Why Gas Will Come Back

A few good stock bets for a carbon-constrained world

Aug 1, 2009  

by Fabrice Taylor

Here’s the thing you need to know about “greening” the planet if you’re an investor: there’s money to be made investing in technologies and alternative forms of energy, to be sure. But the real money is in gas. No, not gasoline. Natural gas. We simply cannot reduce emissions without using a lot more natural gas in place of dirtier fuels like coal and oil. The truth is that there is still no real substitute for fossil fuels. We are not going to be leaving the carbon economy any time soon. But we can shift to gas-fuelled carbon lite.

Here’s an interesting statistic for you to consider: in the United States, one sixth of 1% of energy needs come from wind and solar. It cost tens of billions of dollars in subsidies alone to get to that level of “market share.” Sure, you can double that with tens more billions, as President Obama wants to. Then you’re at a whopping one third of 1%! With unlimited funds, you can multiply it several times but you still won’t make much of an impact.

Meanwhile, gas-powered electrical plants in the U.S. account for about 40% of the one million megawatts of capacity in place. Yet gas only accounts for 10% of production. Why? Because gas is used for “peaking,” coming on when demand is high. Coal plants, meanwhile, run full-out all the time. In other words, the U.S. could quadruple the amount of electricity it gets from gas without building new plants.

So the top investment pick for a greener planet, at least in the short to medium term, is gas. As for companies, the blue chip of them all is EnCana Corporation (TSX:ECA). From there they get smaller, riskier and offer more upside. I’d avoid anything with a lot of debt, though, because it’s not clear when this argument will start to affect prices. My favourite riskier play is Birchcliff Energy (TSX:BIR): lots of reserves, some debt and it needs lots of cash to ramp up production, but it seems able to raise money, as it did with a recent stock sale.

The gas argument is not meant to imply that other energy technologies won’t make any money, rather that it will be a small segment. One prominent player in the alternative space is Canadian Hydro Developers (TSX:KHD), which is adding capacity aggressively. The company operates wind farms, run-of-river hydro (where turbines are installed in rivers – without damming them – to crank out juice) and biomass generators. The company is close to profitability and benefiting from improvements in technology. The stock is somewhat volatile, but like most small caps looks somewhat depressed.

Another name in this space is Plutonic Power Corp. (TSX:PCC), based in British Columbia and specializing in run-of-river power. B.C. has lots of hydrology and is friendly to developers. Plutonic isn’t producing yet, so it’s riskier than Canadian Hydro, but the upside is higher. It has financial backing from General Electric Energy and has had success bidding for B.C. power supply contracts.

At the margins of power generation you’ll find interesting little companies like Sustainable Energy Technologies Ltd. (TSX V:STG). This Calgary concern doesn’t make power; it makes technology that is supposed to allow solar power systems to operate more efficiently. If you’ve studied solar power, you know that efficiency is crucial to make it economical. Sustainable Energy makes gizmos that turn very low-voltage direct current into electricity that’s worthy of grid transmission. That sounds vague, but rest assured that there is, in theory, a market for this, particularly with roof-top installations. When one solar panel in a series is obstructed by shade, the entire array will lose capacity. Sustainable’s technology isolates the power loss to those panels that are shaded, allowing the others to generate at full capacity.

I say in theory because Sustainable has very little revenue so far; it’s still proving itself. This is a penny stock and as such its odds of success aren’t great. But if it does succeed, you’ll make a pile of money. That’s the way speculation works.

Energy generation isn’t the only way to play the green movement. Environmental cleanup is another. We’re going to get tough on producers who pollute, and some firms will benefit. One is Newalta Inc. (TSX:NAL). It’s been around for a long time and has annual revenues of about $600 million a year. It’s trading below book value and at a cheap eight times earnings, and it pays a dividend that yields 3.5%. The outlook for environmental cleanup, especially in the oil industry, is very good, and although it’s a competitive business, Newalta is very well run with management that’s been in place for some time.

This is a limited list, of course. There are dozens of Western Canadian companies involved in one way or another in the green technology movement. As a general rule of thumb, you’ll be well served as you navigate this trend to apply your common sense. Odds are if a story adds up in your mind, it has a better chance of survival. Otherwise, avoid it.

And try to avoid pie-in-the-sky ideas too. While it’s true that there’s lots of talk about carbon storage and cap-and-trade schemes, these will both require legal changes, which haven’t been announced yet. I’d be very wary of investing at this stage in, say, a fund that promises to make you money by investing in carbon credits or what have you. I’ve seen a few of these offered, but avoid them until you get some clarity on what the law will demand. If you don’t know, after all, neither do the promoters of these offerings.

Prairie Trader is an independent overview and assessment of investments available to Albertans. Alberta Venture assumes no responsibility for the accuracy of any stock recommendations. You can send letters about this column to feedback.

Current Issue