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The disaster in the Gulf has killed the chance for a national energy policy: here are the winners and losers, if I’m right

posted on May 14, 2010 at 8:30 am
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The list of casualties from the explosion at Transocean’s (RIG) Deepwater Horizon just keeps getting longer.

There are the 11 rig workers who died in the fire. The reputation of BP (BP), the owner of the oil, Transocean, the owner and operator of the rig, and Halliburton (HAL), the company that at the time of the explosion was pouring the concrete that was to seal the well. The wetland ecologies of the Gulf coast. The fishermen and shrimpers who make a living from these waters. The towns and communities that depend on the Gulf for their economic life blood.

And somewhere in that list of casualties you should add national energy policy.

Certainly any national energy policy that’s built on cap and trade or a carbon tax or any other mechanism for fighting global climate change is now dead. And maybe even the kind of smaller, focused energy bill that Senate majority leader Harry Reid (Dem.-NV) started to talk up last weekend.

One of the strange consequences of the Deepwater Horizon disaster is that it has reduced the chances for any kind of comprehensive energy plan in the near future to between slim and none

Not because the United States doesn’t need a national energy policy. We do. Desperately. The disaster in the Gulf of Mexico just makes that clearer.

But because of the politics of energy in Washington.

The disaster has made opening up new areas of the U.S. continental shelf for oil drilling, as proposed by the Obama administration and its Republican opponents before the explosion, politically impossible. And without increased drilling as a bargaining chip to offer there’s no way to build the coalition necessary to pass an energy bill that focuses on fighting global climate change like the Kerry/Lieberman legislation that the Senators from Massachusetts and Connecticut introduced on May 11.The 987-page plan once included provisions for expanding offshore oil exploration and production, but those were stripped out of the version introduced on Wednesday and replaced by a provision that would give states the right to veto any drilling plan. That would have the effect of limiting drilling off the Atlantic and Pacific coasts.

Hard to see how Kerry and Lieberman can bring oil state Democrats and any Republicans at all on board with that language.

I can see a chance for a bill that creates something like a scaled-down version of a national energy policy but not the version that Reid highlighted over the weekend as his alternative to the Kerry/Lieberman plan. Reid seemed to indicate that he’d like to move forward on a reduced plan modeled on the legislation the Senate Energy and Natural Resources Committee approved last June with four Republican votes.

But I don’t see how even that bill flies in the post-Gulf disaster environment. The smaller plan in that bill would include a national mandate that utilities generate a percentage of their electricity from renewable sources, stepped up energy efficiency standards, incentives to build out the power supply grid, and subsidies and loans for energy production from such low-carbon sources as solar and wind.

And it also included provisions that would expand oil and gas drilling in the Gulf of Mexico. That was a critical feature in gaining the bill the votes it needed in committee. With those drilling provisions stripped out, as is likely in today’s post-Deepwater Horizon explosion environment, I think this bill too goes nowhere.

Smart politicians could cobble together a new coalition that used support for policies to encourage the use of natural gas as the new bargaining chip to replace the drilling bargaining chip.

And I think smart politicians could recast an energy bill to harness some of the post-Deepwater Horizon anger. An effort that appealed directly to our national interest in increasing domestic security by reducing dependence on foreign oil and on increasing U.S. competitiveness and employment could work.

Smart politicians are always in short supply, however, and I think the odds against this effort are pretty formidable. Not impossible. But unlikely. As long as politicians are still focused on using the emotions of the moment to bash some target.

Here’s how a handicap the likely winners and losers in the post-Deepwater Horizon disaster environment.

