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Top Secret Energy Plays

Never heard of Vantage Energy Services (AMEX: VTG  ) or GreenHunter Energy (AMEX: GRH  ) ? You're certainly not alone.

Trading volume and message-board chatter for both companies is practically nil, even though these companies tap two of the hottest investment themes out there: offshore drilling and alternative energy. In time, many more investors will be familiar with these names, so I figured Fools should be among the first to get the lowdown.

What's Vantage's point?
Cashing in on the deepwater drilling craze, that's what.

At the helm of Vantage Energy is Paul Bragg, a former Pride International (NYSE: PDE  ) chief executive. In 2005, Pride's board showed Bragg the door after years of botched construction programs and other disappointments. It was an ugly split, with the suddenly former CEO suing for breach of contract, and Pride countersuing for breach of fiduciary duty.

Bragg's two-year non-compete agreement has concluded, and the man has wasted no time getting back into the drilling game. He's brought on a slew of other veterans from Pride, Transocean (NYSE: RIG  ) , and elsewhere.

SPAC, meet spec
Vantage is a special purpose acquisition company, or SPAC. As with Star Bulk Carriers, whose subsequent returns have been less than incredible, Vantage found a willing seller in Taiwanese shipper TMT. Subject to shareholder approval, Bragg and company will purchase four premium jackup rigs, due for delivery between the fourth quarters of 2008 and 2009. Vantage has also acquired options to buy two newbuild drillships, one of which was just exercised.

All of these rigs are being built on spec. There are no contracts attached, and it's up to Vantage to secure work in advance of the rig deliveries. This strategy has propelled Norwegian newcomer Seadrill to stalwart status, but American companies have shown more restraint.

Sure, ENSCO International (NYSE: ESV  ) has ordered a few spec rigs, but there's a torrent of cash flow supporting the program. Vantage is vaulting into this venture with little more than some veterans and a vision.

Speaking of vision, these guys must be hoping investors aren't squinting and reading the fine print. Check out this presentation slide, demonstrating how cheap Vantage is on a relative cash flow basis. Why pay 7 or 12 times discretionary cash flow for rival drillers when you could pay a mere multiple of 2?

The problem is that, despite the "2008" heading, Vantage's cash flow numbers are based on a fully deployed fleet in 2012. Of course this looks like a rock-bottom multiple compared to other companies' forward year cash flows! This material is incredibly misleading, and I want nothing to do with the people behind it.

The hunt for green alternatives
In contrast, the principal behind GreenHunter has done much to impress me. Gary Evans is the founder of Magnum Hunter, an oil and gas company that generated 37% annual returns for shareholders before Cimarex Energy (NYSE: XEC  ) snapped it up for $2.2 billion. It took Evans 20 years to create that amount of value in the oil patch. He thinks he can do the same in the alternative energy space over two to three years.

GreenHunter, as a basket of green businesses, has the potential to provide the sort of diversification currently offered only by the PowerShares WilderHill Clean Energy (AMEX: PBW  ) ETF. The company may branch out into solar and geothermal power plants, but for now the three prongs are a biodiesel refinery, a wind business, and a biomass-fired power plant. The last is a modest project, so I'll focus on the first two.

The biodiesel refinery, located strategically on the Houston Ship Channel, is the largest in the U.S., at 105 million gallons per year of nameplate capacity. Critically, GreenHunter didn't build this asset from scratch. By converting an old waste oil and chemical refinery, the company achieved a per-gallon installed cost of $0.50, less than half the cost of leading competitors.

Also important is that the facility will be able to process a wide array of non-food feedstocks. I say will be because production is set to begin later this month, so there are certainly execution risks here.

In the wind area, GreenHunter has some leased properties in various states, but that's not the interesting part. The present tightness in turbine supplies is a bigger issue than land access. GreenHunter's solution was to invest in the only Chinese manufacturer able to export turbines to the U.S.

Again, there's startup risk here (for example, production is running behind schedule), but it's comforting that GreenHunter folks have been to the East China Sea to see the typhoon-resistant turbines turning.

My overall impression of GreenHunter is that this company takes a particularly entrepreneurial approach to challenges and opportunities in the renewable space. Combine that with a strong preference to buy existing assets on the cheap, rather than develop new technology, and I think you have a recipe for gains.

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