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Elliott Gue  

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  • The Dirty Truth About Clean Energy [View article]
    Thanks for the comment.

    It's truly amazing how investment in alternative energy always chases the least cost-effective solutions because that's where the subsidies are most attractive. Germany is a perfect example. Notice how the build-out of onshore wind dropped off as feed-in tariffs for wind came down, challenging the subsidy economics of new projects.

    Solar ramped up as wind investment dried up because feed-in tariffs guaranteed tremendous 20-year returns for new installations. Now, the government is cutting solar subsidies because the costs are mounting so the investment focus appears to be turning once again, this time to offshore wind. Offshore wind is one of the only sources of electricity with worse economics than solar PV in my chart above.
    Dec 26, 2011. 12:43 PM | 2 Likes Like |Link to Comment
  • The Dirty Truth About Clean Energy [View article]
    Thanks for the comment. I addressed some of your points in prior comments but have two additional comments.

    First, leaving aside all the arguments about whether the EIA's cost estimates are correct or off base, one thing is for certain: alternative energy stocks certainly haven't been good for investors. A number of erstwhile high flyers have gone bankrupt this year and former technology leaders like First Solar have been among the year's worst performers and have dramatically underperformed the broader energy indices. Alternative energy stocks may actually be the only sector that's fared worse than the financials over the past year.

    The fact is that many of the investors "lured" to the sector have been attracted to subsidies. In Germany, feed-in tariffs lock in impressive returns on investment for a 20 year period. I certainly have no problem with saavy investors who took advantage of these subsidies to invest in alternative energy and lock in low risk government-guaranteed long-term returns.

    But, that game is coming to an end as these subsidies are now cut across the developed world. Since Europe was a major source of subsidies, the ongoing sovereign credit crisis there certainly isn't going to help matters.

    As for the cost causation argument, the idea that the relationship depicted in the regression chart is caused by resource shortages simply doesn't hold water. The two EU countries with the highest power costs are Denmark and Germany. Denmark has significant domestic natural gas production. It's a tiny country of 5.5 million people but produces about 0.8 bcf/day of gas (2010 figure), considerably more than the 0.5 bcf/day it consumes. In other words, the country is a net gas exporter that, unlike many EU nations, isn't dependent on Russian gas imports.

    As for Germany, the country actually has about 41,000 million metric tons of coal reserves and has long been the EU's largest coal-producing nation. In fact, if we look at the entirety of Europe and Eurasia including the former Soviet states, there is only one country with larger reserves and production of coal than Germany: Russia. Germany also still relies on coal for about 40 to 50 percent of their electricity production so domestic resources are a meaningful asset.

    Looking at the other side of the equation. France has no developed energy commodity resources. The country has no coal or gas production to speak of yet it has among the lowest electricity costs in the EU. That doesn't support your theory either.
    Dec 26, 2011. 12:34 PM | 2 Likes Like |Link to Comment
  • The Dirty Truth About Clean Energy [View article]
    Thanks for the comment.

    I try to stay out of the political arguments and focus on the investment angles but I am continually amazed at how many comments I get from any articles that are seen as vaguely favourable to the energy industry. An article I posted on Seeking Alpha after the Macondo spill in the spring of 2010 is another good example of this.

    The good news is that given all the raw emotion surrounding these issues, investors willing to step back and evaluate the facts dispassionately have opportunities. For example, after the Macondo spill, I read dozens of articles about how deepwater drilling was coming to an end because of the spill. In the end, it was a great buying opportunity for a number of stocks focused on the deepwater.

    As for utility cost increases, I think you are correct. I just got back from a trip to the UK and the cost increases they're seeing are enormous. Power prices are up 20 and 30 percent year-over-year in some cases compared to down 3 to 5 percent in the US. I can tell you it is a big issue for consumers, particularly with the economy there at or near recession.

    The simple fact us that environmental issues tend to carry the most weight in good economic times not during recessions when most households are worried about costs.
    Dec 26, 2011. 12:12 PM | 1 Like Like |Link to Comment
  • The Dirty Truth About Clean Energy [View article]
    Thanks for the comments. I agree that Bill Gates is a brilliant man but I would be careful about basing buy/sell decisions solely on his actions. Some readers may remember a few years ago when he invested in a company called Pacific Ethanol (produced ethanol), firm that ultimately went bankrupt. To be fair, I believe he may have reduced that stake before they went Chapter 11 but I doubt it was a winner overall.

    It's important to remember that someone with as much cash as Bill Gates can take a few more speculative positions in the context of a larger portfolio. That doesn't mean they're sure winners.
    Dec 26, 2011. 11:59 AM | Likes Like |Link to Comment
  • The Dirty Truth About Clean Energy [View article]
    Thanks for the comment. "Grid parity" is really only half the issue.

    After all, wind power has already achieved grid parity in many markets and the EIA projections outlined in the article show onshore wind competitive with nuclear and advanced coal on a pure cost basis. The falling cost of wind has been due to some tremendous advances in the efficiency of turbines over the years.

