an important grid stabilization market.

I was hard on Beacon when I started writing this blog in the summer of 2008. At the time its stock was trading in the $1.50 range and it was easy to foresee the hard times. Today Beacon's stock is trading in the $0.30 range and it's had remarkable success obtaining government guaranteed project financing and grants for its planned facilities, and negotiating reasonable utility tariffs for an entirely new class of grid stabilization service. While substantial challenges remain it's getting easier to foresee a time when Beacon will turn the corner financially and represent a solid investment value. Beacon's market capitalization of approximately $60 million includes $36 million of hard net worth and only $26 million of intangible premium for the $95 million of research and development costs it expensed in prior periods.

Axion Power International (AXPW.OB) is developing a third generation lead-acid battery technology that uses carbon electrode assemblies to replace the lead-based negative electrodes used in flooded and sealed lead-acid batteries. The resulting PbC® battery is a battery-supercapacitor hybrid that lasts several times longer and charges several times faster than flooded or sealed lead-acid batteries. It also offers higher power and can stand up to repetitive deep discharge cycling without battery damage. The PbC is not a silver bullet solution for all energy storage requirements, but it has substantial potential in a variety of emerging energy storage applications ranging from renewable power integration, to hybrid railroad locomotives and automotive stop-start systems.

Since inception, Axion's biggest challenge has been the industrial engineering associated with developing a manufacturing process for an entirely new class of battery product. There was no established art and most subcomponents of the electrode assemblies didn't have commercial analogs. The process has been difficult and time consuming, and complicated by fact that several first tier manufacturers who are very demanding when it comes to consistency, quality control and performance are considering the PbC for use in mass market products. So instead of starting out as a young company and growing to adulthood over a period of several years, Axion is being forced to achieve levels of maturity and excellence that are not typically expected from young companies that are introducing a new technology.

Axion has a strong intellectual property position and seems to be responding well to the demands of its potential customers. It's finishing work on a second-generation electrode fabrication line that will be in production by the first quarter of next year and is expected to satisfy the consistency, quality control and performance standards of its potential customers. Substantial challenges remain, but the bulk of the hard work is in the past rather than the future. Like Beacon, Axion's market capitalization of approximately $50 million includes roughly $22 million of hard net worth and about $27 million of intangible premium for the $22 million of research and development costs it expensed in prior periods.

Once you get beyond Beacon, Active Power and Axion, everybody else in the energy storage sector is or will be making a commodity product with modest to insignificant technological and performance differentiation.

Energy storage is hard-core heavy manufacturing at its best and worst, but it's not a technology business like the ones we came to know and love during the information and communications technology revolution. Investors who do not understand this reality are doomed to pay premium prices for secret sauce.

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

October 05, 2010

Finer System Level Details for the Comparison of Photovoltaic Technologies

by Joseph McCabe, PE

In our last article  "Metrics for Thin Film Solar CIGS Company Comparisons," we alluded to finer system level details in the comparison of photovoltaic (PV) technologies and promised this follow up article on the subject.

System level details begin with the PV modules themselves. Band gap, temperature corrections  and fill factor are just some of the finer technology details, all slightly related in that they can produce system performance differences when comparing similar PV technologies.

Band gap is the quantum-level point where the PV technology absorbs photons. Think of the last time you saw a rainbow with its many colors. These colors are reflecting the visible wavelengths of sunlight. Band gap is akin to the measurement of the number of wavelengths, or colors, that can be absorbed; even ones you can't see. The higher the band gap, the more the PV technology is able to grab the power contained in our terrestrial sunlight. Locations in higher latitudes have different wavelengths than at the equator, so knowing the band gap can be an important performance factor, especially in high latitude locations.

The higher the band gap, the lower the temperature correction. Temperature correction was covered in the previous article, but to summarize again, the lower the temperature correction the better the PV system performance, especially in places like Phoenix Arizona. So higher band gaps mean greater potential energy capture, and better temperature corrections.

