Two Alternatives for Investors in the Politicized Alternative Energy Sector

Pure play? or Diversified? When it comes to alternative energy companies, the list is long and there is certainly reason today to believe that it is about to get a whole lot longer. Already on the Seeking Alpha homepage today, we have seen multiple submissions by socially responsible and sustainability-focused firms heralding the opportunities that are now present thanks to the new President.

We share the optimism in the alternative energy space; however, we see that there are clear differences in how to approach this strategy. First, while there may be a lot more spending by the government on alternative energy resources, let's be clear how the project and approval process works in Washington. Let’s just say it isn’t necessarily an efficient arbiter of the optimal solution set. Far more likely, we will see intense lobbying, back room hand shakes, and the politics of the usual sort to choose the most “appropriate” investments and expenditures. 

So it will be very hard for investors to identify the pure play firms that will benefit from an Obama Presidency. The leadership in Congress will control who gets funded and who does not, so the free market will not be there guiding this process. From an investment perspective, this is akin to having your Atlantic City blackjack dealer decide ahead of time which cards you’ll need for a winning hand. Not really the way we at Ockham like to invest.

So what’s the alternative for each investor? Looking at the Ockham Research portfolio of some major corporations that have significant alternative energy products and service offerings, there are some names that look very interesting from a value perspective. While every stock in this space has been kicked in the teeth (with the broader market) in the last six months, generally, an administration open to signing Congressionally-led green technology expenditures could be a welcome way to buoy up their R&D budget shortfalls in the economic slowdown.

First, on the solar side, we have written several times recently on Applied Materials (AMAT). AMAT is a great example of a diversified alternative energy company. Applied Materials is one of the leaders in harnessing solar power, but they also have a substantial portion of their business tied to semiconductor technology. As we wrote (Applied Materials-Leading By Example), AMAT has converted their parking deck into a massive solar panel, which powers their entire corporate headquarters. A large company such as AMAT might be one of the firms hiring lobbyists to compete for government funds in Washington.  A large and established firm such as this may not be quite as risky as investing in a newer alternative energy start-up, but there is still a considerable amount of upside potential.

Another alternative energy company that we have written about recently is Rentech (RTK) which is attempting to produce clean synthetic fuels made from coal and natural gas. When we wrote a blog about them in August, they had made a breakthrough in producing transportation-grade synthetic fuels. Rentech has been around for a few years, but is smaller and more of a speculative pick than AMAT.  This would be an example of a pure play in green energy. Be careful, though, this stock swings wildly and is currently under $1.

Last, we want to highlight a piece from our blog that is an example of unintended consequences of the government intervening in the free market. That example came in the form of Pilgram’s Pride (PPC), one of the largest producers of chicken in the country. The post (Pilrgim’s Pride Exposes Misguided Policy Shame) detailed how ethanol subsidies contributed to making corn far more expensive, and corn being a major input in raising chicken resulted in a major squeeze of PPC’s bottom line. Pilgrim’s Pride had to cut 1100 jobs at that time, as a result of a policy that realistically did very little to advance the alternative energy movement.

Ethanol in Washington has taken on a life of its own, and is more of an instrument of pork barrel spending for Midwestern congressmen than it is an attempt to satisfy an economy hungry for clean energy. Pilgrim’s Pride now trades for about $1 and of course not all of the blame can be placed on ethanol or a simplistic view of government subsidies, but clearly it is a partial reason for the company’s struggles.

We do not have the answers and we really just wanted to present the case that throwing government money at an initiative is not a panacea. Now that Senator Obama is President Elect Obama, we at least know that alternative energy will be a major focus of his administration. He is hoping for a “Manhattan Project” type effort to usher in a new era of clean energy. What exactly that means is yet to be determined.