    But, despite these advances, wind hasn't really been able to replace conventional fossil fuels because of the inherent variability of output from wind plants. Large-scale wind plants can see their capacity factors--percentage of total generating capacity actually produced--range from 10 percent to levels of 60 percent plus from month to month. Offsetting these peaks and lulls requires the use of natural gas peaking plants as shadow capacity. In the UK and Germany, shadow capacity equal to 90 percent of total installed wind capacity is required to maintain the grid's stability.

    If and when solar achieves grid parity, it's still not going to be a viable large-scale generation option.
    Dec 26, 2011. 11:55 AM | 1 Like Like |Link to Comment
  • The Dirty Truth About Clean Energy [View article]
    Thanks for the comment. As the world's largest natural gas producer and with a glut of gas in storage, the US will inevitably enter the liquefied natural gas (LNG) export business. There are a few different export terminals under various stages of development both in the US and Canada. The EIA isn't really modelling any net gas exports in its annual energy outlook though they're no longer projecting a surge in LNG imports as was the case a few years ago.

    That said, I just don't think LNG exports are going to have much of an impact on gas prices or generation costs in the intermediate term. First, the costs of actually building these export terminals is enormous and it wouldn't be surprising at all for delays to creep into the process. Even assuming all the LNG export terminals are built on time, the actual export capacity will ramp up only slowly starting in 2015. It will be 2020 or later before the quantities are significant enough to really have much of an impact on price.

    Secondly, US and Canadian producers are essentially mothballing their dry gas fields and focusing their attention on wet gas--natural gas liquids (NGLS) rich--and unconventional oil fields. The reason is that demand and pricing for oil and NGLs is far better than for natural gas. But, there's enough gas produced from these fields to meet domestic demand at the current level.

    Producers drilled the dry gas fields like the Haynesville and Montney Shales to hold their leases but are now reducing activity levels. Once a market for gas materializes (export and or vehicle fuels) these fields can be produced.

    I don't see gas prices remaining at current depressed levels forever but a move back up to around $5/MMBTU or so should be enough to incentive additional production. A move to that level wouldn't hurt gas economics a great deal.
    Dec 26, 2011. 11:48 AM | 1 Like Like |Link to Comment
  • Occidental Petroleum Corp: Unprecedented Discoveries And Expertise Keys For Growth [View article]
    I can certainly see DNR getting acquired. They are leveraged to oil and that's good leverage to have in this environment. I think a lot of these oil-levered producers are getting dragged down by the macro concerns and "risk-off" trade rather than their underlying fundamentals.

    We are seeing a pick up in M&A interest in the energy patch. I' also note that the US corporate bond market is wide open for business despite what's going on in Europe so access to capital isn't relly an issue.
    Nov 23, 2011. 02:41 PM | Likes Like |Link to Comment
  • Overcapacity In The Oil Services Industry? What You Need To Know [View article]
    We are producing more of our own energy. North America is independent when it comes to natural gas. In fact, the US is the world's largest gas producer.

    We're also energy independent when it comes to coal.

    US oil production is growing thanks to unconventional fields and the deepwater Gulf. This gives the nation a significant advantage
    Over other developed nations like Germany and Japan that import nearly all of their energy needs.

    I think it will be tough for the US to become totally independent in terms of oil but probably can become less dependent over time. Producing shale fields will require a huge investment in new infrastructure including pipelines, gas processing plants, storage and terminals. This is one reason I write a lot about the high-yield Master Limited Partnerships ( MLPs) like Enterprise Products Partners (EPD). These firms are buikding out a tremendous amount of infrastructure to support these plays.

    Long EPD
    Nov 20, 2011. 11:08 AM | 2 Likes Like |Link to Comment
  • Overcapacity In The Oil Services Industry? What You Need To Know [View article]
    I'll try. I've written about the major US unconventional oil and gas fields on a few occasions for Seeking Alpha. To summarize, unconventional fields popularly known as "shale" fields are the hottest oil and gas-producing plays onshore in the US right now. To be produced economically, companies use a combination of horizontal drilling and fracturing (pressure pumping) techniques.

    The first of those technologies is self-explanatory. Fracturing involves pumping a liquid into the reservoir to literally crack the reservoir rock that contains the oil or gas. This aids the flow of oil and gas through the reservoir and into the well.

    Not all of the US shale plays are the same. The Haynesville Shale in Louisiana is a "dry gas" play meaning that what's produced from wells in this field is primarily methane (natural gas). In contrast, the Bakken Shale of North Dakota is mainly an oil play as these wells produce crude oil mixed with a bit of natural gas and significant quantities of so-called natural gas liquids (ethane, propane and butane are the most common NGLs).

    The Eagleford of South Texas produces mainly oil in the northern window, wet gas in the middle part (methane plus lots of NGLs) and mainly dry gas in the lower reaches of the field.

    Crude oil prices are quite elevated right now with brent trading well over $100/bbl and West Texas Intermediate in the upper $90's per barrel. At those prices, as you might expect, producing oil from unconventional onshore fields is tremendously profitable so producers have been drilling like there's no tomorrow in fields lie the Bakken.