Fill factor is the ratio of the technology's actual ability to capture available energy to the energy that is theoretically available. More mature PV technologies like single crystalline silicon have higher fill factors, newer thin films like CIGS have lower fill factors which will be increasing as the technologies mature.  Higher fill factors means more power out of the relatively same cost of manufacturing (more voltage and or amperage and thus more maximum power from the same surface). When comparing PV manufacturing companies’ technologies consider current, and future band gaps, temperature corrections and fill factors. 

Over time, PV performance is typically reduced due to weatherization, packaging and PV cell material degradation. Comparison of different PV technologies should include annual performance degradation. For example, lower grade silicon feed stocks will have higher annual performance degradation. There is the potential for new, high quality PV materials and packaging that have no annual degradation. Certain certification tests attempt to simulate performance degradation over time, like IEC 61215 for crystalline silicon and IEC 61646  for thin films. However these certification procedures do not have the ability to expose the modules to sunlight for the years and years needed to evaluate actual annual degradation. My brethren in the industry might be upset with this suggestion, but under nondisclosure you should ask manufactures for the historical paper trail and results from all certification tests. Huge investments in PV manufacturing companies as well as PV projects should know the documented test results for bankability assurances.

Another finer system level detail in comparing PV technologies is whether it is deposited on glass or a flexible substrate. Glass needs to be held in place with a structure that insure it will not fly away, fall down or break. Flexible PV modules promise to be integrated into building materials, similar to the way United Solar, a division of Energy Conversion Devices (ENER), laminations have been used in single ply roofing and standing seam metal roofing. When a PV technology can reduce the structural balance of systems (BOS) cost there is an economy for the installation due to the lack of glass and the potential for true building integration. Look for CIGS companies like Miasolé, Global Solar Energy, Ascent Solar (ASTI), and Nuvosun to follow in SoloPower's footsteps in certifying the long-term performance and safety of high efficiency flexible PV modules for building integrated (BIPV) and other flexible applications. Perhaps structural and electrical BOS components can be the subject of a future AltEnergyStocks article on the potential for further reduction of PV system costs.

Two approaches in the PV industry can help assure the potential long term performance of a PV system.  One approach is to do internal due diligence, risk analysis and bankability evaluations including all the finer system level details some of which are discussed above. Another approach is to obtain project performance insurance, possibly combined with an acceptable level of internal analysis. Performance insurance is a new aspect to the PV industry which can help to assure project financial performance overtime. Chartis (formerly AIG), Zurich Insurance Group, The Hartford Financial Services group, ACE Limited, JP Morgan, Chubb Group of Insurance Companies, Munich RE and others are beginning to step into this PV performance insurance function. The insurance industry is developing new risk management products for the maturing PV industry like business interruption Insurance, which can be used in lieu of internal assurances. These new insurance products do not eliminate the need to ensure bankability of the modules, systems, and quality of installation, but they can make the job easier.

Joseph McCabe is a solar industry veteran with over 20 years in the business and degrees in Mechanical Engineering, Masters of Nuclear and Energy Engineering and an MBA. He is an American Solar Energy Society Fellow, a Professional Engineer, and is internationally recognized as an expert in thin film PV, BIPV and Photovoltaic/Thermal solar industry activities. Joe can be reached at energy [no space] ideas at gmail dotcom.

October 03, 2010

The Four Best Peak Oil Investments

Tom Konrad CFA

The best four stocks I've found in my six month quest to find the best peak oil investments.

I apologize for being a tease. 

Since March, I've been writing this series I've called "The Best Peak Oil Investments," but in many cases what I've actually done is to warn readers to stay away from particular sectors.  This bait-and-switch was compounded for my syndicated readers at Seeking Alpha when their editors decided to re-title the early articles in this series "Peak Oil Investments I'm Putting My Money On." 

If you've stuck with the series for the last seven months and twenty-five articles despite the sometimes misleading titles, I'm going to (finally) try to make it up to you.  After mentioning over fifty stocks in the course of this series, and dismissing entire sectors, I'll narrow my stock picks down to the four I like best at current prices.

