Clean Energy Stocks Shopping List: Landfill Gas and Geothermal
Stocks seem expensive now, but that may not last. Here are two
Landfill Gas stocks and three Geothermal
stocks I'm hoping to buy if the market falters.
Tom Konrad, Ph.D., CFA
This article continues my Clean
Energy Stocks Shopping List series. So far I've brought you:
Five
clean transport stocks,
I looked at why it makes
sense to wait for better prices,
Five
Energy Efficiency stocks (always my favorite sector), and
Five
Electric Transmission Stocks.
This article takes a look at two of
the most economical clean electricity generation technologies, landfill
gas and geothermal.
Kilowatts from Trash
As I discussed in my recent article on Advanced
Biofuels, I expect that advanced biofuels are likely to have to compete with
electricity generation for feedstock, and electricity generation is likely to
take a large part of the pie. More importantly, the most likely companies
to gain are the ones that control the feedstock. I like waste management
companies because they already have contracts and experience in dealing with
local governments. As those governments adopt broader recycling measures,
waste-to-energy, and even mandatory
composting, waste management companies that have the skills to process waste
effectively will be able to provide these additional services. This should
increase their revenues and profits from the same amount of trash, and may lead
to new opportunities to sell byproducts such as recycled materials and
electricity.
#1 Waste Management Inc. (WMI). Waste
Management not only collects trash, but also does recycling and waste-to-energy
services. Over the last few years, they have been aggressively expanding
their methane gas recovery facilities at existing landfills, and often works
under contract with governmental entities. To me, this portfolio of skills
seems ideal for exploiting future opportunities to find value in the stuff that
we throw away.
WMI has a rock solid balance sheet, with almost $1 billion in cash, strong
cash flow, and low debt-to-equity and current ratios. A modest forward P/E
of 13, and a dividend yield of over 4% makes this company attractive to cautious
investors, even at current prices. This is fortunate, since the low Beta
means that the stock is unlikely to decline much in response to a general market
decline.
#2 Veolia
Environnement (VE) Also provides world-wide waste management services,
but is a much broader company with an expertise in government contracting.
In addition to solid waste, they offer a large range of environmental management
services, from water and wastewater treatment (there are also opportunities to
generate electricity from methane produced at wastewater treatment plants.)
They're also involved in several of my other favorite sectors: energy efficiency
through their energy management services, and clean transportation through their
transit and rail services.
The company is much more highly leveraged than Waste Management, however, and
had a very thin profit margin in 2008. This makes the company much more
riskier than Waste Management, with a Beta of 1.8 compared to Waste Management's
0.5. However, a market downturn may provide the opportunity to buy this
company at a dramatically reduced valuation.
Geothermal Stocks
Hot rocks are a hot industry these days, and geothermal electricity has a lot
going for it. First, electric utilities are very comfortable with it,
since geothermal plants are baseload and are very reliable, and costing
only about 6 to 11 cents per kWh. Geothermal
also has strong support on Capitol Hill, gaining explicit mention and ($350
million) in the Recovery Act.
#3 Ormat (ORA),
a vertically integrated geothermal company works with almost all the players
in the industry. Many of the exploration companies, such as US
GeoThermal (HTM), contract with Ormat to build their power plants.
They also do their own exploration, construction, and operation of geothermal
plants world wide.
Although I consider the company a core geothermal holding, I recently sold
much of my position because the recent rally carried the company to very high
valuations, with a forward P/E and dividend yield of 25 and 0.4%. Given
that the stock price has almost doubled since early March, I expect to be able
to get back in at much better prices.
#4 Raser
Technologies (RZ) is a sharp contrast to Ormat, being the industry
upstart with a disruptive business model. Raser is leveraging cheap,
off-the-shelf technology from United
Technologies Corp. (UTX) in order to greatly decrease exploration costs and
time. This modularity means that Raser can start building a power plant
before they have fully explored a geothermal resource. If they later find
that the resource can support a larger plant, they can simply add units.
Their first plant in Thermo Utah was completed in less than a year, on a known
low temperature resource that had been previously been considered too cool to
generate power, meaning that exploration was not necessary.
The company recently completed a $25.5
million offering at a 22.5% discount to the stock price at the time.
The stock promptly sold off more than 30%. With the company rapidly burning
through cash, the raise was necessary in order to continue their rapid expansion
plans. I would not have touched the company before the raise (although I
listed it as one of Ten
Clean Energy Gambles for 2009. With Raser down almost 30% since then,
and some fundraising out of the way for the short term, the odds of the gamble
are looking a lot better.
#5 Nevada
Geothermal Power (NGPLF.PK) is a more conventional exploration and
development company with a few high quality projects. This company now
expects their first producing project at Blue Mountain to be fully
operational in October 2009. The shift from an exploration company to
a power producer should bring a whole new class of investors to the stock,
although the recent doubling of the stock price has quite possibly discounted
most of these gains. But with thinly traded stocks such as NGP, any change
in investor sentiment could easily drop the price significantly and provide new
buying opportunities in the meantime.
DISCLOSURE: Tom Konrad and/or his clients own WMI, VE, ORA,
HTM, RZ, UTX, and NGLPF.
DISCLAIMER: The information and trades provided here and in the comments are for
informational purposes only and are not a solicitation to buy or sell any of
these securities. Investing involves substantial risk and you should evaluate
your own risk levels before you make any investment. Past results are not an
indication of future performance. Please take the time to read the full
disclaimer here.
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