Natural Gas Companies: A Contrarian Bet on Higher Prices
The decline in natural gas stocks has been anything but natural lately.
With ample stores and cheap prices, natural gas-related equities have taken a beating and continue to be battered.
While it is always difficult to call a bottom, the tide may be turning for natural gas companies despite the latest data.
The price of natural gas fell again last week after the government reported an unexpectedly large increase in supply. To date, natural gas prices have slumped to levels not seen in 10 years.
Recent Energy Information Administration (EIA) reports reveal that the energy industry continues to deliver gas at a faster rate than Americans can consume it.
U.S. supplies grew by 42 billion cubic feet in the week ended March 30, pushing the country's total supply to 2.5 trillion cubic feet. According to Platts, a premier source for energy prices, industry analysts had expected supplies to grow between 33 billion to 37 billion cubic feet.
With natural gas stores bursting at the seams, some of the nation's largest producers have announced plans to scale back production.
Jen Snyder, head of North American gas for research firm Wood Mackenzie told the Washington Post, "There hasn't been enough demand to use all the supply being pushed into the market."
Where prices go from here depends a great deal on the weather.
Germany Set to Invest $260 Billion in a Renewable Revolution
The moment Germany announced its highly publicized decision to phase out nuclear energy in the wake of the Japanese triple disaster; observers began to ask one very important question.
Just what energy source would replace such a huge swath of power in Europe's dominant economy?
The short-term solution had to be natural gas.
But this would make Germany more dependent upon imported energy, especially from Russia.
In that sense, the nuclear phase-out made the Nord Stream pipeline – from Russia, under the Baltic Sea, to northern Germany – absolutely essential.
Today, the first line of the twin pipeline is already in operation. The second should be on line at the end of next year (if not sooner).
Then there is the other Russian project – South Stream. This one intends to move Russian and Central Asian gas into Southern and Central Europe.
Much of that will also reach Germany.
In addition, several pipeline projects are vying for the excess production from the second phase of the Azerbaijani Shah Deniz offshore development in the Caspian Sea.
Included among these is Nabucco, a venture to bypass Russia and transport gas into the Baumgarten hub in Austria for ongoing distribution.
Nabucco has long been the European Union favorite, but it has been unable to attract sufficient supplies. Three other pipeline proposals also are attempting to secure the Caspian gas for transit to Europe.
But there is a problem for Germany in all of this.
It does not want to form an increasing dependence upon imported gas to power its economy.
And this sentiment is driving one of the biggest alternative energy revolutions in recent memory.
The German Push Toward Wind and Solar Power
The 17 currently operating nuclear reactors in the country provide about 20% of the national electricity needs. Any replacement of those plants (where capital expenses are already sunk) will add significantly to the end costs of energy.
That means a political decision following the Fukushima Daiichi disaster one year ago ends up costing the average German citizen even more to secure what is already among the most expensive electricity in the world.
Germany does have shale gas.
But the furor over nuclear power is paralleled with a similar environmental concern regarding the dangers of fracking, a process of pumping water and chemicals under high-pressure to break open the rock and free the gas.
There are now four U.S. examples of seismic anomalies resulting from the combination of fracking and deep horizontal drilling.
And they have not instilled much confidence for the markets.
Instead, what the Germans are deciding to do is already being called the biggest restructuring of the national energy landscape since the end of World War II.
The government will initiate a campaign valued at more than $260 billion to harness wind and solar power.
The price tag is staggering. It is already pegged at more than 8% of the nation's entire gross domestic product (GDP). And it could move even higher.
This will involve huge wind farm areas in the Baltic and massive new high-power transit lines nationwide. The goal is to have at least 35% of the nation's power needs generated from renewable sources by 2020.
However, the developments of this massive policy shift are even more exciting.
2012 Natural Gas Price Forecast: Why to Avoid the "Widow Maker"
I've been watching natural gas for years now and find myself shaking my head lately.
The cost to buy the "clean energy" is collapsing as crude oil, a product that needs refining, stays above $100 per barrel.
In fact, this chart for natural gas is what I call a Widow Maker.
Take a look…
As you can see, it shows the price of the March 2012 NG contract over the past two years – and it's not pretty.
Why Natural Gas Prices Will Continue to Drop
The last time I wrote about natural gas for Buy, Sell or Hold was November 2010.