    Meanwhile, natural gas prices are depressed and have been averaging in the $3.50 to $4.50 per million BTU range for some time. At those prices, it's not profitable to produce gas from many of the dry gas fields in the US. So, activity in places like the Haynesville Shale is moderating.

    Meanwhile, a barrel of natural gas liquids (NGLs) tends to follow the trend in oil prices more so than the price of natural gas. So, NGLs prices have been robust this year. That means if you have a wet gas field--gas with NGLs--you can produce wells profitably because the value of the NGLS found in the raw gas stream is high.

    I am often asked why producers keep drilling "gas" shale fields with gas prices so weak. NGLs are one of the major factors driving this seemingly paradoxical behavior.

    My quote above is referring to the fact that if a service company is performing work in a region known for oil or NGLs production (ie the Bakken Shale or parts of the Eagleford) they're still raising prices to perform services. That's because activity is still strong in these plays.

    In contrast, as activity in gassy plays slows down, services companies are losing their pricing power for services performed in regions like the Haynesville.

    I hope that helps.
    Nov 18, 2011. 02:35 PM | 6 Likes Like |Link to Comment
  • Assessing Market Risk [View article]
    Thanks for the comment. I am somewhat puzzled by all the IBM haters that have emerged over the past few days. Warren may be a bit late to the proverbial party but it's one of the best-performing large-cap stocks this year and corporate spending on IT has been a bright spot in this recovery. Corporates that IBM sells to also have cash and borrowing power unlike governments or consumers -- it's nice to have solvent customers.

    Long IBM
    Nov 15, 2011. 05:24 PM | Likes Like |Link to Comment
  • Assessing Market Risk [View article]
    Thanks for the comment but why does everything have to be taken to the extremes? I am not saying that everything is fine and dandy or that we're on the verge of a 1982 to 2000 style bull market. Nor am I saying that Europe will become a competitive single economy by the weekend.

    In fact, I have written on this site, in two books and in my newsletters that I see a prolonged period of sub-par growth and deleveraging headwinds.

    As for gold, didn't even mention that in the article but I certainly wouldn't want anyone to think I'm bearish there either. In my 2005 book I called for gold to hit $4,000 per ounce before topping out.

    What I am saying is that the mood out there is pretty bearish even as the odds of recession in the US diminish rapidly and the odds of a Chinese hard landing are receding. I am calling for some market upside, not a new secular bull market.

    Long GLD
    Nov 15, 2011. 05:18 PM | 1 Like Like |Link to Comment
  • Assessing Market Risk [View article]
    Thanks for commenting.

    In my view Europe will sort of muddle through and the ECB will ultimately step up as lender of last resort. It's definitely the weakest link though.

    As for the US economy, there has been a clear improvement in the data. Retail sales were strong and the Q3 inventory headwinds should abate so I think GDP can print above 3% in the fourth quarter. The odds of a US recession are declining versus where they were in midsummer in my view.

    As for China, the recent decline in inflation suggests an end to their inflation fighting campaign. China has significant policy bullets unlike its developed world peers. So, that reduces the odds of a hard landing in my view.

    I'm not saying the news is stellar but it's a lot "less bad" than it was. I think this will drive a rally in the broader market. But, as the old saying goes differences of opinion are what make a market.
    Nov 15, 2011. 05:08 PM | 1 Like Like |Link to Comment
  • Assessing Market Risk [View article]
    I had to laugh when a couple of pundits on business TV spent a good 10 minutes coming up with wild theories why volume was so low last Friday. Typically is on Veteran's Day when the bond market is closed.
    Nov 15, 2011. 05:01 PM | Likes Like |Link to Comment
  • Assessing Market Risk [View article]
    European credit markets may have "yawned" but the high-yield debt market in the US has revived in a big way.

    Not only did prices rally but so far this month US corporates have issued nearly $20 billion ion junk bonds and about $145 billion in total debt (junk and investment grade corporates). In the entire third quarter, junk bond issuance averaged about $10 billion per month and in September it was just $7 billion or so.

    My point is that we aren't seeing the global credit contagion that we saw post-Lehman back in 2008. US companies are still able to borrow money.
    Nov 15, 2011. 05:00 PM | 1 Like Like |Link to Comment
  • Assessing Market Risk [View article]
    It may or may not be successful though one thing is clear, it won't happen immediately. The market clearly has took some cheer in the idea though as it rallied impressively through the month of October as the details of the plan emerged.

    But, the more important point in my view is that the Europeans are beginning to panic a bit. Remember it was less than two months ago they were saying that leveraging EFSF was a "stupid" idea. Then, they ended up doing exactly what the market demanded.

    Then, the market basically demanded the resignation of Berlusconi and Papandreou last week. Both initially resisted and then acceded to the what markets wanted.

    Next up is the ECB. Mario Draghi has said the ECB isn't the lender of last resort for Italy and Spain even though the recent spike in yields is the bond market trying to force the ECB to be more aggressive. Eventually, I suspect they'll cave in to those demands as well.
    Nov 15, 2011. 04:49 PM | 1 Like Like |Link to Comment
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