  1. Winner: nuclear power. The industry has $18.5 billion in loan guarantees from the federal government in place and another $36 billion guarantees are in the administration’s proposed 2011 budget so the industry really doesn’t need comprehensive energy legislation to move from planning to construction. A favorable regulatory environment is about all the additional support the industry needs to push ahead and that is pretty much guaranteed. The stocks to look for in this sector are those of companies building the reactors such as Shaw Group (SHAW), Fluor (FLR), and Flowserve (FLS).
  2. Winner: hybrid car makers and auto battery makers serving that market. The incentives here, as with nuclear, are already in place with scheduled increases in fuel efficiency standards. One of the easiest and most profitable ways to increase miles per gallon averages across a car maker’s fleet is to increase sales of hybrids. Companies to watch here are Johnson Controls (JCI) and A123 Systems (AONE). A123 shares have been hammered and then hammered some more recently. (For why the stock might be nearling a buy see my post http://jubakpicks.com/2010/05/13/update-watch-list-stock-a123-systems-aone/.)
  3. Winner: natural gas. At current low prices of less than $5 per million BTUs, natural gas doesn’t need subsidies to encourage utilities to switch from coal or oil to gas for generating power. If subsidies to encourage the use of natural gas in the transportation sector are part of any new energy plan that would be another plus. I’d look at low cost producers such as Ultra Petroleum (UPL) and pipeline companies such as Energy Transfer Partners (ETP) as picks in this sector.
  4. Winner: ethanol makers. If the U.S. government isn’t going to invest in creating the infrastructure necessary to increase use of natural gas in the transportation sector or to improve the national electricity grid so that electric cars become a key source of storage during nighttime periods of low demand (for how that would work see the Rocky Mountain Institute’s smart garage plan http://move.rmi.org/move-news/what-is-the-smart-garage.html ), then ethanol becomes an increasingly attractive alternative. Why?  Because it is domestic: it replaces oil; and the farm lobby is very powerful. My guess is the drawbacks of corn-based ethanol would make any extension or increase in support to the U.S. industry politically contentious and that approval would require horse-trading that would include provisions to increase access of Brazilian sugar-cane-based ethanol to the U.S. market and increased support for pilot projects to produce biofuels from non-food crops. I’d keep an eye on Cosan (CZZ), one of the biggest producers of ethanol in Brazil. (For more on Cosan see the section on Brazil in my post http://jubakpicks.com/2010/02/05/how-to-build-a-global-portfolio-what-countries-do-you-want-to-own/ )  
  5. Modest loser: land-based wind power. I think the costs of land-based wind power have come down enough so that with modest support from state mandates that utilities buy green power the sector will keep growing in the United States. However, the fastest growth isn’t coming from the United States but from overseas. It would certainly help if U.S. demand picked up enough to offset declines in the Spanish market, but I think global growth in countries such as China and India is robust enough to keep the sector humming. Of course, a lack of U.S. incentives will hurt domestic wind turbine players such as General Electric (GE) I’d look overseas in this sector to Vestas Wind Power (VWDRY.PK). The weak euro has made the company’s products significantly cheaper and with that advantage the company has signed new orders in China. (For more on other European stocks that benefit from the weak euro see my post http://jubakpicks.com/2010/05/11/looking-for-euro-stock-bargains-you-havent-missed-out-and-here-are-three-to-watch/ )
  6.  Big loser: ocean-based wind power. The costs of offshore wind power are significantly higher than that of land-based systems. Without federal subsidies I don’t think utility rate payers will be willing to see their electric bills increase enough to make off-shore projects competitive.
  7. Big loser: solar. The global solar industry is facing a drop in demand later this year when the German government cuts its subsidies for solar power. With prices already headed lower because of a surge of new producers entering the market, the sector could sure use a boost from a pickup in U.S. demand. A stable, long-term schedule of financial incentives for solar power from the federal government would do the trick. But in the absence of that kind of domestic demand incentive, I think U.S. and European solar cell producers will struggle as they lose share to Chinese and other Asian producers able—or at least willing—to sell at lower prices.

Quite frankly, I hope my cynicism about Washington politics is excessive. I think a failure to produce a national energy policy is a mistake that costs the United States jobs and reduces our national security. So I sure hope my handicapping of energy sectors is wrong.

But I fear that just as you can’t be too rich or too thin, you can’t be too cynical about Washington.

 Full disclosure: I own shares of A123 Systems, Cosan, Energy Transfer Partners, Flowserve, Johnson Controls, Transocean, and Ultra Petroleum.

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21 comments

  • EdMcGon on 14 May 2010

    Jim,
    I may not agree with you about everything, but that last line nails my political views perfectly!

    One of the other problems with alternative energy sources like wind and solar is they don’t produce as much energy for the cost as nuclear, oil, or coal.

    One thing I would add to your comments on ethanol: Sugar-based ethanol won’t happen in the U.S. (via domestic growth or trade) because the corn lobby won’t let it happen.

    If you look at the history of sugar-based ethanol, the U.S. developed the technology to make it, then gave it away to the Brazilians for practically nothing. Now, all their cars run on sugar-based ethanol, and Brazil is energy independent, while we struggle with our energy policies for our 4th decade.

  • funnytom99 on 14 May 2010

    As an engineer and investor, I was hopeful that with economies of scale that the ethanol industry would overcome the energy cost to manufacturing ethanol. Unfortunately, they have not.

    I really thought Ormat had a good idea with tapping the geothermal into the grid 24/7. Too bad they cooked their books. I whiffed badly on that one.

    Not to sound like too much of a T-Boone Pickens syncophant, but I think natural gas is our best alternative to oil. It is cheap, we have lots of it domestically, and it isn’t too difficult to retrofit cars for it.

