Profiting from the Advanced Energy Initiative: Clean Coal, Nuclear Power & Uranium Miners

Several days ago before the State of the Union address, I wrote an article about profiting from the increasing importance that government has placed on advancing new energy initiatives to ween ourselves off of dependence on foreign oil. The report began generally by taking a look at the PowerShares Clean Energy Fund (PBW), and ended specifically with profit opportunities from changing the way we fuel our vehicles through the use of hybrids - Honda Motor Co. (HMC), Toyota Motor (TM), UQM Technologies (UQM), Altair Nanotechnologies (ALTI), ethanol - The Andersons (ANDE), Pacific Ethanol (PEIX), VeraSun Energy (VSE), MGP Ingredients (MGPI) and fuel cells (an industry I just can't recommend investing in at this point).

Today's report focuses on the second half of the Advanced Energy Initiative, which discusses how ways we power our homes and business will change. The first part of the AEI describes ways we'll begin reducing our dependence on foreign oil by changing transportation fuel sources, while the second part really focuses on decreasing our dependence on natural gas.

Since natural gas is primarily produced in the U.S. and Canada, this is less of a security issue and more of an issue of scarcity, the volatility of natural gas prices and how that affects our economy. Essentially, the goal is to rely less on natural gas to power our homes and businesses to ensure the availability of affordable electricity and ample natural gas. It's assumed that by doing so, prices drop and U.S. firms will be more competitive in the global market, keeping more jobs here at home. The Advanced Energy Initiative mentions that according to the National Association of Manufacturers, the chemicals and plastics industries, which rely on natural gas both for energy and as a raw material, have lost 250,000 jobs and $65 billion in business due to the rise in natural gas.

The three main goals of the AEI as it relates to natural gas reduction (and where we'll look to profit) are:

1. Add $2 billion to clean coal technology research and bring to marketplace;

2. Eliminate proliferation of risks and expand the promise of clean, reliable and affordable nuclear energy;

3. Reduce the cost of solar photovoltaic technologies so that they become cost competitive by 2015 and expand access to wind energy.

Clean Coal
According to the AEI report, the U.S. holds more than one quarter of the world's coal reserves and the energy content of this reserve exceeds that of the world's known recoverable oil. The difficult part is eliminating the pollution produced by coal so that we can tap into this resource on a greater scale without further damaging the environment. The problem is even greater in developing countries China and India, which generate 2/3 of their electricity from dirty coal, resulting in the most polluted cities in the world. Of course there is much debate about the whether clean coal can be achieved at all, and I could dedicate an entire blog to this subject, but this is an investing blog so I'll focus on those companies attempting to reduce/eliminate coal pollution.

The process of reducing coal pollutants is called CO2 capture/storage [CCS] or geological carbon sequestering, and involves separating the CO2 as it's created and pumping it underground to be stored. One initiative from the government and a group of coal producers and utilities is FutureGen, a proposed zero emissions power plant that uses a technology called Integrated Gasification Combined Cycle [IGCC] that boasts drastically reduced sulfur dioxide [SO2], nitrogen oxide [NOx] and mercury emissions as well as sequester the greenhouse gases [CO2]. It all sounds good on paper, but there is great concern that it's more of a PR stunt for these polluting companies than a sustained solution with great impact. Clean coal is largely considered a stopgap measure, rather than a lasting one to solve our energy needs with little environmental destruction.

As far as investing in this arena, there are limited choices. Of course, there are the coal producers themselves that stand to benefit from an increased use of coal - Penn Virginia Resources (PVR), Massey Energy (MEE), Peabody Energy (BTU) and Arch Coal (ACI), but socially conscious investors may be more comfortable and find greater profit in a small but fast growing company that provides the technology to significantly reduce coal plant emissions. The company is Fuel Tech (FTEK) and it provides the technology to help reduce the nitrogen oxide by as much as 30 - 70%, not only in coal plants but other manufacturing plants as well. One big factor pushing up its stock price recently is news that the company is making inroads into China, which is concerned about pollution ahead of the 2008 Bejing Olympic Games.