At the time, natural gas was about to start its most seasonally bullish period of the year. I recommended a multi-month trade with an exit by the end of the March 2011 contract.
However, this year is completely different. Natural gas has collapsed in price instead of climbing during the peak winter cold months.
While it's been a warmer than normal winter across the United States, especially in the Snow Belt, this price drop has more to do with U.S. production rising on a year-over-year basis than it does the weather.
Five Stocks That Will Thrive After the Solar Energy Industry Shakeout
With as much as two-thirds of the struggling solar energy industry expected to either fail or be acquired over the next three years, the table will be set for the survivors to capitalize on a market with enormous growth potential.
Solar companies have struggled to keep their heads above water as the price for solar panels has fallen as much as 40%. The average operating margin in the solar energy industry plummeted to 0.1% in the third quarter from 13.7% a year earlier.
The stocks have been pummeled, as a result. The Claymore/MAC Global Solar Index (NYSEARCA: TAN) exchange-traded fund (ETF) is down 58% this year and the Market Vectors Solar Energy (NYSEARCA: KWT) ETF is down more than 60%. Several individual solar stocks have lost more than 70%.
"It's just a really difficult time," Morningstar Inc. (NYSE: MORN) alternative energy analyst Stephen Simko told The Globe and Mail. "The profitability of the industry has collapsed… Unless more bankruptcies happen and more production is shut down, this is a problem that is going to persist."
Few Will Be Left Standing
The tremendous pressure on margins has most people both outside and inside the solar energy industry predicting massive consolidation.
"This is the decade of mergers and acquisitions," Jifan Gao, chief executive officer of Changzhou, China-based Trina Solar Limited (NYSE ADR: TSL), told Bloomberg News. "From now until 2015 is the first phase, when about two-thirds of the players will be shaken out."
The Macquarie Group Limited (PINK ADR: MQBKY) agrees. In a recent report the Australia-based research firm said consolidation would claim 66% of the world's solar companies. Macquarie predicts that only four out of 35 solar companies in China will survive the next three years.
But in the aftermath of the carnage, the surviving solar companies will emerge stronger and in prime position to make the most of an exploding market.
In fact, the solar market has grown in 2011, but because capacity has exceeded demand, prices have continued to fall.
A Growing Market
According to the Solar Energy Industries Association, solar is the fastest-growing energy sector in the United States. The group says solar panel installations in June were up 69% over the previous year.
That pace of growth is expected to continue for an industry that supplies just 1% of the electricity in the United States. The U.S. Energy Information Agency projects installed solar energy capacity to increase 20 to 40 times 2010 levels over the next decade.
The primary reason for such optimism is the same reason the industry is suffering – falling prices that make solar competitive with traditional sources of energy like coal, oil, and gas.
First Solar Inc. (Nasdaq: FSLR), for example, says the solar panels it makes now can produce electricity for 14 cents to 16 cents per kilowatt – still significantly above the average cost of electricity in the United States of 11.6 cents per kilowatt.
But the solar energy industry has steadily improved panel efficiency, and expects the advances to continue. First Solar says that by 2014 its panels will produce electricity for 10 cents to 12 cents per kilowatt.
"At that point, there's a tremendous amount of interest," First Solar spokesman Alan Bernheimer told USA Today.
But which companies will survive to reap the benefits of the golden days of solar?
Renewable Energy and Government Subsidies Go Hand in Hand (for Now)
The Obama Administration is coming under fire for providing subsidies to renewable energy sources, such as solar, wind, and geothermal.
And not for the first time.
The latest tiff results from a $528 million loan to Solyndra LLC. Despite receiving federal funds, the private, California-based solar panel maker went belly up on Sept. 1, filed Chapter 11 bankruptcy protection, and laid off every one of its more than 1,100 workers.
U.S. Secretary of Energy Steven Chu has gotten more political flak from the loan program in recent months. Political opponents claim it's an example of government waste in the making.
Since 2009, Washington has doled out some $16 billion in 28 loans. The Energy Department says this loan money has resulted in 60,000 jobs.
However, with $6 billion being committed in only the last few weeks (to beat a Sept. 30 budgetary deadline), disasters like Solyndra are something best avoided when Chu speaks on renewables.
Just as predictably, they are likely to figure prominently in the rhetoric coming from the other side.