    EdMcGon, what is your view on ETP or UPL?

  • orenv on 14 May 2010

    I think we need to wait and see how much of a “disaster” the oil spill actually turns out to be. Lessons were learned from the Exxon Valdez, lets hope they get applied and we don’t try to scald the entire Gulf seaboard.

  • carter318 on 14 May 2010

    The problem with ethanol production is that we developed a technology that only makes sense at certain latitudes. Corn based ethanol is a waste of time and money. Sugar cane is the way to go. We cant grow sugar cane at our latitudes for year round harvesting. The only other place that could possibly do it in the western hemisphere would be the large underdeveloped coastal plains of Central America. But this would entail cooperation between a half dozen countries. No chance of this happenning with the growing Chavez influence in that region.

  • Renaudm on 14 May 2010

    I am not quite sure why we even differentiate between domestic and foreign oil.
    The Debate should be all about decreasing our dependance on oil in general. Oil reserves are finite, non renewable and decreasing. Maybe not just quite yet, but within the next few years, it will become increasingly expaensive to find and extract oil as the known reserves are in extremely inhospitbale areas. either deep in the ocean or in the frozen Siberian tundra.
    We need to look for alternative renewable solutions that are not so taxing on the environment. Corn based ethanol is not it and nuclear is not either. Similar to the disaster in the Gulf of Mexico which “never should have happened”, Chernobyl and 3 Miles Island, should never have happened either, but something happened, fingers were pointed, but the damage was done.
    Wind and Solar produce energy but not enough to replace Oil.
    It will take courage, bi partisanship and smart decision in Washington to bring a real energy policy that actually works, and that is in very short supply these days, so for an investor, the only way to make decent return in short term plays as indicated in Jim’s post…

  • georic on 14 May 2010

    Jim, Vestas is a Danish company and the Danish crown is still the currency of that country, not the Euro. But, and I have not checked it, maybe the mills are in the Euro zone?

  • yx on 14 May 2010

    Jim:

    Is this bad for GLF, Noble and other offshore drillers too?

  • AndyM789 on 14 May 2010

    Renaudm: There is a new generation of nuclear reactors under development that should address the safety issues. Pebble-bed reactors, as they are called, are basically meltdown-proof because the reaction that produces the heat is inherently self-limiting. There is a temperature ceiling, enforced by the laws of physics, which the reaction cannot exceed. You still have the waste problem, though.

    The first one is scheduled to go online in a few years, and China has committed to building a ton of them over the next decade. These types of reactors could be a great stopgap while we get a truly renewable energy economy up and running.

  • viwi on 14 May 2010

    Jim,
    I am even more cynical about politics, when it has to do with the energy policy.
    Here is my thinking …
    (1) Oil … I agree with you: sooner or later cheap oil resources will be exhausted, but there are plenty of oil on the Earth. It is expensive, but it does not matter; there are always people available who are willing to pay for old technology higher price than for newer, less proven technology.
    (2) Coal/gas … There is plenty of it. Cars can utilize gas, and it is a pity that it this is not common in the US, where shale gas production has not even reached its peak. US is very slow in adapting this technology, and I attribute it solely to the policy makers.
    (3) Nuclear … Once again, it is all about politics. All the known incidents on nuclear power stations were due to the reactor design, which was aimed to produce, in addition to energy, fuel for atomic bombs. Take Japan, where are plenty of nuclear reactors shaken by earthquakes every single day. They are doing pretty good job. The major reason – different reactor design. Someone in Congress should do their homework and find out that the combined environmental effect of all the nuclear power stations is much less than coal, gas, or hydro power stations.
    (4) Wind … It has a limited capacity, but someone should look on the other positives of using wind energy. For example, have a large number of those turbines near Chicago, will make the city less windy.
    (5) Solar … It is still expensive. However, if google this topic hard enough, you will be surprised to find out that in the late 70-s, when oil prices were high, everyone was saying absolutely the same words, as everyone is saying now. I was once fooled by an article thinking that it is a “fresh” one. Actually, it was published exactly 30 years ago. What happened over those years? Nothing. Really, nothing – government decided that solar energy is not the highest priority and barely supported solar energy research. Once again – politics drives the economic troubles.
    (6) Ethanol … The idea is not a bad one. However, politics play an important role here. Ethanol is considered to be a agricultural product, meaning that it is taxed, if imported, making all these ideas of growing sugar canes in Central America 20% less attractive (or more, if you take into account actual net profit).

    This list is not complete, but my point is simple: all our energy troubles are due to political games in support of some selected groups of businesses.

