|
-- Posted Tuesday, 24 August 2010 | | Source: GoldSeek.com
If there were an alternative energy sector exam, Cormark Securities Analyst MacMurray Whale would ace that test. He knows the micro and macro forces at play in a truly global sector and how those forces are affecting companies seeking growth in largely uncharted waters. It's altogether uncommon knowledge but in this exclusive with The Energy Report, Whale provides a heady glimpse at some prospective alternative energy plays with tangible catalysts for growth. MacMurray likes some big-cap energy developers paying dividends and some much smaller solar plays with big upside. It's an alternative energy cheat sheet you don't need to feel guilty about.
The Energy Report: MacMurray, if the alternative energy cycle were a year, what month would we be in?
MacMurray Whale: In general, I would say about March. But I think that all of the different subsectors have different timelines.
Ten years ago, we would have been talking about fuel cells and hydrogen, and people would have said at that time that we were in the January of that business. But if you asked me about those companies today, I would say we're pretty much exactly where we were 10 years ago. From a technology-development point of view, there have been amazing developments. But from a marketability perspective, while many drivers have improved, there has been almost no improvement in the financial viability of the companies providing the technology. We're closer but, as an investor, you want to see progress in the business model. We've seen very little progress on the business models of some of the tech names in the alternative energy space.
But if you asked: "Where are we in terms of solar power?" I would say it's vastly different now. Ten years ago, a few off-grid early adopters were paying huge prices simply because they needed the power in a remote location. Now, in certain areas of the world, solar photovoltaic power systems are seeing grid parity. From a market development point of view in solar, we're in December in some parts of the world.
If you're talking about wind, you're beyond that year; it's competitive with incumbents in some places. But if you're talking transportation battery technology or natural gas transportation technology, you're probably not even in midyear yet.
TER: What are the catalysts for growth?
MW: I think there are three major ones: finance, regulation and let's call the other "technology development."
In the finance world, the world went through a balance sheet crisis that caused a recession. Now capital is more expensive and less available. We need to see a willingness for lenders to lend and allow the balance sheets to get bigger again. That's the catalyst we're waiting for.
In terms of regulation, new legislation is very important because of the nature of the incumbent technologies that are being challenged by these new technologies. In some cases, you need regulation to force adoption; in some cases, the regulation helps reduce the costs of switching to a newer, riskier technology. The Cap and Trade Bill that made its way through the House but didn't make it through the Senate would have been a huge regulatory catalyst. There was an energy portfolio standard that was also removed. That would have been a significant catalyst because it would have forced the utilities to adopt alternative energy technology.
The last one, technology development, is just all about hitting a particular cost target. You can't just have performance and cost parity with the incumbent technology. The cost and performance must be better than the incumbent technology because of the risk associated with the new technology.
TER: What's going to give financial institutions confidence in this sector?
MW: That's a good question. I think ultimately it is confidence that a particular technology is ready. What I mean by that is not necessarily that it's cheap and not necessarily that it's hugely better performing, but simply that the risk associated with its adoption is in line with the return that it is providing.
And further confidence will be built around an improving global economy. I think the U.S. is still hugely important in investor sentiment. Just the strength of the economic recovery will create more willing investors because they will be feeling more positive and they will put more money to work. And then that bullishness on the economic front will mean higher energy prices, and that will be a major driver. Although I realize that seems a bit of a circular argument.
TER: But what if an investor wants to put some money into alternative energy. What's there to get that investor excited?
MW: We've seen a big shift just in the last 6–12 months. In the power development space, the power developers that aren't cash-flow positive or the ones that are but don't have a dividend are down 25% over the last 12 months. There's a whole other group—the large caps with a yield—that are up 25%–30% over the same period, so there's been a flight to quality.
But looking at geothermal power developers, where there is much greater upside, investors will ask about the cost to build, and see that it requires a third or half the total capital even before the resource is known. And the investor just says, "Not right now, thanks."
TER: So then how do alternative energy companies attract the money that's going into oil and gas and even mining?
MW: The power companies need to show a really big resource that is undervalued that some good management team can extract value from; whereas the technology developers have to have something proprietary and not difficult to bring to market.
We've seen some crossover on the geothermal side because it has similarities with mining. The valuation on a geothermal stock is akin to a mining company or an oil or gas exploration company, where you quantify the resource and then discount it.
In contrast, U.S. investors are a lot more used to tech investing. It's like Google Inc. (NASDAQ:GOOG) or Microsoft Corp. (NASDAQ:MSFT), you just get a hockey stick of growth and you take a multiple of earnings into the future and then discount it back.
The people running these businesses and we, as analysts, are trying to find the right investor base for a particular business model. Very rarely have I seen an investor who invests using the "hockey stick" approach who will look at, say, renewable power. However, he will look at a renewable tech play. But on the power side, the investor who does the net asset value (NAV) approach will look at the geothermal plays.
These days, it's just easier for the mining and the oil and gas guys to get their head around a resource value. Because when all is said and done, there's a hard asset to backstop valuation.
TER: What are the catalysts for U.S. Geothermal?
MW: U.S. Geothermal remains small, but they have some potential projects and expansion projects that are attractive. They've done a very good job developing what they have. They don't quite have the sort of explosive growth, if you will, that some of the other geothermals have, but I think the quality of management is very high.
A lot of investors in this space are interested in takeover candidates whose capital needs to be cheaper. I think U.S. Geothermal could be a potential takeover target.
I think the projects are being undervalued. I think in the space of a year we could see a re-rating of those projects as they continue to move through development.
TER: It seems financing is a lot harder to come by for that kind of thing in America, as opposed to Europe. What's the difference in the mindset between people managing European banks and people managing American banks?
MW: It's a very, very good question. We really haven't been able to figure that out. The European banks like the lack of oil exposure and the lack of natural gas exposure but I believe they're a lot more influenced by the governments to support this type of development.
TER: And in the U.S. you also have a strong oil and gas lobby that probably mitigates some of the government funding for alternative energy.
MW: I think you're right. The oil and gas industry enjoys a number of incentives; just the removal of those would change the cost of energy in favor of renewables.
TER: Do you have some parting thoughts on alternative energy?
MW: I know everybody's been excited about natural gas and natural gas vehicles, but I think that story is over. I think it's not as well managed as it should be; and there's a lot of hype around natural gas that will wane in the next 24 months. I think you're better to stick to lithium and battery technology developers and even the integrators, rather than focusing on natural gas in the transportation space.
Solar will come back; those technologies will do better and wind is certainly solid. But if you want something that has that real sex appeal, it's still the batteries and hybrids and the technology suppliers on that front.
TER: This has been great, MacMurray. Thanks very much.
MacMurray Whale heads the Power & Alternative Energy equity research team at Cormark Securities Inc., a leading private investment dealer/broker based in Toronto, Canada. The team covers more than 40 publicly listed power developers and technology firms, active in creating, producing and deploying renewable power and other low carbon/environmental technologies. MacMurray has 20 years' experience in technology research and development reaching back to his doctoral work on photovoltaic energy conversion at MIT, and continuing through his research program as an engineering faculty member at the University of Victoria. MacMurray was the recipient of the prestigious "1967" Science and Engineering Postgraduate Scholarship for his work on microscale heat transfer. Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part. The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report. From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported. Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734. Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
-- Posted Tuesday, 24 August 2010 | Digg This Article | Source: GoldSeek.com
Previous Articles
|
