September is starting out as the month of speculation about a massive three day air strike on Iran. 

Is Bush ready to attack Iran while our troops are still trying to stabilize both Afghanistan and Iraq?  In February, administration officials were denying it.   The preparations now going on could simply be the stick part of a negotiating strategy; the bad cop to Russia's good cop.  But Bush's chances of successful cooperation with Putin could be better.

What if?

If Bush does launch a massive three day air strike on Iran, what will that mean for alternative energy stocks?  I think it would have to be favorable.  We can certainly expect the oil price to rise sharply, which tends to be good for alternative energy.  Because a war with Iran would almost certainly disrupt world oil supplies, not only from Iran but from neighboring states such as Saudi Arabia.

Of Alternative Energy stocks, the ones likely to see the greatest appreciation from a war induced oil price spike are the ones most aligned with energy security, with a lesser advantage seen by the rest.  If the region remains in turmoil for a long time (and the wars in Iraq and Afghanistan certainly point to that as a possibility) then the rest of alternative energy will probably follow.

Here is my list of the alternative energy stocks I think would benefit most from short and long term increases in the price of oil:

Batteries/Hybrids: 

Short term: Hybrid car makers such as Toyota (NYSE: TM) and Honda (NYSE: HMC) will benefit as people spooked by high gas prices buy hybrids.

Longer Term: All carmakers will be introducing efficient cars, so component makers with an advantage in efficiency such as Magna International (NYSE: MGA), as well as battery and capacitor manufacturers will benefit.  A war with Iran might cause car makers to stop waiting for better Lithium Ion batteries and just go with the tried and true NiMH batteries in a big way.

Biofuels

Short term: Ethanol from corn is lousy on the environment, but almost all the energy that goes into it is domestic.  So most corn ethanol producers will benefit.  I have mixed feelings about biofuels, but ADM is my favorite, because they have a dominant position, and produce their own feedstock. Biodiesel producers will also get a boost, for the same reason, but try to find ones which don't rely too much on the commodity oil markets.

Longer Term: Look to cellulosic ethanol companies, such as BlueFire Ethanol Inc. (OTCPK: BFRE), and ethanol from sugar companies such as Brazil's Cosan (NYSE: CZZ.)  

Coal-to-Liquids

Short term: Coal to Liquids (CTL) firms are likely to get a big short term boost because coal is domestic.

Long term: CTL may have trouble due to constraints in the domestic supply of coal.

In general technologies that can be used for transportation fuels will see big benefits, with lesser benefits being felt by electricity generation technologies.  I've declined to list hydrogen here, because I think it's not a very good transportation fuel due to its low density, the additional energy costs of compression, as well as the high cost of fuel cells.

DISCLOSURE: Tom Konrad and/or his clients have positions in MGA, ADM.

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.

Posted by Tom Konrad at 04:52 PM | Permalink | Comments (0) | TrackBacks (0)

Last week I wrote a post about the future of ethanol. In it, I promised a sister piece on the future of coal-to-liquids (CTL). This comes a bit later than initially promised…I apologize to those who had been holding their breaths.

I already wrote a post discussing the future of CTL not very long ago. I’m thus not going to repeat myself here, but rather supplement that post with some new info.

CTL In The News

As stated at the outset of the ethanol article, what drove me to write a series of posts on alternative fuels is that big news items on both ethanol and CTL abounded (relatively speaking) during the first week of January.

Firstly, a very insightful piece on China’s CTL industry appeared in Technology Review in early January (I would recommend this if you have about 10 minutes to spare, it’s very interesting).

This was followed, a short while later, by news that 2 US Senators were trying to revive a piece of legislation aimed at boosting production capacity and providing investment tax credits for CTL in the US. The 2 Senators are also apparently keen on forming a “Senate Coal-to-Liquid Fuel Caucus�. This could be the first step to some helpful pork being funneled to that industry, which, admittedly, hasn't been shown much political love since shortly after the oil shock of the late 1970s.