My Criteria

These stocks are chosen to do well in what I called "The Methadone Economy" in part nine.  If oil prices continue to rise, I expect it to take a toll on economic growth and the availability of funding will probably remain tight.  I'm looking for companies that have solid balance sheets and can fund investment from internal cash flow.  I'll be looking for positive free cash flow, low debt, and high current ratios. 

I'm also looking for companies that typically reduce the use of the personal car, rather than simply making the car more efficient to drive.  More efficient vehicles do reduce fuel use per mile, but because of their lower operating costs may encourage driving, and fail to reduce overall fuel use as much as the efficiency number might lead us to believe.  I also see problems with most alternative fuels, mainly because there are limits to supply, which should lead to the prices of any widely adopted alternative fuel to track the price of oil.

The stocks I do like are Alternative Transportation stocks such as rail and bus companies, bicycle and e-bike companies, and Smart Transportation companies that combine information technology and pricing schemes to reduce waste in the transportation system by making the markets for travel services more efficient.  Unfortunately, I was not able to find any pure-play or nearly pure-play smart transport stocks that meet my financial strength and liquidity criteria.  Portable Navigation Device (PND) maker Garmin (GRMN) has the financial strength I'm looking for, but the increasing competition from GPS-enabled smartphones kept the company out of this list, even though I'm personally an avid user of the company's PNDs.

Top Four Peak Oil Stocks

#1 Advanced Battery Technologies (ABAT) is a Chinese company whose core business in making polymer Lithium-ion batteries.  The company recently bought an e-bike manufacturer which uses ABAT's batteries in its bikes.  I consider batteries in general the best way to invest in vehicle electrification, and ABAT's focus on e-bikes rather than cars also appeals to me.  At the recent stock price of $3.47, ABAT trades at a trailing price earnings multiple of 6.7, has an off-the charts current ratio of over 32.  Free cash flow has been negative over the last year, but turned positive in the last two quarters, and the company has enough cash on the balance sheet to internally fund operations for many years at current rates.  I discuss ABAT in more detail in this article on six electric vehicle and hybrid electric vehicle stocks.

#2 Stagecoach Group (SGC.L) is an operator of rail and bus services in the UK and North America, and it was my favorite of the three mass transit operators I've found because of low debt, relatively strong liquidity, and low price/earnings multiple.

#3 Accell Group (ACCEL.AS) is my top pick among bicycle company stocks.  Accell has a large stable of brands controlling leading positions in many European bike markets and segments.  High gas taxes and dense cities have helped Europe establish a lead in adoption of bikes for commuting and short trips, meaning that Accell has more experience meeting the needs of such riders, who grow in number with oil price rises.  Although I also like the business of bike component manufacturer Shimano (SHMDF.PK), Accell currently trades at a much better valuation.

#4 Vossloh AG (VOS.DE) German commuter and high-speed rail supplier Vossloh trades at an inexpensive price/earnings ratio of 11, with decent growth and dividends that are well covered by income and cash flow.  You can read more about Vossloh in my recent article on mass transit supplier stocks.

Honorable Mentions

In a recent article, I implied I'd pick my five favorite peak oil investments, not four.  When it came to actually picking, I found myself eliminating potential candidates on one criterion or another until I had just four. 

However, I do have two honorable mentions.  The first is the Powershares Progressive Transport Portfolio (PTRP), which I said "The Powershares Progressive Transport Portfolio (PTRP) is a good option for investors looking for a one-stop shop of non-oil related stocks that are better prepared to cope with rising oil prices." One caveat: as some commenters on the original article pointed out, PTRP trades at very low volume, so PTRP is only appropriate for a long term investor and should always be traded using limit orders to minimize price impact.

A second honorable mention is Kandi Technologies (KNDI), which was profiled in a series of guest posts here.  Kandi is a profitable but little known Chinese company making electric mini-cars.  I bought a small position on the speculation that it might become better known, but I did not want to include it in this list because I consider it much riskier than the somewhat similar ABAT, which is already in the list.

