Energy is and will always remain one of the most crucial sectors to a growing economy. When gas prices are inflated consumers don't travel, dine-out, or have the same level of disposable income. When we think of "energy" the first thought that comes to mind is gas prices, however energy stretches far beyond this one space.
In the Presidential election one of Mitt Romney's primary objectives was to stress energy independence by state, developing the keystone pipeline, and limiting wasteful investments into clean energy. President Obama's policy however has been near the opposite, as he has invested money into clean energy and we have seen increased gas prices and slowed demand in other crucial industries within the energy sector.
In this piece I am looking at three crucial industries within energy that President Obama must address during his second term as President to aid in a growing economy. These are all under-the-radar segments of energy, but important nonetheless, and will require President Obama stepping outside his comfort zone in order to address these imminent problems.
Clean Energy: A Questionable Topic
I often wonder if America is ready for clean energy. I know it may sound crazy, or in some ways even un-American to not be a "green energy freedom fighter", but almost all-clean energy projects have been failures. And a significant portion of President Obama's energy policy is to invest in clean energy, such as wind power.
A regular piece in "Human Events" (which is a conservative website) entitled "Green Energy Bankruptcy of the Day" highlights the billions spent on clean energy and its many failures over the last few years. Obviously, there are a lot of benefits to clean energy, as it would lower the prices on almost everything that consumes energy. However, in this era where people are on the go and expect instant results, we have seen several effective failures, such as with the electric car. General Motors (GM) created a stylish and efficient vehicle that ran off a battery and gasoline, but is yet to appreciate with large sales, perhaps indicating that Americans are not ready for the "green energy movement" despite its benefits.
Last month Energy and Environment published an article that looked at many of President Obama's clean energy projects. According to the report, 34 of these companies that were offered federal support are faltering - either having gone bankrupt or having laid off workers. Among these companies include $25 million to Evergreen Energy, which is now a pink sheet stock; $1.46 billion to First Solar (FSLR), a stock that has lost 45% of its value during the last year; and let's not forget the $535 million to Solyndra.
Obama will most likely continue to invest in this space, however investors should not use these investments as a gauge of potential success. When it's all said and done, America has to be willing to accept and embrace clean energy. We must want solar panels on our schools and electrical plugs on our cars, and so far we do not. This is a big economic problem, and an energy crisis. The reason it is a crisis is because we continue to invest in these projects yet the projects don't appreciate with sales or widespread adoption, because we as Americans simply don't want it at this point in time. This is not my opinion, but rather a fact based on the failures of clean energy and American's unwillingness to use clean energy regardless of its benefit.
Furthermore, of the $80 billion set aside for clean energy loans, grants, and tax credits (as part of the 2009 stimulus), more than 10% has gone to companies that are either bankrupt or are on the fast-track to bankruptcy. That's more than $8 billion that could have gone to everyday people, or to create jobs. The bottom line: It can't continue, and Obama's investment choices have not been great and do not suggest upside for the clean energy space, unless changes are made to the investment choices on behalf of the government. Therefore, investors should monitor the investments of the government in clean energy, and should not believe that just because a company receives funding that it will succeed. There is a long line of effective failures, and we must limit these failures in the next four years.
Forgotten Yet Important Isotope Production that Must be Considered
A couple months ago I interviewed Dr. Robert Schenter who is one of the leading experts in medical isotopes and isotope production, and is also the Chief Science Officer of a small start-up company, Advanced Medical Isotope Corporation (ADMD.OB), a company that is anticipating the integration of more domestic energy production to counter the shortages of medical isotopes in the U.S.
Over the next few years, several major nuclear reactors will go offline, and many expect the U.S. to invest in nuclear reactors to provide a solution to the demand, as we consume most of the world's medical isotopes. Part of ADMD's strategy has been to form alliances with U.S. reactors and with companies in clinical development. And it's because of these alliances that Dr. Schenter believes his company is well positioned to control 50% of the world's Mo-99 production within the next few years.
His company, among many others, is relying heavily on legislation and government spending in these particular spaces so that future plans may be realized. And although the investments in this space are necessary to maintain the supply chain of certain cancer drugs, along with diagnostic testing in the medical community, we must determine whether or not President Obama will invest in new nuclear reactors when older reactors are shut down in the next few years-some of which produce necessary isotopes such as Y-90 and Mo-99 (the radioisotope that Dr. Schenter and his company are producing in the U.S.)
Dr. Schenter is fairly confident that the U.S. will make these necessary investments, and much of his reason is due to a lack of choice. Right now, Nordion (NDZ) supplies most of the U.S. medical isotopes from a Canadian reactor called NRU. However, the NRU reactor will be shutting down in the coming years due to aging, and has already been closed at various points in the past for renovations. Nordion's plan had been to utilize Canada's MAPLE facilities after construction was complete. However, Canada recently said that it would not complete construction, which leaves Nordion without a solution to its supply issue.
With the U.S. consuming most of the world's medical isotopes, it becomes our problem. It is simply not the responsibility of Canada, Mexico, or South America to produce medical isotopes when the U.S. is the country that consumes the majority of its production. In addition, most medical isotopes have very demanding logistical requirements. Therefore, we are the most affected by any changes in supply, and because of our reliance on medical isotopes we can't afford a disruption in supply.