Finally, a few days ago, news came out that a DKRW unit involved in one of the first large-scale CTL projects in the US, Medicine Bow, had found a buyer for 100% of its synthetic fuel output, due to start flowing in late 2010. This project will have an initial capacity of 10,000 bpd, with a potential of up to 35,000 bpd after expansion.

(BTW, If you want to browse a good database of CTL news, I would recommend the Green Car Congress’)

CTL Growth

There are currently no great short-term plays on CTL in the US, for the plain and simple reason that there is no CTL production to speak of in America today. The first significant CTL production is not scheduled to occur until around 2011. The EIA estimates that CTL production should reach 5.7 billion gallons by 2030. Compare that, for instance, to the ethanol industry, with 4 billion gallons of output in 2005 and a projected 14.6 billion gallons in 2030.

Investing in CTL

Potentially, CTL has all the hallmarks of a great transition fuel: coal abounds, the technology to produce CTL has been around for a few decades, it can be made into a very clean-burning alternative to gasoline, and if oil does not dip below the upper 40s/lower 50s for an extended period of time, CTL can compete.

However, as discussed above, there may not be a good way to play this in the US for a few more years. That is why you should take a good hard look at China, because CTL is already happening there, and it will be big time in the foreseeable future. The great thing is, you can invest in a US-listed company with great exposure to the Chinese CTL market: Sasol [NYSE:SSL]. Sasol is currently involved in one of China’s most ambitious CTL projects.

Sure, the company’s share price has been correcting along with the price of oil over the past few weeks, and it could continue to do so in the short run. But there are certainly other things to consider. The Gold Stock Bull made the case for Sasol based on its exposure to CTL technology just before Christmas. Need anything more recent? Some 20,000 Motley Fool CAPS participants were very bullish on Sasol today.

Although Rentech [NYSE:RTK] and Syntroleum [NASDAQ:SYNM] are 2 interesting companies to keep an eye on, Sasol may be on the verge of doing great things for its investors.

I don't think CTL is a panacea, especially not in the long run. However, it will occupy a growing niche in the transportation fuel mix of several large energy consumers like the US, China and India, at least until the feedstock (i.e. coal) starts to run low. The good thing about CTL from a retail investor standpoint is that there hasn't yet been too much unfounded excitement around it, which is a problem that often plagues alt energy stocks. This could, however, change soon. The value investor might thus be able to scoop up a some good prospects, but my sense is that the window is closing.

DISCLOSURE: I don't have a position in any of the stocks discussed above.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

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Posted by Charles Morand at 09:55 PM | Permalink | Comments (4)

You are at a cocktail party somewhere, and, after joining a random group of revelers, you utter the following words: “If I say alternative fuel, what’s the very first thing that comes to mind…don’t even think about it, just answer!� If this fiesta was taking place last night, 9 folks out of 10 would have answered “ethanol�. The remaining 10% would have probably made-up a mix-bag of “biodiesel�, “hydrogen�, and, in extremely rare cases, “synthetic fuels�, also known as synfuels. Ten years from now, I bet you anything that far more than 10% of the general public will be thinking synfuel when they hear the words "alternative fuel".

Synfuels are liquid fuels made from coal, natural gas or biomass. They can be used to power the same kind of applications that currently utilize gasoline or diesel, most notably cars. Today I want to focus on one particular sub-type of synfuel - namely coal-based synfuel or coal-to-liquids (CTL). An article on CTL hit the mainstream newswire on Monday, casting some light on this little-known-yet-promising fuel source.

Investing in CTL: 4 Things You Should Know

The aim of this post is not to go over the whole process behind making CTL, thus me providing some links above for those who are curious about the science behind CTL. What I want to do here is to give you nuggets of useful information that will provide a good starting point should you decide to look at this seriously as an investment option. Here are 4 main things you should know:

A) There’s lots of coal around. The Energy Information Agency (EIA) estimates that, at the 2002 production rate, there’s about 200 years worth of coal left in the global ground; 26% is in the US, 23% in the Former Soviet Union and 12% in China. Like oil, recoverable reserves will likely increase as new extraction processes are brought on stream. However, like oil, production rates are going to increase massively as demand from booming economies like China and India picks up.