    Knowing that the above problem exists and will not go away, I invest in gas and oil and speculate on solar energy stocks.

  • Run26.2 on 14 May 2010

    unfortunately, I share Jim’s pessimism on getting a national energy policy. As noted above, look at the range of solutions that Brazil has used to essentially become energy independent and on the verge of a net petroleum exporter (they use *gasp* deepwater drilling).

    georic… you are correct, Denmark is a part of the EU, but uses the krone, not the euro.

    Other thoughts:
    -natural gas: watch for federal regulations that change fracking, which could disrupt/change current horizontal drilling techniques

    -smart grid: a different way to play energy, play the conservation end. I’m watching Comverge (COMV), Enernoc (ENOC) and Itrion (ITRI). Plus other networking players are trying to get into this space.

  • mdplatt on 14 May 2010

    Does anyone have a feeling for how much RIG will be affected by the spill? Most of the focus seems to be on BP and/or the cementing carried out by HAL.

    Despite some obvious near term volatility while BP tries to shut off or draw away the flow of oil, does anyone believe that RIG (with the largest and most advanced drilling fleet out there) should trade at a P/E of 7?

  • dozier99 on 14 May 2010

    Anyone have any thoughts as to how Exelon (EXC) fits into the domestic picture in the future?

  • Upside on 14 May 2010

    The global leader in electric cars is… a Chinese car manufacturer, BYDDF. Buying on recent dips is like buying MSFT in the early days.

  • evernew on 14 May 2010

    Run, take a good look at Orion Energy(oesx).

  • USDAportfolio on 15 May 2010

    Dozier99,

    From what I can tell, Exelon has a solid portfolio of both generation and transmission capabilities and should be a reliable source of profits going forward. It’s on my watch list, and one of the 20-30% (which I mentioned in a previous post on this site) which I think is undervalued. I believe it can benefit along with the development of the Smart Grid. I do not own any shares, mainly because the “energy / utilties” component of my portfolio is already overweight. I assume that your views on EXC are positive, based upon the question?

  • USDAportfolio on 15 May 2010

    Jim,

    I’m not sure I fully agree with your conclusions. I think the disaster in the Gulf could provide the pressure for Republicans to accept language giving States a veto over offshore drilling proposals. And all-in-all, the probability of getting broader support for subsidizing renewable energy is higher now, not lower.

    I think it’s clear that inflation is poised to rise over the next few years — especially in energy. That being the case, the drillers and miners will benefit as the price of their product goes up. Any reduction in (real or perceived) supply due to reduced prospects for offshore drilling will exacerbate that trend. Add increasing energy consumption in the “hot” economies in Asia, and we have a situation for much higher energy prices. I agree with a previous post of yours explaining how oil could again rise above $100 / bbl. Provided no “exceptional profits” tax goes into effect, oil companies will benefit.

    As conventional sources of energy rise in price, the alternatives of solar and wind will look more and more favorable. Solar stocks were well correlated with oil prices over the last few years, and I expect that to continue.

    In summary, I think the energy sector as a whole is a good play going forward – however, in the short term, I remain cautious making any plays in companies with heavy exposure to offshore drilling. I do not see nuclear companies as the prime beneficiary of the Gulf disater. I have said before that I like FSLR – I think it’s a terrific buy below $115 and their acquisition of NextLight provides a great entry into the US market just when Europe’s market is looking less reliable. To make a play on ethanol and food, MON is also looking very attractive at this price. Full disclosure: I own shares of FSLR, MON, and PRNEX.

  • drmdrd on 16 May 2010

    I live in PA and right now we have a ton of NG exploration going on. It is tearing up our state forest land as our state legislature has done a poor job setting up regulations. I’m not sure I’m as confident about the amount of NG that is available to us as described by the countries. But then again I may be biased since I see the land that was once raped from coal mining, logging, being raped for its NG.

    http://txsharon.blogspot.com/2010/04/videos-cornell-professor-discusses.html

  • drmdrd on 16 May 2010

    *countries — I meant “NG companies”. Sorry about that.

  • EdMcGon on 17 May 2010

    funnytom,
    I like natural gas long term, but the industry has to show me they’re either catching on with demand a little bit, or at least cutting back on their excess supply.

    ETP could be well-positioned, although I wouldn’t buy them right now. Their debt load is too heavy for my tastes. (debt/equity of 1.18)

    UPL seems to be managed better, and is in a better position to shift from oil to natural gas. But they have similar debt issues to ETP. (debt/equity of 1.22)

  • phillip e on 17 May 2010

    The symbol for Shaw Group is SHAW not SG.

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