sustainable energy
On October 31, 2008 Verasun (VSE) filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The filing was precipitated by the Company’s disastrous hedging transactions previously discussed here.
Camino does not include companies under bankruptcy protection in its indices and has adjusted the equal weight BIOFUEL index accordingly. Only nine biofuel companies remain in the index.
I don’t know whether we are close to the bottom but October has reduced the market value of the sustainable energy sector by about one-third.
This is somewhat worse than broader markets and sustainable energy has lost ground against the value of Exxon Mobil (XOM). To gage the scale of the sustainable energy business I frequently stack up the value of the companies in Camino’s database against Exxon Mobil. As recently as September 24th at the Clean Energy Showcase in Sacramento I was able to report the 363 sustainable energy companies I track represented 67% of the value of Exxon Mobil. Today it’s down to 50%.
For investors in this sector who have suffered significant losses this year, the real question is is there hope for better-than-market returns in the coming months and years? Or should you go back to cash or to indexing exclusively? I think the answer is maybe.
In Solar there are competing forces which can send the industry on two different tragectories. US presidential candidates are saying they prioritize alternative energy very highly. But they, and politicians around the world, are going to face serious financial pressures driven by market forces. Will they maintain subsidy policies for solar in the face of large budget deficits and potentially continued sub $100 oil? Without the subsidies investors may be faced with a sector growing much slower then in the last few years.
Renewable Electricity doesn’t rely to as great an extent on subsidies. But it does rely heavily on continued access to monopoly electric markets, access driven by global warming and security concerns. I think the good news for investors is governments can continue strong support for Renewable Electricity without having to deal with significant budget problems.
LED and Lighting is today driven almost entirely by market forces. While the sector needs continued cost reductions to increase its market share, silicon technology has proven it can follow a cost reduction path as volumes increase. With technological advances I think there is the possibility of better than market returns here, particularly with the huge declines the sector has already recorded this year. Since we formed the LED and Lighting index on 4/1 it’s down 59.8%.
Biofuels will continue to present challenges to investors. The promise, of course, is Biofuels is one of the strategies available to reduce oil consumption. But the sector is resource contrained, needs significant technology advances, has its margins pressured by declines in oil prices, and has had a number of problems with hedging strategies (VSE and BIOF).
Fuel Cells are still searching for the niches where they can economically complete and start to produce profits. Investing in public companies that are still in the development stage presents a high level of challenge.
Two previous oil price shocks spawned alternative energy companies. Subsequent declines in oil prices pruned the field but did leave behind a viable independent electric producing sector. This sector has continued to grow, is now armed with dramaticly better wind technology, and doesn’t need to impact national budget deficits. I expect Renewable Electricity companies to survive this correction and continue to expand their share of the electric generation market. This should, over time, produce better than market returns.
Mark doe not have a position in any companies mentioned in this article.
Camino’s indices ended the week mixed amid highly volitile trading.
In Biofuels, we again saw the potential for huge losses driven by poor risk management practices applied to hedging strategies. Read more here. Veresun (VSE) dragged the Biofuels strategy down for the week with a 67 % decline. This is after a a 50% bounce the stock received following it’s announcement it was reviewing “strategic alternatives” in the wake of its hedging loss.
On the up side LED-Lighting’s Cree (CREE) capped its strong week with an upgrade. Oppenheimer’s analyst apparently thinks light-emitting diodes are being adopted as a mainstream lighting product. This is a continuing demonstation of the influence of analysts.
I like LEDs. They last a long time (5x a CFL), they have a cool form factor, they don’t use mercury, they are rugged, they are dimmable, and they produce very nice light. Unfortunately, commercial LED products are no more efficient then CFLs and currently cost 20 times as much. Their long life doesn’t yet offset this high cost. Given time I expect them to penetrate more lighting applications but we are not there just yet for mainstream use. I’ll get excited when their cost start to fall significantly and approach no more the 5x the cost of a CFL.
Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks.
Not all the declines in sustainable stocks are macro-driven. For the second time in the last month hedging strategies resulted in stunning losses for biofuels companies. Predictably the loss triggers a precipitous decline in the company’s stock price. On August 18th we reported on BioFuel Energy’s (BIOF) problems with hedging caused a 64% decline in the company’s price.
This time, Verasun (VSE) struck. In an SEC filing related to a stock issuance, the company described its difficulty purchasing corn in a volatile market and the resulting quarterly loss of USD 63 – 103 million. In the face of this week’s market turmoil, Verasun lost 73% of its value or roughly one-half billion USD of shareholder value.
It’s time biofuels companies become proficient in managing the very basic price risk in their business. At this point it won’t be a shock to see another huge loss. Management needs to build investor confidence by demonstrating through convincing communications and risk management policies that they are competent in this important area. Other industries have had problems with risk management and in some cases, such as the electric sector, have improved their performance.
Camino has reconstituted and rebalanced its PurePlay indices effective March 29, 2008.
Solar: Two companies, centrotherm (CTN.DE) and Day4 Energy (DFE.TO) were added. DayStar (DSTI) was removed due to its decreased market cap.
Renewable Electricity: Five companies, Ibedrola Renovalbles (IBR.MC), Goldwind (002202.SZ), Hanwei (HE.TO), Novera (NVE.L), and EarthFirst (EF.TO) were added. Repower (RPW.DE) was removed due to its control by Suzlon.
Biofuels: US BioEnergy (USBE) was removed due to its acquisition by VeraSun (VSE).
Fuel Cells: No changes were made to the constituents.