Wind-based electricity is still about twice the price of coal- and gas-generated electricity. The thing that’s keeping windmills in the ring is public subsidies like tax credits, as well as large-scale public policy support, like renewable portfolio standards, that requires utility companies to generate certain percentages of ‘green,’ carbon-free power.

While we’re at it, windmill systems are extremely capital-intensive. They require lots of upfront investment in land and leases, roads, grid access, concrete foundations, steel towers and complex turbines and blades. Then you need about three windmills, in different locales, just to assure you have 24-hour power generation — due to the fact that the wind does not always blow when and where you need it.

With the U.S. credit system still broken — and to all appearances, the economy going back into the ‘double dip’ of the Great Recession — things probably aren’t going to get much better for windmills in the next year. Maybe someday. Not now.

Source: Energy Investors Beware

We don’t have to like the changes underway, but we do have to respond to them intelligently if we hope to preserve and increase our wealth. The time has come for us “free market” aficionados to dry our tears and try to figure out what to do next.

The federal government’s attempts to reshape the U.S. economy will provide numerous profit opportunities. Take, for instance, the inevitable move toward taxing carbon emissions. Attaching a price to carbon dioxide would, obviously, increase utility bills (and the price of anything made with electricity). As a result, consumers of energy would try to avoid this taxation by utilizing cleaner sources of energy.

Right now, many natural gas-fired power plants are brought online only at times of peak demand, while coal is considered a “base load” fuel since it’s cheaper. But a carbon tax would raise the price of coal (and the extra carbon it emits) closer to the price of natural gas. So it’s seems likely that carbon taxes or any other “climate change” legislation that comes from the Obama Administration will favor natural gas-fired electricity at the expense of coal.

Assuming the political popularity of natural gas will keep growing, and that solar and wind power production cannot increase fast enough to be meaningful (even with heavy subsidies), it makes sense that natural gas-focused exploration and production (E&P) companies and their critical suppliers like National-Oilwell Varco (NYSE: NOV) will enjoy years of attractive growth opportunities. NOV has an attractive business selling brand-new, highly efficient rigs built for shale gas drilling.

At the moment, a glut of natural gas has produced a drop in number of drilling rigs operating in the U.S. This drop was already discounted by the crash in the oil service stocks last fall. But the faster the rig count falls, the faster the gas glut will dissipate as 2009 wears on. If demand for natural gas rebounds later in 2009, while supply is falling, then prices could move much higher in a short period of time. I’m going to keep monitoring the supply situation closely because I think it will yield several good trading opportunities this year. And the best way to get a handle on supply is to follow where and how the smartest companies are investing.

I recently tuned in to several Webcast presentations made at the BMO Capital Markets North American Unconventional Gas Conference. The larger presenters included Talisman Energy, Comstock Resources, Southwestern Energy, Ultra Petroleum, and Range Resources — several of the visionary early movers into shale gas drilling.

These companies employ cutting-edge technology in the natural gas industry. As a group, they delivered much of the production growth the U.S. has enjoyed in recent years. We can’t do without this shale growth. Keep in mind that virtually all new electric power plants brought online in recent years have been gas-fired plants.

Most of the premier shale gas plays (Barnett, Marcellus, Fayetteville, Haynesville, etc.) can be booked into reserves and brought online at cash costs between $2-4 per million cubic feet of gas. With natural gas prices currently at $5.50, the economics of adding to shale gas reserves and production makes sense. Even if they don’t immediately hook up newly drilled wells to gathering pipelines, most of these exploration-and-production companies will still want to drill at a fairly rapid clip to book new proved reserves in 2009.

The E&P industry, like most others, contains the “haves” and “have-nots.” The haves tend to be public companies with premium valuations that reflect their huge inventories of low-cost drilling opportunities. The have-nots tend to be private highly leveraged companies that hit the accelerator on any resource that looked economic in the high-price environment. Many of them are releasing low-end rigs and will not survive this downturn.

Ultra Petroleum is certainly at the top of the “haves” list. It controls tons of acreage in the obscenely profitable Jonah and Pinedale fields in Wyoming. Because its acreage is so cheap to develop, it can keep expending production very quickly, and incremental returns on invested capital are enormous.

The same goes for Range Resources. Range is a first mover and considered an expert in developing the Marcellus Shale. It looks to have locked up most of the highest-quality acreage in the Marcellus. The Marcellus is definitely promising, but it has different characteristics across its wide geography. Range has the most profitable gas wells because it has the most experience, expertise, and proprietary seismic data. At the BMO conference, Range estimated that its Marcellus wells have the potential to earn 20% internal rates of return at $4 natural gas.

The good news if you’re exposed to E&P or service stocks exposed to shale gas: The stocks have already crashed in anticipation of an ugly environment for natural gas pricing, production, and drilling in 2009 and 2010. If conditions stabilize, rather than continue collapsing, many of the stocks exposed to growth in shale gas drilling — including NOV — should regain plenty of lost ground.

The big concern with NOV recently was J.P. Morgan’s downgrade. I read J.P. Morgan’s report and agree with many of its points. But I disagree with its method of getting to a $31 price target for NOV (I think $31 is much too conservative). It gets to $31 through a discounted cash flow model in which it assumes 2009-2011 returns on invested capital will average 8%. This is down dramatically from the 2005-2008 average of 16% and equal to the 2002-2004 average of 8%. I have two issues with this:

1) Hardly any company was investing in rig equipment during 2002-2004. The upturn in day rates didn’t really gain traction until 2004. On the next up cycle, most of the world’s drilling fleet will be approaching 30 years of age. So many of the oldest rigs will be scrapped and there could be a shortage of newer, more productive rigs that NOV helps create.

