The International Energy Agency (IEA) said this week that world oil demand is rising faster than previously expected, while the non-OPEC supply is growing slower than expected. The IEA warned of growing tightness in oil supplies in the second half of the year, and urged OPEC to raise its output. You know what that means: Oil prices are bound to move up as the supply dwindles and demand grows.
Oil neared $70 a barrel this morning, but the important factor to remember is that oil over $50 a barrel changes everything in some of the largest industries and markets in the world, including autos, electricity generation, chemicals, plastics and, it can be argued, consumer spending patterns. When the Saudis are saying that they are now comfortable with a $50 to $65 range for oil prices, I think it’s time to forget about the last comfort level at $28. When even an oil-state Republican President talks about global climate change in his State of the Union address, and Congress flips from Republican to Democratic control, we could be looking at one of the biggest MegaShifts of all time.
That’s why I am excited about new energy technology. Fifty dollars a barrel for oil opened the window for innovative new companies to find oil in better or cheaper ways, or provide technologies that conserve or replace oil in all the industries and markets listed above. These are worldwide markets, so they are huge. A new company that is the first mover in a new technology can grow into a Fortune 500-size operation, with dramatic long-term returns to investors that stick with them.
The Wall Street Journal recently asked Ray Lane, former president of Oracle and now a venture capitalist with Kleiner Perkins Caufield & Byers, founding investors in Google, Amazon, and Netscape, just how big the clean tech trend is going to be. He said: “Bigger than the Internet by an order of magnitude. Maybe even two.”
As you probably know, an order of magnitude is 10X, and two orders of magnitude is 100X. That sounds like a pretty worthwhile MegaShift to be invested in.
We already have a number of new energy companies in our portfolio, and as you know, I’m not limited to recommending companies in one area of the energy chain. I’m interested in companies with the right technologies to find more oil and ways to use it more effectively, as well as those with alternative forms of energy. At this point, our New Energy Technology Portfolio looks like this:
New Sources of Oil
- Gasco Energy (GSX) — natural gas to power utilities providing heat for Colorado oil shale operations
- Infinity Energy (IFNY) — also natural gas for utilities providing energy to heat Colorado oil shale, plus they have a huge new oilfield in the Caribbean Sea off Nicaragua
- Royal Dutch Shell (RDS.A) — technology to extract oil from Colorado oil shale
- Connacher Oil & Gas (CLL.TO) — technology to extract oil from Canadian tar sands
Alternatives to Oil
- Energy Conversion Devices (ENER) — solar and hybrid car batteries
- FuelCell Energy (FCEL) — hydrogen fuel cell stationary power plants
- Ocean Power Technologies (OPTT) — wavepower
- Plug Power (PLUG) — hydrogen fuel cell back-up power
- Rentech (RTK) — coal-to-liquids (synthetic petroleum)
There are real problems that need to be solved with all of these technologies, and there are also FUD problems — Fear, Uncertainty and Doubt spread by the folks with fiefdoms that are threatened. I have quite a collection of these, as I have to check out every one to be sure that our investments are not impacted by them. Here’s a look at just one FUD problem that you might hear in each major new energy technology area:
- Solar — The FUD problem is that solar energy can never have more than a minimal impact on U.S. energy consumption. Reality is that if we set aside an area 10 miles by 10 miles in the Nevada desert and used only today’s 15% efficient energy technology, that 100 square miles could provide all the electricity that the U.S. uses.
- Hybrid cars — The FUD problem is that the batteries will wear out and need to be replaced at a cost of $4,000. Reality is that hybrid batteries like those made by Cobasys, the joint venture between Energy Conversion Devices and Chevron, last for the life of the car. Toyota has never had a recharge battery warranty claim. And incidentally, the next time you hear someone say that hybrid buyers will never earn back the price premium, ask them what the most expensive single factor is in owning a car. It is depreciation. Then ask them if they factored the very slow depreciation of hybrid cars into their calculations. (They didn’t, because they were more interested in spreading FUD than being helpful.)