But the current debate that the Solyndra failure has prompted brings a broad question: Can renewable energy sources make it in the market without a significant push from the government?
A Warning for Poland's Shale Gas Developers
I am leaving for Krakow, Poland, early this morning.
During this trip, I will present what we have learned thus far in North American shale gas development before a meeting organized by the Polish government and chaired by President Bronisław Komorowski.
What will take place in that room, however, is more than a simple exchange of data.
The Shale Gas Revolution Has Hit Eastern Europe
It began only a few years ago, in places like Texas, Arkansas, British Columbia, Alberta, and Pennsylvania… but the shale gas revolution is now sweeping the world.
To date, 142 basins and more than 680 shale plays have been discovered worldwide. In them are sitting a mind-boggling 6.6 quadrillion cubic feet of natural gas. Even if only 10% of that can be lifted, we are still looking at huge new reserves.
Europe has its fair share of these basins, with five major ones located in Poland alone. And that is the reason for the meetings this week.
The government in Warsaw is about to open up these shale plays to major investment.
Before they do so, however, the authorities must set regulations for drilling, determine what environmental impact will take place, weigh the potential economic benefits and problems, and discuss how this newfound energy wealth is going to change lives.
Turns out that's pretty much my job in Krakow; I will be advising on the policy challenges in each of these areas.
Still, they are not likely to expect my first comment…
Suntech Power Holdings (NYSE ADR: STP) Outshines Other Solar Cell Makers
Suntech Power Holdings Co. Ltd (NYSE: ADR STP) is the one company that's best-equipped to withstand the biggest challenge facing the solar cell industry – falling prices and squeezed margins.
Make no mistake: The solar sector has suffered of late.
Several stocks have shed as much as 20%, as a result of margin concerns and a drop-off in generous European government subsidies.
And Suntech has been no exception. It's fallen nearly 25% since April 1.
But China-based Suntech Power has advantages its rivals do not – and that makes it more of a bargain than a flop.
Surprisingly, that advantage is not low labor costs, which accounts for less than 4% of the cost of building solar cells, but rather technical advances in manufacturing.
For years Suntech has scouted out research, such as a two-decade-old project at Australia's University of New South Wales, which it has adapted to enhance its manufacturing process. Those efforts have increased efficiency and beefed up performance of the solar cells themselves.
"They were trying to commercialize [that technology] the entire time," Stuart Wenham, Suntech's Chief Technology Officer, told Technology Review. "It took Suntech to turn those laboratory processes into production processes."
One such process cut solar panel costs by 10% to 20%; another increased manufacturing efficiency by 10%.
The End of the Cap-and-Trade Masquerade Opens New Doors For Investors
When U.S. Sen. Harry Reid, D-NV, last week disclosed that the so-called "cap-and-trade' energy proposal that passed the U.S. House of Representatives last year would not be taken up by the Senate, climate-bill proponents were deeply dismayed.
Indeed, Financial Times columnist Clive Crook even said that the United States "has let the world down on climate."
But here's the irony. With the Senate's refusal, we may just have moved a step closer to a climate change policy that will actually work. And that's good news for U.S. taxpayers. And it opens new doors for U.S. investors.
How to Profit From the Geothermal Energy Push
Geothermal energy isn't a new concept in the United States.
It's actually been around for some time, with numerous geothermal power plants in California, Nevada and a few other western states. There are new plants on the drawing board, too. Unfortunately, the recession has stifled the construction progress on many of them.
But all that's about to change. Thanks to a few key technological developments – and a big cash infusion from the government – the stars are aligning to produce the perfect storm for this super-green energy source.
Copenhagen Climate Summit Could Reshape the Investment Landscape
Leaders and policymakers from nearly 200 nations yesterday (Monday) commenced an 11-day summit in which they will attempt to hammer out some details of a carbon treaty that could have significant impact on businesses and investment.
The Copenhagen summit aims to put finer points on what, up to this point, have been dull notions about how to respond to global climate change. World leaders from both wealthy and developing countries will attempt to set new carbon emissions goals, outline a timetable for achieving those goals, and detail on how they will be financed.
Some analysts are skeptical that such an immense undertaking will be met with success. Emerging and developed nations have clashed in the past, as poorer nations contend that climate change is a problem wrought by industrialized countries. Industrialized nations, they argue, should therefore be held to higher standards and offer financing to emerging markets that are ill equipped to deal with reform.