Alternative Energy Investments

The following is an excerpt from the book Black Gold
by George Orwel
Published by Wiley; June 2006;$2795US/$3599CAN; 0-471-79268-3
Copyright © 2006 George Orwel
The oil market is not the only one looking up Alternative fuel stocks are also attracting many investors Because oil and gas are expensive, Americans are looking for cheaper nonfossil fuel and that demand is boosting the alternative fuel stocks as well This is especially good for anyone who cares for the environment — the greens If you consider yourself an environmentalist or a preservationist, this is perfect for you, for you are now able to support efforts to preserve the environment while at the same time profiting from those efforts It’s a win-win situation Consider this: Pacific Ethanol Inc, a small ethanol-producing company started in 2003 by Bill Jones, the former secretary of state for the state of California, has trebled its stock price on NASDAQ to about $30 a share within a year of going public in March of 2005 Like many other similar renewable fuel start-ups, millions of dollars in private equity money are being thrown at Pacific Ethanol like the world is coming to an end Billionaire Bill Gates, the chairman of Microsoft, is one of those investing in renewable fuel stocks Gates’ investment company, Cascade Investment, has agreed to pump $84 million in Pacific Ethanol
The US government has recognized alternative fuel as the fuel for the future and has included a number of tax incentives in the Energy Policy Act of 2005, the energy law signed in the summer of 2005, to spur growth in the alternative fuel sector If you haven’t already, you should give alternative stocks a try as it will make you feel morally stronger It’s been nearly three decades since efforts to promote alternative fuel floundered after the 1973 oil crisis, but it’s making a comeback Still, alternative fuel remains a small industry, with small cap companies dominating Since 2005, 15 of the 36 companies in the WilderHill Clean Energy index have made huge profits That includes hydroelectric power and wind energy, solar energy, and fuel cells
Some of the most successful companies in the renewable fuel sector are huge conglomerates, like General Electric and Germany’s Siemens, and also big oil companies, like BP, that are hedging their bets Investing in these companies offers a chance to own a clean energy stock Here’s some information about GE worth knowing: It made close to $2 billion in sales from production of wind-powered turbines in 2005, treble what it made from that business unit in 2002 However, that’s only 1 percent of GE’s revenues
There’s a lot of hope that alternative fuel technologies developed by some of the smaller companies will become commercially viable and help support the sector As a result, stocks for these companies are expected to soar WilderHill Clean Energy Index gained 26 percent in the past 12 months alone, compared with 50 percent for oil That’s not bad, considering this is not an established sector in the United States
Moreover, since continued oil supply is uncertain, a lot more consumers are going to turn to coal, which is abundantly available in the United States, China, and India Coal used to be frowned upon because of its dirt, but technology has improved enough to make it just as clean as other fuels Shrewd investors could buy shares in US coal producers, including the two biggest, Peabody Energy Corp and Arch Coal Inc, both based in St Louis, Missouri Coal companies have profited from the current oil boom
Investing in coal doesn’t mean that Big Oil isn’t safe anymore It only means that you are on much firmer ground when you have a diversified portfolio If you look at both types of stocks, the difference isn’t large Exxon Mobil, for instance, returned 36 percent to its shareholders in market appreciation and dividends in 2005 and BP returned 21 percent Peabody Energy stockholders, meanwhile, did far better in the same time period They more than doubled their money, and Peabody shares have risen more than three and a half times since the company’s initial public offering in 2001 Arch Coal stock returned 65 percent in 2005 as well
Coal producers have benefited from increased demand from power plants and steelmakers in the United States, China, and India Massey Energy Co of Richmond, Virginia, for instance, said its average selling price for coal used in steel-making jumped 38 percent in 2005 Consol Energy, Inc of Pittsburgh, the third largest US producer, plans a $500 million mine expansion to keep up with orders
Soaring prices for natural gas have given coal demand another lift Many electric power plants have switched from gas to coal, which costs about half as much In the spring of 2006, Duke Energy Corp closed on a deal purchasing Cinergy Corp for about $9 billion, in large part because of Cinergy’s coal-fired plants
Back to oil, we’ve also seen that the market has been good to minnows as well In fact, some smaller oil companies also have outperformed the giants For instance, Apache Corp of Houston produced a 12-month total return of 51 percent for its stockholders, helped by increased first-quarter selling prices of 51 percent for crude oil and 11 percent for natural gas Apache recently bought property from Shell, BP, and Exxon Mobil and its profit rose tremendously in 2005 Oil transport companies have not been left behind Overseas Shipholding Group of New York made an acquisition in 2005 that made it the world’s second-largest oil tanker company The bigger fleet, combined with higher tanker rates, boosted the company’s 2005 earnings by about 40 percent The world’s biggest owner of oil tankers, Teekay Shipping Corp of Vancouver, Canada, capitalized on high energy prices in yet another way In the fall of 2005, Teekay raised $132 million through the public sale of a 20 percent interest in Teekay LNG Partners LP, whose ships carry liquefied natural gas and crude oil
Is it too late to buy energy stocks, large or small? BlackRock, Inc, which manages $391 billion, doesn’t seem to think so It reported to the SEC in late summer of 2005 that after $870 million in purchases, it owned stakes in Peabody, Arch, Consol, and Massey ranging from 33 to 88 percent The money manager also has a 47 percent stake in Newfield Exploration Co, an oil-and-gas company that returned 49 percent to its shareholders in 2005
The bottom line is this: The world needs a lot of energy, but supply is getting tighter; an “überspike” in oil prices is in the making and the potential rewards for the savvy energy investor are huge
Copyright © 2006 George Orwel
George Orwel is an Oil Analyst and Senior Writer for both the Oil Daily and Petroleum Intelligence Weekly Previously, he covered the oil market for six years as a staff reporter for Dow Jones Newswires Orwel has appeared on key media outlets, including CNN, BBC, and NPR, and contributed articles to the Los Angeles Times and the Christian Science Monitor, as well as other publications He lives in Brooklyn, New York

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