2) J.P. Morgan gives no consideration to NOV’s greatly strengthened negotiating position relative to its customers, since it scooped up several competitors. It is a one-stop shop for equipment and consumables for every E&P and drilling company worldwide. It can afford to take advantage of this down cycle with more cheap acquisitions. Such moves won’t dilute shareholder value — thanks to its strong balance sheet and cash flow.

3) J.P. Morgan gives no credit to NOV for its excellent integration of Grant Prideco — a company with very attractive growth prospects (considering that its product lines are levered to the strongest trends in oil and gas production, including stronger drill bits and better drill pipe).

So J.P. Morgan reflects the bear case on NOV, yet it still gets to a $31 price target.

J.P. Morgan’s target implies that NOV should trade at 3 times its estimated 2009 EBITDA, in line with the offshore drillers. In my view, NOV deserves to trade at more than twice the EBITDA multiple of the drillers, since it’s a far less capital-intensive business model. NOV will not be generating losses during this downturn, nor will it be forced to spend a lot on maintenance capital expenditures (as drillers must, depending on the age and shape of their fleet).

I expect the market to come around to this view when NOV reports earnings in early February. Sure, the segments of NOV’s business that are the most sensitive to the rig count will slow in 2009, but the stock market excessively discounted this slowdown when it hammered the NOV share price from its crash from $92 last July to $18 in November.

At the current quote of $25.62, NOV is a very cheap stock that could easily rebound to the mid-$30s in the coming months. I think the trend for NOV will be up over the next month or two as the market anticipates that 2009 and 2010 earnings will not be as bad as previously expected.

Source: Investing for Comrades, 101

As the Gulf population soars, demand for electricity has reached crisis point – so much so, they’re being forced to divert valuable oil meant for sale to the West, to domestic use… and it’s hitting their profits.

Nuclear power is the long-term objective… but until then coal will bridge the gap.

And one little-known company is perfectly placed to benefit from this imminent wave of investment…

A power crunch in the Gulf States has been brewing for years – and it’s reaching crisis point.

As their economies rapidly develop and populations soar, demand for power is rising at a double-digit annual rate.

This demand means profitable oil and gas meant for export has to be burnt to generate domestic electricity – instead of being sold on the open market for record prices.

To maximise the profits from their energy resources, Gulf States will go nuclear. Talks have been held with the US and France and deals have been signed.

But here’s the thing…

It takes time to build and develop a nuclear power station, and something needs to fill the gap until then… and, according to today’s Times, it looks like it is going to be coal.

‘King Coal’ to replace oil – a great medium-term profit play

According to the newspaper, oil-rich Gulf States are planning to start importing coal.

Oman Power and Water Procurement Company indicated in December that a planned 700-megawatt power and water desalination plant may need to be fuelled by coal instead of natural gas.

Last summer Abu Dhabi’s oil output fell by 600,000 barrels per day as natural gas was diverted from injection into oil wells to power stations to meet peak demand for electricity.

I’ve been bullish about the price of coal for some time. Despite its reputation as a dirty fuel, there is simply no alternative.

Overnight, two of Canada’s major coal producers announced a large jump in metallurgical coal prices for 2008.

Fording Canadian coal trust settled contracts at $275/tonne for all coal projects, compared with $93/tonne in 2007. Western Canadian Coal negotiated a majority of is 2008 coal year contracts for hard coking coal at an average above $300/tonne, an increase of 365% over 2007.

There has been supply disruption in South Africa because of the electricity crisis, in China because of heavy snow and now the earthquake, with mines in Australia flooded by heavy rain. Indonesia, the world’s biggest coal exporter, says most of its output for 2008 is already sold!

The outlook is pretty clear to me: Demand is higher than ever, supply is squeezed to the brink.

And I believe I’ve found the perfect stock to profit from the return of ‘King Coal’…

Up 17% since October ‘07 and there’s a long, long way to go yet!

I first recommended my readers get into the coal story back in October 2007… Since then it’s risen 17% and I reckon it has much further to go.

Why? Let me explain.

Besides global demand for the “dirty” fuel at record levels, I expect this unique coal profit play to do very well regardless.

You see, unlike its rivals, the company currently generates revenue from two sources – BHP Billiton’s Crinum underground coking coal mine and Rio Tinto’s Kestrel open cut operation, both in Queensland, Australia.

Their objective is to expand its strategic mining and royalty interests through investment in mineral exploration and mining projects. As an active shareholder, it aims to develop an involved relationship with the companies in which it invests and provides strategic and corporate finance advice.

Management leverages its contacts in the mining industry to find suitable investment opportunities, and liaises with an advisory panel to assess the technical aspects of potential future projects.

Cashflow from the existing royalty streams is either re-invested in new mining interests, or paid out to shareholders.

Great for the share price… and even better for dividends too!

It really is a rare gem in a sector that’s had some troubles of late.

Setbacks due to liquidity problems in the overall market continue to make mining finance difficult to raise from conventional lenders.

As a result, this company – with its strong balance sheet and experienced management team – is well positioned to provide finance for projects that can secure new royalty flows and develop its mining interests.

With coal looking set to fill the gap until the new nuclear revolution happens, there’s plenty more royalties to be had.

Management has proven that it knows what it is doing and tightness in credit markets means the company has lots of investment opportunities from which to choose.

Take a three month trial run of Smart Commodities UK and all details of this share will be yours in an instant.

Regards

Garry White
Editor
Smart Commodities UK

Source: Coal Demand Booms, Here’s One Investment to Buy Now