B) I’ve come across a couple of different estimates of crude oil price floors required to make CTL operations in the US profitable. Estimates typically range from $40/barrel to $45/barrel. You thus have to be an energy bull to want to invest in CTL in the US. Apparently, the Chinese are running operations that are economical at $25/barrel.

On a related note, I recently came across an interesting article in the September 2006 edition of Chadbourne & Parke’s Project Finance Newswire (PDF, see article on p. 24) discussing, among other things, the energy price risk associated with investing in CTL from a project finance standpoint.

C) CTL fuel burns much cleaner than conventional fuels, as a lot of the dirty stuff is removed during the production process. This means that, under certain favorable regulatory scenarios, CTL could hold some form of a ‘clean’ premium over gasoline at the pump (e.g. lower taxes). However, producing synfuel from coal generates large amounts of carbon dioxide, and carbon dioxide could become regulated at the federal level before most proposed US CTL operations are fully up-and-running. This could add certain costs at the front end of the production process that would nullify back end benefits.

D) Politicians and the military like CTL. I won’t discuss the military as I don' know too much about it, other than the fact they have been running some tests and seem to like the idea of not having to rely on hostile countries to power their fighter jets.

Politicians like CTL for the same reasons they like ethanol: (a) there’s a rural job-creation angle in an industry otherwise seen as on the wane, (b) it’s an easy sell to voters concerned about the security implications of sourcing a large part of America’s energy from unfriendly nations, and (c) soft environmentalists, under the right conditions (e.g. carbon capture at CTL plants), will embrace CTL because of its overall cleaner profile. If you want specifics on the existing and proposed government incentives for CTL, go to the EIA’s most recent Coal News and Markets page and scroll down to the section called “Coal Technology� towards the end. Under the sub-heading “Coal-to-Liquids Project Financing�, there is a short discussion on this topic (sorry for not being able to provide a direct link to the section, the page doesn’t allow for it).

3 CTL Stocks

The article on CTL discussed initially lists 3 companies who are banking on a bright future for coal-based synfuel: Headwaters [NYSE:HW], Syntroleum Corp [NASDAQ:SYNM], and Rentech [AMEX:RTK].

Of the 3 companies, Headwaters is the only 1 with positive earnings, although I suspect it’s not from its CTL operations. The stock has had a terrible year, and it is currently trading down about 40% from its 52-week high of $40.19. Earnings year-on-year are down nearly 38%. Nevertheless, analysts covering the stock seem confident that 2007 EPS will be markedly higher than 2006 EPS.

Syntroleum Corp hasn’t exactly had a great year either, and analysts don’t expect the firm to become profitable for a few more years. Syntroleum is the company with the most important exposure to the military.

Rentech is the company I am most familiar with, as I seriously investigated it as a potential investment last summer. In the end, I decided not to buy at and I’m happy I made that choice. Rentech has a very interesting project pipeline, and is probably the closest thing to a CTL pureplay there is. I might look it again in the near future.

After deciding not to purchase Rentech, synfuels fell off my radar screen, and with good reason. There hasn't been an exciting synfuel story yet, and investor attention (but not mine!) has been squarely on ethanol. I must say that reading that article has rekindled my interest, and CTL is definitely something that I'm going to start paying more attention to.

To conclude, if you want a good, safe way to get some exposure to CTL, have a quick look at the South African company Sasol [NYSE:SSL]. When South Africa was under a trade embargo because of its apartheid regime, Sasol perfected CTL technology to keep South African cars running, and the company is now busy developing that side of their business in places like China.

Posted by Charles Morand at 11:54 PM | Permalink | Comments (1)

Syntroleum Corp (SYNM) commemorated the successful production of more than 140,000 gallons of ultra-clean fuels at its gas-to-liquid (GTL) fuels plant at Port of Catoosa, Oklahoma. The plant also manufactured 60,000 gallons of additional products, such as syncrude. Gathered to mark the occasion were representatives from Syntroleum, the U.S. Department of Energy (DOE), Marathon Oil Company and Integrated Concepts and Research Corporation (ICRC). [ more ]

Posted by Mark Anderson at 09:16 AM | Permalink | Comments (0)