Money and Investing Thoughts

I have a strong interest in the renewable energy sector and believe this is a strong growth area for the next 20-40 years as renewables increase their percentage of world wide energy consumption. Green Hunter Energy (GRH: 1.33 +0.1165 +9.60%) flew across my radar a few months ago and I added it to this site’s Watch List. A recent news item caused me to take a closer look at the company and what I found is quite appealing.

First a disclaimer: I usually look for stocks with strong earnings that are under-appreciated by the market. Green Hunter does not meet this criteria. This is a start-up company burning cash and may be some time away from generating profits. Also, I can find very little information about the company besides what is offered on the Green Hunter Energy’s website. I consider this a very, very speculative stock.

That said, let me outline the items about the company that draw my interest. Green Hunter Energy was started by an experienced oil executive, CEO Gary Evans, who made excellent profits for himself and stock holders building up and selling a conventional energy exploration company. He has entered the renewable energy sector by investing in several different forms of renewable energy with a goal to buy cheap and generate profits quickly. Currently GRH is pursuing opportunities in biofuels, biomass electricity generation and wind energy. At this point, the company has acquired several facilities or contracts that point towards significant future profitability. Here is an outline of these opportunities:

Biodiesel Processing: Green Hunter Energy has acquired a refinery on the Houston ship channel with the capability to produce 100 million gallons of biodiesel per year. The refinery will be able to produce biodiesel from almost any feedstock. The facility has the capability to process its own methane, required in the biodiesel refining process and will also produce high grade glycerin for an additional income stream. The facility also includes 700,000 barrels of storage. The location and storage allow the company to ship biodiesel to international markets where prices are significantly higher than in the U.S. The refinery recently reached 50% of its production capacity and is producing biodiesel using animal fats as a feed stock. Recent comments by Mr. Evans indicate the company will make about 80¢ profit per gallon with animal fat feedstock and over $2.00 when the have access to Jatropha oil. See below.

Bio-Electric Power: Green Hunter has acquired a biomass fueled power plant in El Centro, California. After upgrade and refurbishment the plant will be able to produce 25MW on a $20 million investment. To build a similar plant from scratch would cost well over $100 million. The plant will be fueled by cattle manure and wood waste. The plant is scheduled to be up and running by mid 2009. California has mandated that 20% of electric power be from renewable sources by 2010, so this appears to be a timely investment.

Wind Power: Green Hunter energy is developing wind energy projects in Montana, California, Texas and New Mexico. They have signed a turbine supply agreement for 900 MW of 1.5 MW turbines with MingYang Wind Power Technology of China. MingYang will be building turbines of German design and is ramping up for large scale production. Green Hunter has exclusive rights to any turbines MingYang wishes to export through 2012 and MingYang is the only Chinese company licensed to export wind turbines. Current Chinese policy is for the retention of wind resources to grow domestic power production giving GRH exclusive rights to a valuable resource.

Biofuel Feedstock Production: Green Hunter Energy is in the process of acquiring land to grow Jatropha Curcas for its oil. Jatropha is considered the best option for a plant based oil source. It will grow on land not suitable for food crops and has high production in as soon as one year after planting. GRH is developing plantations in Argentina, Paraguay, Mexico and China. Owning the source of the feedstock for their biodiesel production will significantly enhance the profitability of the company in the next 2 to 3 years.

You can see the company is putting the infrastructure in place to be a serious alternative energy provider. The next step is to start generating some significant revenues, followed by profits. With the biodiesel refinery reaching 50% production capacity, revenues should start showing soon. As noted above, I consider this a highly speculative stock until revenues are proven but I will be very interested if the stock falls to lower levels. At this time I am adding the stock to this site’s Special Opportunities Portfolio to help me keep an eye on the stock price.

Each week I provide a review of the previous week’s performance of the WilderHill New Energy Global Innovation Index, symbol NEX. This information is provided by New Energy Finance. The NEX consists of about 90 stocks from 20 countries in seven sectors and is the bogey for the PowerShares Global Clean Energy Fund (PBD: 9.73 +0.259 +2.73%). These results are for the week ending on Friday.

For the week the NEX gained 2.3% in contrast to the losses for the NASDAQ, off 2.1% and the S&P500, down 0.9%. AMEX Oil gained 3.3% to compare the NEX against traditional energy. Power storage was the top sector, gaining 4.7%. Wind, “renewable-other” and solar were also in positive territory. The worst performing sector was hydrogen and fuel cells, losing 1.6%. Biomass and biofuels were also at the bottom of the sector list losing 1.2%.