Trading

For US based investors like myself, it's unfortunate (if not surprising) that only one of these companies is listed on a domestic exchange, and that one is a Chinese company.  To trade the three European companies, North American investors will need to go through the world trading desk of their broker, and this will involve paying much higher transaction costs.  The high transaction costs mean that these stocks should only be purchased as long-term investments to be held for several years.  However, that should not be a problem for peak-oil motivated investors, since we already can only be certain that oil prices will rise over the long term; short term price changes are anyone's guess.

I personally do not yet have a position in any of these stocks because I expect the stock market to continue to decline in the near term.  I'm waiting to make my purchases (of a possibly slightly different set of peak oil stocks) at even more attractive valuations.

Benchmarking

Even though I'm not buying these stocks today, I find it useful to look back on my stock picks and see how they have performed over time.  As I write on September 11th, a $10,000, equally weighted portfolio of these four stocks would contain 720 shares of ABAT, 878 shares of SGC.L, 61 shares of ACCEL.AS, and 24 shares of VOS.DE.   Since I've come out saying that investing in oil exploration and production companies is not the best way to invest in peak oil, I plan to test my theory by comparing this portfolio in the future to 183 shares of the Energy Select Sector SPDR (XLE), which is composed of oil E&P companies. 

[Late note: This article was not published until October 3, at which point the portfolio had risen 5.8%, while XLE was up by 4.0% between writing and publication.  While this makes the relative valuation of the companies less attractive, the reasons for choosing them over oil and gas companies are unchanged.  I have not yet bought any of them because I'm still expecting a significant market correction, and am waiting for even more attractive prices.]

Conclusion

These are my top oil related picks, but I have to admit I'm as curious as you are as to how they work out.  Can you do better?  Leave your picks in the comments, and I will track them along with my own when I check back to see how these stocks and XLE are doing.


DISCLOSURE: None.
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.

October 02, 2010

Interview: Jeff Siegel's Predictions for Renewable Energy and Solar Stocks

by Garfield Hodgson

Jeff Siegel, a top renewable energy investor recently took time out from his very busy schedule to grant an interview with Garfield Hodgson of Total Solar Energy (TSE). If you don't know Jeff, he runs the newsletter Green Chip Stocks, an independent investment research service that focuses primarily on renewable energy and organic & natural food markets.

TSE: Hi Jeff. Thanks for your time. Can you tell me when you first got started in solar stocks?

Jeff: I had actually been an advocate of solar energy ever since I did a high-school project on it back in 1987. I just found it so fascinating that we could power our homes and our lights and our appliances with these little devices. And I found it frustrating that more attention wasn't being paid to it.

My interest in solar never waned, and as I started working in the world of finance, I made it a point to focus on investment opportunities that would not only pay off for investors – but for the global community as well.

TSE: Given the current economic and volatile stock market situation, would it be wise to invest in solar stocks right now?

Jeff: Well, with any investment, there is always risk. That includes renewable energy. Yes, the future of solar is very bright. Going forward, solar will be a significant piece of our new energy economy. But at the end of the day, any time you invest, you are taking on some risk.

That being said, I think at this time, a lot of quality solar stocks are undervalued. Some of this is because of the euro (so many solar manufacturers are heavily exposed to the euro), some of this is because of the broader market pulling these stocks down, and some of it is because there are a lot of people that are counting solar out because of the German feed-in tariff cut. The latter makes no sense. The future of solar is NOT in Europe, but rather the U.S. and China.

I think the solar market will still struggle this year, but once we have some more clarification on China and U.S. solar support, we're going to see the launch of one of the biggest solar bull markets ever. So those in it for the long haul, I've been recommending picking up some of the stronger solar stocks on those big dips. We are, however, going to have to exercise a little patience.

TSE: How would you evaluate the year 2010 for the solar industry up to now?