Expanding Nuclear Capacity
Whereas coal currently provides half of the electricity we use to power our homes and business, nuclear power currently makes up a much smaller percentage and provides just 20% of the electricity we use. Many feel that nuclear energy is a much better alternative to coal or natural gas to fuel our energy needs because it's much cleaner, the plants are cheaper to operate (1.72 cents/kilowatt-hour compared to 2.21 for coal, 7.5 for gas and 8.09 for oil) and the electricity costs that result are lower and more stable. The big negative with this type of energy is the up front cost to build the plant and the risk associated with spent nuclear fuel, making it too much of a financial risk for companies to build new plants.

Consider these stats from a recent Kiplingers article:

• The amount of electricity the U.S. uses is expected to increase 50% in the next 25 years - on a global scale, the increase is expected to be more profound as emerging economies use more TVs, radios, computers and air conditioners.
• The London based World Energy Council says that meeting new demand for electricity while reducing the current level of emissions will require tripling the world's nuclear plant capacity by 2050.

Also pointed out in the article is the lack of investment opportunities in the nuclear space since most companies rapidly building nuclear facilities are foreign companies or privately held. General Electric (GE) is a play, but their nuclear business represents just 10% of its annual revenues.

Where does that take us? To existing utilities with an existing sizable inventory of nuclear plants as well as the uranium mining companies. The reasons are fairly straightforward, as the article points out - in addition to huge start up costs there are years of regulatory hurdles to clear, so companies with existing nuclear facilities have a huge leg up. On the mining end of things uranium prices have skyrocketed recently and over the long haul should continue this trend.

The big gorilla of nuclear utility plays is Excelon (EXC) with the largest exposure to nuclear power facilities. You're probably never going to make a fortune with this company, but just as it has over the past several years, it's probably just going to keep going up at a steady pace over the long haul. Not to mention it pays a dividend of about 2.75%

Number two in the space is Entergy (ETR) which also has done nothing but go up over the last several years. You see in the chart below that the stock broke out from a base back in July and has run up nearly 30% since. It's too extended for my liking at this point, but if you can get it off the 50 day moving average, it might be a great time to add a small position.

Because of heavy regulation and cost to build new nuclear facilities in the U.S., there just aren't many U.S. players in the nuclear utility space.

The Uranium Miners
There are more investing options with the uranium miners and for this I'd like to refer you to two excellent articles on the uranium mining industry written by James Finch of StockInterview: Why the U.S. Needs a Nuclear Renaissance & of Uranium Stocks, Smaller May Be Better.

The big gorilla of uranium miners is Cameco (CCJ) which has seen its stock price weighted down recently after flooding at Cigar Lake, a major mining facility. If you're looking for the biggest, least speculative play, the stock may soon off a decent entry point. A quick technical analysis of the chart indicates it will probably spend more time going sideways and possibly even retest the November lows around 31. If it hits that level, I'm backing up the truck for the long haul.

From a technical standpoint, Energy Metals (EMU) and USEC Inc. (USU) currently offer the best profit potential over the next several weeks. Others to consider are Fronteer Development (FRG) and Uranerz Energy (URZ).

If you're willing to play the Toronto Stock Exchange, there are many more opportunities but depending on your broker, you'll most likely pay much higher commission fees. Another thought would be to play the ETF's of the two big mining economies - Canada and Australia, but both the iShares Canada (EWC) and iShares Australia (EWA) are concentrated in financials. Although uranium mining is currently a small chunk of their business now, big Australian miner BHP Billiton (BHP) should generate a larger portion of their revenue from uranium mining in the next few years as India, China and Russia continue to move towards cleaner energy solutions. An interesting fact: Australia doesn't currently use an nuclear power of its own!