Looking at the longer term history of NEX you can see the once hot renewable energy sector has been treading water since falling about 25% from Christmas 2007 until the end of January 2008. At some point, (months, years?) renewables will become a greater percentage of global energy production and this sector should increase in market value. As with all investments, time will tell.

Here are the winners and losers from the NEX for last week:

NEX top gainers since 19 Aug 2008
Suntech Power Holdings STP + 27.4%
Yingli Green Energy YGE + 22.5%
Climate Exchange CLE + 20.5%
LDK Solar LDK + 18.0%
Energy Conversion Devices ENER + 13.9%

NEX top losers since 19 Aug 2008
EnviTec Biogas ETG – 13.4%
Verasun Energy VSE – 13.0%
Medis Technologies MDTL – 12.9%
Babcock & Brown Wind Partners Group BBW - 11.0%
Centrotherm Photovoltaics CTN - 8.1%

Note: I have a long position in VSE.

Business – California home sales rise for fourth month – sacbee.com.

In contrast to the national news that existing home sales rose from June to July but are still below the levels from a year ago, California is bucking the national trend by showing its 4th straight month of year over year sales gains. Many pundits and commenters poo-poo monthly sales gains, claiming only year over year gains will signal the end of the housing down turn. This data could be a signal.

You may also note the median price is 40% lower than a year ago. There are a couple of explanations for this. First, the majority of purchases are repo properties which are selling at deep discounts due to the severe state of disrepair of most of the properties. Second, most of the sales are taking place in the inland counties where property is much less costly that coastal or major city (LA, SF, San Diego) areas. So much for the end of long commutes due to high gas prices. My sense is that Californians in particular have a strong desire to own their own home. California is a state of immigrants and many of them feel home ownership is a part of the American dream. They are taking advantage of the current price weakness to get their piece of the dream.

A final note on home prices. The Case-Shiller report made big news with a year over year price decline of about 16%. This report tracks homes in 20 cities. I took a close look at the Office of Federal Housing Enterprise Oversight (OFHEO) survey released yesterday and found some surprising facts. The OFHEO index is a purchase only index tracking the repeat sales of the same single family properties. Here are some facts from the report released 8/26/2008:

• Nationwide year over year price decline of 4.8%
• 30 states showed year over year price increases.
• Only 3 states, CA, FL and NV, showed year over year price decreases of greater that 10%.

My conclusion is that at least in the West the increased home sales will start working to absorb the bank owned inventory and point to a resumption of more normal real estate conditions. There are different ways to look at prices, but they may not have fallen as far as many believe, especially outside of the foreclosed inventory. As the public and even the media start to realize there is a bottom to this crisis it will be interesting to see the effects on both the housing and stock markets.

I have come across a couple of interesting news items recently that point towards continued viability and growth for the U.S. ethanol industry. As I have written in the past, I believe the U.S. corn based ethanol industry will grow as a viable part of the country’s vehicle fuel structure. The current environment of high corn prices is pushing these companies towards efficiency and innovation. The ground work they are laying now will lead to increased profitability as ethanol becomes a larger portion of total fuel consumption.

The first item is this article about ethanol producer POET expanding into cellulosic ethanol. POET is a privately held ethanol producer that is one of the nations largest, producing over 1 billion gallons per year from 23 plants. The company has announced they have developed the technology to process the corn cobs for additional sugars to refine into ethanol. According to the press release, using the corn cob along with the corn will increase ethanol production by 11% per bushel and 27% per acre of corn. It will be a simple process for farmers to harvest the cobs along with the corn and tranport the crops to POET’s ethanol facilities. Construction of the company’s pilot cellulose processing plant should be completed in the 4th quarter of 2008. POET and the Dept. of Energy are investing $200 million in the new technology. To me it make a lot of sense for the corn ethanol producers to expand into cellulosic production that to try to start up a whole new industry from scratch.