Jeff: Lots of irrational thinking this year. Again, there's too much focus on Europe. Aside from a slide in the euro, long-term investors know that the payoff will come from the U.S. and China market. But until we stop focusing on tariff cuts and the misconception that there's an oversupply of product (which is absolutely false), then the market will be quite shaky. We've seen that this year, and I think we'll probably continue to see this.

TSE: Where and when to do you expect to see parity with fossil fuels? And what effect will this have on solar stocks?

Jeff: You could actually make the case that they already are. Assuming of course, you strip ALL subsidies for fossil fuels, and take into account the liquidation of natural capital associated with the production, distribution and consumption of fossil fuels.

In other words, if utilities that operated coal-fired power plants had to pay for carbon, had to pay for mercury pollution and had to pay for any other damage done to ecosystem services (things like the regulation of climate, cycling of nutrients and water, pest control, etc), solar would be significantly cheaper than coal. But what we do is use a baseline for energy costs that are simply incorrect.

Back to the real world, however, where we continue to subsidize fossil fuels and turn a blind eye to the trillions of dollars of damage done to our natural capital every year – I imagine we could see grid parity within 10 years in most parts of the world where there is a strong solar resource.

TSE: What are the major threats to the growth of the solar industry at the moment.

Jeff: Lack of leadership and support. I absolutely hate the idea of subsidizing anything. But the only way solar can compete is for it to get the same generous subsidies that the fossil fuel industries have received for years. And we need to end the debate with the naysayers.

The technology exists, the proof exists, the data is conclusive – we can power a significant portion of our world with solar. I no longer even entertain those who want to continue throwing up roadblocks. They are no more than minor bumps that I'm happy to roll over. This is going to happen. You can either be part of the solution, or you can step aside.

TSE: Do you see the UK feed-in tariff having the same effect on share prices as it did when it was introduced in Germany?

Jeff: Hard to say. Every government operates differently. Spain had a great plan, but its execution was horrible. These tariffs have to be monitored and phased out sooner than later. Otherwise, you create a bubble that's bad for everyone.

TSE: Do you feel the US would benefit from a nationwide feed in tariff?

Jeff: Not necessarily. I think this needs to be done on a regional basis. An FIT in California, Arizona, New Mexico, Texas, Colorado, Utah – these would be great because you have such a strong solar resource in these states. But if you try to force a FIT for the whole country, you'll get a lot of backlash, and in some areas, it probably won't be nearly as effective.

TSE: How do you think the solar industry will look in 5 years?

Jeff: I think the leading solar companies today will be some of the biggest corporations in the world. I think the technology will be much more advanced, production costs will decrease and there will be more policy support. The costs for consumers will be much less, and I think we'll see a lot of companies offering solar leasing programs.

TSE: Once again Jeff, thanks for your time. I certainly hope you are right.

Garfield Hodgson is the owner of the website Total Solar Energy were you can find all the latest news and views on the world of solar energy. Started over 3 years ago to help people find cheaper ways of installing solar energy, the site has now become one of the most visited in the UK.

October 01, 2010

Energy Storage, a Tough Year and a Mixed Quarter

John Petersen

Quarterly updates are among my least favorite tasks because they focus on where the energy storage sector has been instead of where it's going. I still haven't developed a presentation format I like, but it feels like things are heading in the right direction. Reader comments and suggestions on how I can make these updates more useful are always appreciated.

The 12-month performance for the energy storage sector was dismal and the only companies that currently trade above their September 30, 2009 closing prices are Active Power (ACPW) and Enersys (ENS). Most other companies in the sector are way down for the year. While softening markets for Exide Technologies (XIDE) and Axion Power (AXPW.OB) can be attributed to fund liquidations arising from the 2008 crash, most of the softness seems to arise from nagging uncertainty over what the future holds. A number of companies seem to have turned a corner during the third quarter, but sector performance in general can only be described as mixed.