- Ethanol – The FUD problem is that ethanol production uses corn that is taken away from human consumption. Reality is that ethanol production is best with feed corn, not sweet corn, and after the ethanol is extracted, the remaining material, called distillers grain, is an excellent livestock feed. Another sort-of-FUD issue is that “it takes more energy to make ethanol than the ethanol produces.” Wrong, but I have always thought the underlying numbers on corn-based ethanol will not be compelling in the long run. It takes about 75% of the energy in ethanol to make the stuff, using fossil fuels. (Nobody counts the solar energy used to grow the corn.) So there is a net energy gain, but it isn’t overwhelming.
- Wind – The FUD problem is that wind turbines are inefficient because they only operate a small percentage of the time. Reality is that wind turbines are usually located in areas where they operate 65% to 80% of the time. That’s why the Department of Energy says that the windpower potential in the U.S. equals 100% of our current electricity consumption. Looking at maintenance cycles, no power plant operates 100% of the time. The closest is geothermal, with about a 98% uptime record.
- Geothermal – The FUD problem is that geothermal is too new and experimental, and limited to areas with hot springs or other evidence of near-surface extreme heat. Reality is that geothermal energy has been generating electricity for over 100 years, and today in the U.S. alone there are almost 2,800 megawatts of geothermal energy connected to the power grid, displacing around 25 million barrels of oil.
We have a few recommendations in a number of these areas, and today I want to look more closely at geothermal, since I have a new recommendation in that area for you.
It used to be true that geothermal plants had to be near hot springs, as Calpine’s plants are. (Calpine is a major power producer, only part of which is geothermal, that went bankrupt during the California energy crises and just filed its reorganization plan yesterday.) But there is a new technology called Advanced Binary Cycle that allows geothermal plants to use water in the 200 degrees F to 360 degrees F range. As you can see in the diagram below, this water is pumped to the surface and used to heat a second “working fluid” that has a low boiling point. So, instead of driving the turbine with steam from the water source, the working fluid vaporizes and turns the turbine. The vapor then condenses back into working fluid to be reused in a closed system, and after the heat transfer, the cooled water is returned to the reservoir through a second well.
Source: Raser, Inc.
There are many more lower-temperature hot water fields than steam fields, so this opens up many more areas to geothermal energy production. Plus, because the energy production process is a closed loop on both the water and working fluid side, there are zero emissions. The geothermal resource itself is sustainable and renewable.
This is why I want to get us into geothermal — it makes so much sense. The worldwide opportunity for geothermal energy is huge. In 2005, geothermal generated almost 36 gigajoules of energy, which is enough to run every house in Florida for a year. A recent MIT report estimates that the U.S. has 5.6 million exajoules of recoverable geothermal energy, more than enough to run our whole economy forever. And it is all done with no carbon dioxide, no smog, no ash, no smoke and no nuclear waste.
Plus, geothermal lowers oil imports and lowers emissions and saves money. Here’s how:
You may know that just about six to 10 feet below the surface, depending on where your frost line is, the earth is normally a steady 55 degrees F year-round. Well, I’m going to take advantage of the earth’s typical temperature and save some energy in heating my house. I am planning to put in a simple system that buries a 24″ diameter pipe in a deep ditch around the house. In the winter, air from the pipe enters my heat pump to be heated (it works just as well with a furnace). But I only have to heat this air 15 degrees F to get a comfortable 70 degrees F, instead of from sub-freezing. In the summer, the 55o F air comes in to air condition the house, and the only energy expenditure is for the fan to distribute it.
Going down deeper into the earth in most places, the temperature remains a steady 55 degrees F. But as we know, there are many areas where the hot internal core of the earth comes much closer to the surface — within 5,000 feet, or easy drilling distance with current technology. Looking at the total costs of generating electricity to convert to heat, geothermal is about 3.3X as efficient as that process. So instead of heating your Vermont house in the winter with oil ($3,000 for the season) or electricity ($5,000), geothermal can do the job for about $1,500. That’s compelling, even before you get to the environmental benefits.