Comments

[lonc1943:]

I have considered coal liquidification the better fuel than than ethanol.  The United States has a large supply of coal, it is insane to use food to power transportation.   Lon

2008 Nov 06 09:45 AM

[rayrevol:]

food is not source for ethanols of the future - eg cellulose with proper enzymes (duh)

manhattan project - the issue is not (currently) scientific it is policy and manufacturing - turn all the automobile plants into plants
to make wind turbines and outfit all windy states - they did that in WWII to make bombers

2008 Nov 08 08:31 AM

[Doctor Alpha:]

Alternative Green Energy is the Future. Rentech (RTK) Significant Announcement on the Horizon

Company: Rentech

Ticker: RTK

Company Snapshot: Rentech is composed of two business segments each focusing on a major global issue, alternative green energy and fertilizer production. Rentech’s alternative energy segment is one of the world's leading synthetic fuels technology and development companies. Over the last twenty-five years, Rentech has developed and patented the Rentech Process, an advanced version of the well-established Fischer-Tropsch process. The Rentech Process can convert a wide array of carbon-bearing materials, including green resources such as biomass and municipal solid waste, into ultra clean fuels and chemicals ranging from jet fuel to diesel gasoline. Rentech’s objective is to help the world reduce its dependency on oil and lower emissions, including greenhouse gases. Rentech’s second business segment is their fertilizer plant Rentech Energy Midwest Corp. -REMC-, located in East Dubuque, IL. REMC is one of the country’s largest nitrogen manufacturers producing nitrogen-based fertilizer products and industrial nitrogen products.

Recommendation: Buy

Recommendation Date: Friday, November 21, 2008 at .50 cents per share

Recommendation Results:
** 11/21/2008: UP 8.00%
** 11/24/2008: UP 12.96%
** 11/25/2008: DOWN -1.72%
** 11/26/2008: UP 3.42%
*** Since Date of Recommendation: UP 24.00%

______________________...
On Friday, November 21, 2008 we recommended Rentech (Ticker: RTK) with a buy rating at .50 cents a shares. Since then a few positive and significant developments have taken place.

* November 22, 2008 Indiana and Illinois announce they are pursuing major clean coal power projects. Illinois Attorney General Lisa Madigan has announced a measure that will create 2 clean coal projects including a $2.5-billion plant near Taylorville, Illinois. That plant comes in the wake of another $2 billion coal gasification project in southern Indiana.
www.wthitv.com/dpp/new...

* November 22, 2008 Baard Energy has received its final air permits from the Ohio EPA which in turn allows them to build a coal to liquid plant in Wellsville along the Ohio River. One of the first of its kind. The permit is the third and final state environmental permit necessary for Baard Energy to proceed into final design and construction of the 53,000 barrel-per-day coal/biomass to liquids plant at the Columbiana County Port Authority site in Wellsville. Baard has yet to release who will supply their Fischer-Tropsch technology.
www.reviewonline.com/p...

* November 22, 2008 President-elect Barack Obama reaffirmed his support for alternative energy. This includes Rentech’s Fischer-Tropsch technology that converts biomass, natural gas, and coal into liquid fuels ranging from jet fuel to diesel gasoline.
news.yahoo.com/s/ap/20...;_ylt=Anucx2RdHWzyzTRu...

* November 24, 2008 The US Air Force concluded analysis of the effects of using a natural gas-based synthetic fuel with its Lockheed Martin F-22, as work to trial the technology accelerates through its trainer, transport and fighter fleets. The office of the assistant secretary of the air force for installations, environment and logistics is expected to select a private partner during December to develop a Fischer-Tropsch production facility at Malmstrom AFB, Montana.
www.flightglobal.com/a...

______________________...
As of Friday, November 21, 2008 for an Aggressive short-term trade we like Rentech at these current levels. Rentech will release fiscal year 2008 financial statements December 16, 2008. Rumor has it these numbers will be very positive.

Rentech’s stock price has been down significantly along with everyone else:
15 days down –43%
45 days down –62%
65 days down –79%

The last time Rentech hit .46 cents a share was October 27, 2008 and the stock proceeded to rally .43 cents to .87 cents a share. An 89 percent increase in 7 days. Since March of this year a 40 to 80 percent fluctuation in price has been common and we look for this level of volatility to continue. Rentech could easily exceed a $1.20 per share before year-end based on a number of reasons.