The big winner for the quarter was Altair Nanotechnologies (ALTI), which was weak at June 30th but recently announced plans to sell a 51% interest to Canon Investment Holdings for $49.8 million and expand into China. The big loser was C&D Technologies (CHP), which was struggling at June 30th, recognized an intangible asset impairment $60 million in the quarter ended July 31st, and then negotiated an agreement in principle with certain noteholders that will convert $127 million of debt into equity and give the noteholders a 95% ownership stake.

The Altair and C&D transactions won't close until the fourth quarter, but for purposes of this article I'll treat both as done deals and work with rough pro forma estimates. I'll also adjust the data for other companies as necessary to reflect financing transactions that have been reported since the date of their last quarterly reports.

The following table provides a quick summary view of stock price performance in the energy storage sector for the last twelve months and for the third quarter of 2010.

9.30.10 Price Performance.png

For the more visually inclined, the following graph tracks the composite price performance of my five categories of energy storage companies over the last year.

9.30.10 Composite Graph.png

The history part is pretty straightforward. Now it's time dust off the crystal ball and take a look at how things are shaping up for the next few months. Since my undergraduate degree was in accounting, the numbers are the first place I go when trying to discern the probable shape and size of future events. The following table provides summary data on a few financial metrics that I like to emphasize in any forward-looking analysis.

9.30.10 Value Metrics.png

For companies with a history of losses, the first number I focus on is working capital. If a company can't cover a year's losses and make its planned capital investments with available funds, it will almost certainly be forced to seek new equity or debt financing and that can be very difficult in a turbulent capital market. The five companies that have clear working capital issues are identified with a red X in the working capital adequacy column.

A second key metric is the difference between a company's market capitalization and its book value, which is commonly referred to as blue-sky. Public companies normally trade at a premium to their book value because intangible assets like proprietary technologies, human resources, industry experience, customer relationships and the like usually have no recognized balance sheet value. When the blue-sky premium is out of line on the high side, it's a warning flag. When the blue-sky premium is out of line on the low side, it can hint at substantial upside potential. While peer group comparisons aren't always reliable, they can provide useful guidance.

Many investors spend a lot of time obsessing over quarterly results, but I believe trailing twelve-month numbers provide a more reliable picture of how a company is performing because they smooth quarter-to-quarter changes in the business cycle and make it easier to spot companies that are performing better than their stock. Since its last quarter was disappointing but the company is solidly profitable on a trailing twelve month basis, I believe Exide Technologies (XIDE) will be a surprisingly strong performer over the next nine months.

The next twelve months will be turbulent times in the energy storage sector as manufacturers introduce a variety of transportation products and ramp up demonstrations of large-scale stationary storage products. I expect good things from Axion Power (AXPW.OB) as its PbC technology advances from successful laboratory testing with automakers to on-road fleet testing in stop-start systems. While it's a decidedly unpopular position, I think cars with plugs will have a hard time meeting lofty market expectations. If the initial product introductions are not a smashing success, companies that make lithium-ion batteries could falter. While their working capital values are terrible, Beacon Power (BCON) and ZBB Energy (ZBB) seem to have more upside potential than downside risk and may be good speculations at current prices.

While my experience and personal investing preferences are in the lead-acid subsector, one could make strong to compelling arguments about the investment merit of each company I track. The challenges facing some are daunting, but the potential markets for their products are enormous. The information technology revolution was typified by a series of technologies that dominated the market then faded to obscurity. The cleantech revolution in general and the storage sector in particular will be very different because the best any company can hope for is a technology that will dominate a substantial market niche. In information technology, investing was like the hunt for the great white whale. In cleantech, it will be more akin to hunting in a herd of elephants.

The last year has been has been very tough on the energy storage sector, which is down 40% while the broader market indices are up 10%. The sector seems to be turning a corner as the shape of events over the next couple years become more obvious. Once the corner is turned, I expect the sector to outperform the broader market and become a mega-trend that will endure for decades. The sector is on sale for now but it won't be for long.

9.30.10 Summary.png

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


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