But is it practical? Yes, just take a look at what some companies are already doing with geothermal technology. There is a public company headquartered in Indiana, listed on the Toronto Exchange, named WFI Industries (WFI.TO). They make single-home systems that tap underground energy — often only five or six feet down — for around $12,000. The stock has moved up about 25% recently, and I need to do more work on their capitalization to understand what we are getting before I would recommend it. Also, I expect them to move to the NASDAQ at some time, and I don’t want to get caught in another Ocean Power Technologies snafu. So, just keep it on your radar for now.
At the other end of the scale are the utility-size geothermal producers that can take advantage of the new binary cycle technology. The biggest of these is Ormat Technologies (ORA), a Reno-based subsidiary of the Israeli company Ormat Industries. Its Electricity segment develops, builds, owns and operates geothermal and recovered energy-based power plants, and sells electricity in the United States, Guatemala, Kenya, Nicaragua and the Philippines. Its Products segment designs, manufactures and sells power units for geothermal power plants, power units for recovered energy-based power generation, and remote power units and other generators.
Ormat Technologies is a $1.4 billion company selling at over 60X earnings, and I am not a big fan of buying stock in subsidiaries as opposed to the parent. The Israeli parent trades in the U.S. but only on the pink sheets. So, we’re not going to invest in this one either.
I am interested in Raser (RZ), which makes binary cycle geothermal equipment. The company, though, has been a long-time promoter of a new type of efficient electric motor that really hasn’t gone anywhere. I will watch them to see if they get any traction in geothermal equipment before making an official recommendation.
The company I have found for you has a much more exciting outlook, despite its small size.
Buy US Geothermal
US Geothermal (UGTH on the Bulletin Board) is building its first geothermal utility plant in Idaho, and the company will open it at the end of this year. They’ll start at a modest 13 megawatts but plan to expand that to 200 megawatts over time. They have the capital to get the first plant into production, with $35 million in cash and no debt, but nobody knows about this company and the total market value is under $100 million.
But there is a lot more to the story than that. After the great gas line crisis in the early ’70s, the Department of Energy spent over $40 million developing a geothermal reservoir and binary cycle power plant at Raft River, Idaho. It sits on 8.2 square miles of active ground, and the DOE estimates that it can produce 1,000 megawatts, or about five power plants the size of the first one that UGTH is developing. (A very conservative projection from the company’s independent consultant says that the site has a 50% probability of a power production capacity of 15.6 megawatts per square mile, which translates to 100 megawatts or more.) When lower oil prices returned, the DOE lost interest and shut down the project in 1982.
Twenty years later, US Geothermal acquired control of the geothermal rights and started planning their first plant. It is being built for them by Ormat. The Raft River Rural Electric Cooperative has finished construction of a 3.2-mile power transmission line that connects the power plant to the Bonneville Power Administration substation at Bridge, Idaho.
US Geothermal already has a contract with Idaho Power to sell them 10 megawatts of power and also has two other contracts near completion for 13 megawatts each for future production. The whole state of Idaho uses about 370 megawatts of power a year, so eventually UGTH could sell almost all of the output from two 200 megawatt plants to Idaho Power, making that state completely non-polluting in electricity production, and still have another three plants worth to offer to nearby states. One of the 13 megawatt contracts is with Eugene Water and Electric in Oregon. US Geothermal is also conducting exploration activities at Neal Hot Springs, Oregon.
The stock has moved up this week while I was finishing this report, and I would not chase it. Buy only a 25% position in UGTH under $2.25, and let’s see if we can use a multiple buy strategy to get more under $2. My target price is $5.
New Energy Technology MegaShift
One of the reasons that energy prices have soared over the past couple of weeks is that hurricane season officially began last Friday. If your name is Andrea, Barry, Chantal, Dean, Erin, Felix, Gabrielle, Humberto, Ingrid, Jerry, Karen, Lorenzo, Melissa, Noel, Olga, Pablo, Rebekah, Sebastien, Tanya, Van, or Wendy, you may be in for some kidding this year. Those are the names selected for North Atlantic hurricanes in 2007.
