Money Matters - Simplified

5 Energy Stocks for the Future

Wishing may be a viable strategy in kids' movies, but on Wall Street,
it's a dud. We too often tend to invest on wishful thinking, even when
the odds tell us that the scenario for which we're hoping likely won't
come to pass. Witness alternative energy. As each new technology
arises, investors pounce, hoping that this time, they've found the
green, renewable solution that will free us from oil, coal, and other
CO2-spewing fuels.

Misplaced wishes

Remember corn-based
ethanol's promise to free the United States from foreign-oil bondage
while simultaneously lowering greenhouse-gas admissions? It sounded
like Nirvana ... except that Nirvana had to be fortified with a
$0.45-per-gallon tax credit for all ethanol, and a $0.54-per-gallon
tariff and 2.5% ad valorem tax on the imported stuff. Domestic
ethanol's sails were further trimmed by Congressional mandates
requiring yearly increases for blended gasoline to top out at 15
billion gallons of ethanol by 2015, up from 10.5 billion gallons in
2009.

I'm not sure anything more could have been done to guarantee
ethanol's success. Nevertheless, the fuel's proven as lucrative for
investors as Beanie Babies have been to collectors: 

Company

5-Year High Price

Current Price

Percent Loss

Green Plains Renewable Energy

$53.68 (April 2006)

$7.26

86%

Verenium (Nasdaq: VRNMD)

$149.28 (February 2007)

$7.14

95%

Pacific Ethanol (Nasdaq: PEIX)

$44.50 (May 2006)

$0.50

99%

Source: Yahoo! Finance. Verenium executed a 1:12 reverse stock split, and its five-year price was adjusted accordingly.

Ethanol failed to grant many people's wishes -- but perhaps wind
will be different. Perhaps it can do to coal, which fires 45% of the
nation's electric power, what ethanol was supposed to do to oil. 

At first blush, the numbers are intriguing: According to the U.S.
Department of Energy, rates for wind-generated electricity installed
today are comparable to conventional wholesale electric power prices of
$0.025 to $0.035 per kWh. Alas, when subsidies are stripped away, the
price of wind power jumps considerably higher.

The ugly investable reality

Face
it: Coal and oil are here to stay. To quote the World Energy Outlook
2008 Edition's executive summary: "Fossil fuels account for 80% of the
world's primary energy mix in 2030 -- down only slightly on today. Oil
remains the dominant fuel, though demand for coal rises more than any
other fuel."

The cost of subsidies and mandates is another reality. When
government grants a subsidy, it loses revenue, something the federal
government is hardly well-positioned to forgo these days. The White
House predicts that the U.S. federal deficit will grow to $1.6 trillion
in the current fiscal year, while upping the 10-year tally of deficits
to $9.1 trillion, bringing it in line with the Congressional Budget
Office estimates. 

Green energy is only adding to the red ink. This year's massive
stimulus package earmarked $39 billion for the Department of Energy,
and contained an additional $20 billion in tax incentives for clean
energy projects. And let's not dismiss the president's campaign promise
to spend $150 billion over 10 years to develop new energy technologies.
How much more can we afford?

The reality is that that big energy requirements demand "black
energy," and a lot of it. Black energy, in turn, demands big companies
offering economies of scale, while providing a buttress against
volatility. The following fossil fuel firms are the biggest domestic
coal and oil producers by market capitalization.
They're well-cushioned (all endured the depressed energy market in that
prevailed in the early 2000s), and conservatively capitalized (none has
a debt-to-equity ratio above one). In addition, they all pay and grow
dividends and will likely continue based on current payout ratios:

Company

Market Cap

Debt-to-Equity Ratios

5-Year Dividend Growth Rates

Dividend Payout Ratio

 

Peabody Energy (NYSE: BTU)

$9.8 billion

77.51%

16.36%

7.28%

 

CONSOL Energy (NYSE: CNX)

$7.5 billion

53.47%

7.39%

12.60%

 

Arch Coal (NYSE: ACI)

$3.1 billion

82.45%

24.21%

29.28%

 

ExxonMobil (NYSE: XOM)

$336 billion

8.70%

9.60%

26.01%

 

Chevron (NYSE: CVX)

$142 billion

13.71%

12.09%

31.95%

 

Sources: Capital IQ (a division of Standard and Poor's) and Reuters.

Wishing is a harmless exercise, as long as it doesn't conflict with
the reality of investing. We might wish that we had a cleaner, cheaper
mass-energy source, but in reality, we currently don't. Old-school
fossil fuels are the reality, and no amount of wishful thinking will
change that. Invest accordingly.

 

© 2009 UCLICK, L.L.C