The second item I found of interest was several articles on the use of ethanol blender pumps. Blender pumps allow the buyer to select the blend of ethanol he desires at the pump. These types of pumps  now offer the different combinations of E10, E20, E30, E40, E50 or E85 with the corresponding higher octane rating as the percentage of ethanol increases. Prices also decrease as the percentage of ethanol increases. Recent studies show that blends of up to E30 work well in modern cars with no or postive effects on mileage. From a press release on one study:

“These studies show that moderate 20-30 percent ethanol blends can reduce air pollution, improve gas mileage, and save drivers money in the most popular cars on the road today,” said Brett Hulsey, president of Better Environmental Solutions, an environmental health consulting firm. “Moderate ethanol blends are homegrown in America, can be delivered with existing pumps to current vehicles, and cost less than gasoline. Ethanol lowers CO2 emissions 20 percent from gasoline, making it one of our most effective greenhouse gas reduction programs currently in place.”

Fuel retailers in corn states noticed when they installed E85 pumps many of their customers were blending the E85 and regular gas by hand to achieve optimum performance. Blender pumps had long been used in northern states to blend diesel fuel during cold weather, so the solution to offer ethanol blender pumps made sense. From a happy customer courtesy of DakotaFarmer:

“I found E30 was best. It costs less than unleaded or E10 and didn’t reduce my mileage,” says Al Kasperson. He is a former instructor at the Lake Area Technical Institute in Watertown.

By the end of 2009 ethanol producers will be producing enough ethanol to replace 10% of the 140 million gallons of gasoline consumed in the U.S. each year. As E10 is the standard for regular gas in many parts of the country, the ethanol industry needs to find ways to increase demand for their product. At this point there only a handful of blender pumps installed in states like Iowa, Minnesota, Kansas and South Dakota, but their spread could will definitely increase the demand for ethanol.

I have been making the point here that corn ethanol is an integral component of this country’s fuel structure. Those that are calling for and end to grain based fuels will not succeed and the ethanol companies will have a major (and profitable) role on reducing our dependence on foreign oil. I will close with this quote from the website of Senator Barack Obama:

“Twenty years from now our nation’s transportation fuels sector will be powered primarily by domestically produced biofuels, if we have the vision and the will to make that happen,” Obama said. “Just as we sent a man to the moon, we can harness our technological skills and entrepreneurial spirit to end our dangerous reliance on foreign sources of oil. In doing so, we will not only protect our national security, we will also protect our public health, create quality jobs for the next generations, and keep billions of dollars here at home, rather than sending them to nations that want to do us harm.”

I should not be bored owning a high yield stock that is this consistent, but the quarterly earnings reports for Ship Finance International Ltd (SFL: 12.11 +0.41 +3.50%) almost make it difficult to write an interesting analysis. Ship Finance has developed a business model that appears to be bullet proof and the market puts such a low value on the company there appears to be no room for a negative surprise. This quarter SFL increased the quarterly dividend 2¢ to 58¢, giving the stock a current yield of about 8.4%. This makes 18 straight quarters where the dividend has been stable or increased.

Here is a little background and some numbers that I think show the stability of Ship Finance. The company was spun off by Frontline Ltd. (FRO: 4.92 +0.02 +0.41%) in 2004 with 40-some of Frontline’s tankers, which have been leased back to FRO. 39 of SFL’s vessels are still leased to FRO and in the last 4 years SFL has increased their fleet to a total of 71. Oil tankers now make up approximately half of the fleet as the company has diversified into dry bulk, container ships, offshore supply ships, drill rigs and chemical tankers. Most of the leases require the lessees to pay ongoing expenses and SFL books steady profitable cash flow from each lease. The fleet has an average remaining charter term of 13.4 years.

I love the cash flow: From the fixed charter payments the cash flow (EBITA minus interest) per quarter is $1.11 per share, excellent coverage for the 58¢ dividend. In addition to the regular lease payments SFL has a profit sharing agreement with Frontline to receive 20% of the revenue over a fixed charter rate. This amount came it at 46¢ a share for the excellent 2nd quarter. The profit share has averaged over 30¢ per share for the last 18 quarters. Ship Finance will also take advantage of profitable sales opportunities. They recently sold two new-build tankers to be completed next year for $111 million each providing a profit of $68 million (about 50¢ per share) to be booked next year.

The company is using the excess cash flow to pay down debt and as capital to invest in fleet expansion. All deals are viewed with the goal to increase the quarterly distribution. They have ready access to financing and structure new deals to minimize capital and interest rate risk.

I look forward to future dividend increases and would not mind if the market started pricing the stock like the stable dividend payor it is, a 6.5% yield would give a $35 share price. I think the stock is definitely a buy anytime the yield pushes into the mid 8′s. SFL is a component of this site’s Income Portfolio.

Note: I have a long position in SFL.