Gasco Energy (GSX) has gone from well under $2 in the middle of May to $2.73 at today’s close. The reason this happens, and the reason that I stay calm when the stock is down, is that natural gas prices follow crude oil prices, but with much more volatility. As the government’s Energy Information Administration said in a research report: “A significant stable relationship between the two price series is identified. Oil prices are found to influence the long-run development of natural gas prices, but are not influenced by them.”
In the short term, the correlation is not perfect. Natural gas was very cheap relative to oil in mid-2006. It’s now approaching a normal relationship, but it typically overshoots and gets expensive relative to oil, so now is not the time to exit. This happens because many utilities can substitute oil for gas and vice-versa, but it takes some time.
The warm winter of 2006 was a 1-in-100 years event, unless global warming is accelerating, and even in that case, the huge natural gas surplus that developed is now gone. U.S. natural gas production was 2% lower in the March quarter than in March 2006, and even though there are nearly twice as many gas wells being drilled, we are getting less natural gas out of the ground. The wells being drilled are much lower yield, or they are high-yield wells with short lives as high-tech production techniques suck the gas out at record rates. These wells deplete 40% to 50% of their gas reserves in 12 months or less. Just like crude oil, as supply diminishes and demand rises, we’re going to see higher prices, which is ultimately good news for a natural gas driller like Gasco.
Even though the stock is up about $1 from its lows, GSX remains a buy up to $4.50 for my $9 target.
Rentech (RTK) is the direct beneficiary of a U.S. Air Force decision to push development of a new jet fuel that is only 50% petroleum based. The plan was announced at the Paris Air Show this week. They want to certify their entire fleet for 50/50 fuel by 2010 — that’s soon! The Air Force burned 3.2 billion gallons of aviation fuel in fiscal 2005, or 52.5% of all the fossil fuel used by the government.
At the same time, at this month’s annual conference of the International Air Transport Association in Vancouver, commercial airline officials said that they have failed to persuade environmentalists and politicians in Europe that they were doing enough to clean up flying, so they are going to push for synthetic jet fuel. All this makes the return on investment for the coal companies look better and better, and the new energy bill wending its way through Congress now has lots of goodies for coal-to-liquids.
And who you gonna call? Not Ghostbusters. I think we are looking at an explosion in joint ventures for Rentech, as other peoples’ money funds one Coal-to-Liquids plant after another using their technology. RTK remains a Top Buy up to $5 for my $11 target.
Avian Flu MegaShift
BioCryst (BCRX) presented the results of two Phase I safety studies of intramuscular peramivir for treating seasonal flu. The data demonstrated a clinical advantage relative to approved flu treatments of the same class, Tamiflu and Relenza, with better activity and a longer therapeutic window.
The upcoming milestones for BioCryst include:
| Date | Product | Indication | Event |
| Q3:07 | BCX-4208 | Psoriasis | Start Phase II trial |
| Q3:07 | Oral Fodosine | CTCL* | FDA go-ahead for pivotal Phase IIb |
| Q3:07 | Oral Fodosine | CTCL | Start pivotal Phase IIb trial |
| Q3:07 | IM* peramivir | Seasonal flu | Interim peek at Phase II study |
| H2:07 | IV* peramivir | Avian flue | Start Phase II trial |
| Q4:07 | IM peramivir | Seasonal flu | Results from Phase II trial |
| Q4:07 | IM peramivir | Seasonal flu | Start Phase III trial |
| 2007 | BCX-4678 | Hepatitis C | IND filing to begin trials |
| 2007 | BCX-4678 | Hepatitis C | Start Phase I trial |
| 2008 | IV peramivir | Avian flue | Results from Phase II trial |
| * CTCL = Cutaneous T-Cell Lymphoma | |||
| *IM = intramuscular | |||
| *IV = intravenous | |||