The question is if whether President Obama will invest and allow the operation of a nuclear reactor in a place such as the University of Missouri (MURR reactor), a centralized location for prime isotope supply. The MURR reactor may be the only reactor in the U.S. that is capable of handling the demand, and once the NRU reactor goes offline there will be a huge demand in the U.S. Therefore, we need a solution, and the MURR reactor might be the only viable solution, but it will need updates and permission from government to go online.
Those who are wise in the space, such as Dr. Robert Schenter, are placing their bets on the U.S. stepping up to the plate. The MURR reactor is among the only reactors in the country that could handle such a large demand, and Dr. Schenter's company, among several others, is one that has working relationships with these reactors. Thus, the relationships are in place and the need is present, but will the government action exist?
Coal: Necessary to Small Economies
In the month prior to the election, coal stocks had been great market performers, after four years of misery. The industry's value had risen drastically as Mitt Romney's policy would've given individual states the ability to manage their own energy production. In the last four years, states have not had this luxury, and coal stocks have suffered as production has been cut, speculation over Chinese trade has created fear, and even the most solid of companies have cut their workforce. But like I said, in the month prior to the election, when it looked as though Romney was gaining ground on President Obama, coal stocks were on fire. Take a look at the performance of these stocks in the month prior, and then following the election.
One Month Prior
Alpha Natural Resources
Perhaps the greatest judge of investor optimism is the price performance of a stock, or an industry. As you can see, coal investors are not too optimistic with President Obama at the helm, judging by the performance both prior and following the election. However, some are optimistic regarding future price action, including the CEO of Peabody Energy who said, "The long-term market fundamentals for coal remain strong, despite the current headwinds of weak prices and rising costs." Some believe the market is expecting such worst-case scenarios that upside is imminent. Though others believe strongly in political presence determining future performance, and that President Obama's policy could hurt local economies that rely on coal and other energy for survival.
A few months ago, before the election, I spoke with a financial advisor who specializes in energy in the Eastern Kentucky region, JC Hensley, and he discussed jobs, policy, and the importance of mining to their local economy. He said:
"In Pike County Kentucky (which is well-known for its coal mining) we have lost over 1,000 jobs in the last six months in our largest industry, which is coal. It's the heart and soul of our economy."
He then went on to discuss policy and changes that he's witnessed in a small economy in relation to government control, which might relate to the slowed production of coal in a region that is overflowing with supply:
"Policy is trying to dictate utility companies to switch over to natural gas and other means to provide energy. Neither policy or government should choose; the decision should be that of the free market."
In cases such as in Pike County, and in many other regions of the U.S., local economies do rely heavily on the production of some form of energy for much of its economy. As natural gas has risen in the last few months, coal has gained some ground, but investors aren't certain if it will last. Obviously, investors and those familiar with coal believe that its future is at the mercy of policy.
Energy as a whole is a massive market, as some don't realize that energy stretches far beyond just electricity and gasoline, but also into biotechnology, the medical field, and among the production of many goods. So far, President Obama has not proven himself to be "pro-coal"; but with its importance on jobs and sustaining our way of life, this will be one important industry to watch over the course of four years to see if coal sees any level of stability.
By reading this article, you might think I am pro-Romney; but the truth is that I believe Romney had much better energy policy and that Obama was strong in other areas. The above areas are segments of energy that people don't typically think of when they think of energy. However, each of these segments is crucial to the health of the economy, and is very important to monitor over the next several months as CEOs and investors adjust to the prospectus for the next four years.
1) We need to monitor and watch clean energy investments. To this point, we have been given no proof that the U.S. is willing to accept clean energy as a replacement to oil, coal, etc. Hence, large investments do not constitute as a success and do not mean that a particular company would make a good investment.
2) Pay attention to all updates regarding Canada's NRU reactor. Watch for policy that could bring isotope production to the U.S., at the MURR reactor, and the companies that could benefit. If not, then look for losses from biotechnology companies with cancer drugs that use isotopes in certain products. Also, look at companies such as Johnson and Johnson (JNJ), General Electric (GE), and even Bristol Myers (BMY)-companies that all profit from diagnostic machines that use medical isotopes, in particular Mo-99
3) Finally, watch drilling and mining of coal for the performance of coal stocks and job growth. As natural gas rises, so should coal -but if not mined, unemployment will remain high and the cost of energy will trend higher as well.
Surprisingly, we have produced more oil under Obama than in any period of the last eight years, and a big topic on CNBC throughout the day last Monday was that we could soon become energy independent. If gas prices decline, the economy will grow stronger; if we mine for more coal and produce our own medical isotopes, we will see higher employment; and if we will invest in only the crucial clean energy projects, we will save more money. These are all very important energy segments to monitor, and the solution is easier said than done. But rest assured that if each of these areas doesn't see mass improvement, it will be felt both in the market and among the general public, as investors don't seem too confident with the energy sector posting the largest loss of any sector since the presidential election, with over 5%.
Disclosure: I am long GM.