Rentech’s management is currently in a pickle. The stock has dropped significantly and the officers of the company need results ASAP if they want to be able to justify their year-end bonuses. In addition, all stock options are underwater including those belonging to the board of directors. As we have seen in the past, Rentech actively manages their stock price by issuing press reports before releasing their latest financial numbers. Only to be followed with additional press releases over the coming weeks in an attempt to influence the stock price. One news release could easily move Rentech’s stock price .50 to .60 cents like it has done so many times in the past. Two or more press releases could be very significant.

Press releases for Rentech's alternative energy segment could focus on:
* Technology licensing partnerships = Revenue increase
* Revenue and cost sharing relationships = Revenue increase and cost decrease
* New business strategies and directions = Shareholder assurance
* New product sales revenue generated by their Product Demonstration Unit -PDU- leading the way to future business opportunities as companies discover value in Rentech’s numerous gas to liquid products = Revenue increase and shareholder assurance
* Continued process improvements at their Product Demonstration Unit -PDU- facility in Commerce City, CO = Shareholder assurance

Rentech’s fertilizer plant, Rentech Energy Midwest Corporation -REMC- located in Dubuque IL, is an extremely valuable asset that generates a tremendous amount of cash. The value of this plant alone creates a support at current levels helping to reduce downside risk. Rentech currently has 166 million shares outstanding and their fertilizer plant alone is valued between 120-210 million. A quick back of the envelope calculation, 122/166 and 210/166, suggests a stock price between .73 to $1.27.

Rentech recently reaffirmed EBITDA guidance for their fertilizer plant and there’s a good chance Rentech will post a net income, something they haven’t done in years. Moving from a net loss to a net income would be a significant event and I think the street HAS NOT priced this into the stock. Last quarter Rentech successfully completed their Product Demonstration Unit -PDU- that converts natural gas into various petroleum based products like jet fuel and diesel gasoline. The completion of the PDU means a reduction in expenses. Combine reduced expenses with record fertilizer sales revenue, coming from greater demand for corn that is used in the production of ethanol based fuels, could translate to a positive earnings per share. Management needs a homerun if they want to justify year-end bonuses; there’s an incentive for them to be aggressive. Shareholders are less likely to be pissed off when they hear about seven figure total compensation packages when the stock is trading at $3.15 versus .50 cents a share. Again, management has a strong incentive to move this stock and all stock options are currently underwater.

Press releases for Rentech's fertilizer segment could focus on:
* Record fertilizer sales revenue growth for fiscal year 2008
* Very favorable EBITDA guidance for 2009
* Favorable asset valuation discussion of their fertilizer plant

As reported at Mutual Fund Facts About Individual Stocks -MFFAIS- the overall number of institutional owners has recently increased 20 percent from 81 to its current level of 97. This is very positive.
Institutions adding to an already existing position include:
Goldman Sachs added 825,221 shares
Vanguard Group added 5,662,885 shares
Barclays Global Investors added 1,918,971 shares
Credit Suisse added shares
Putnam added shares
Oppenheimer added shares
Northern Trust added shares
Bank of New York Mellon added shares
Bank of America added shares
Wells Fargo added shares

There’s a large short position, I believe 8-9 million shares and it’s probably a safe assumption that these sellers are in the money since Rentech is currently near 52-week lows. If Rentech’s stock price does move quickly, press releases and an overall market rally, we could see short sellers add to the buying as they lock in profits. This 1-2 combo could move Rentech’s stock price in excess of .40 cents a share.

Because of a crisis in confidence the major indices, DJIA and S&P 500, have seen a record setting retreat in the last 30 days, especially in the last 7, and the market is due for a 1,200-point rally. This alone could move Rentech’s stock price .30 cents a share.

2008 Nov 28 02:19 AM

[einstein p ...:]

RTK is the type of company that should do extremely well under the Obama administration. The tests with the US Air Force have exceeded expectation and the synthetic fuel is green.

Current oil prices cannot stay at 50 dollars a barrel for very long. In fact, this price is counter-productive to the development of alternatives and detrimental to the social programs in several countries which depend on oil and other natural resources to fund these programs. In my opinion, the low prices will "spring load" the price of oil, causing it to retest the highs or exceed them ---- recession or not.

We will need technology like RTK, along with every other viable alternative --- excluding ethanol.

Disclosure -- I am long the stock.

2008 Nov 30 12:43 PM