Searching for an Energy Revolutionhttp://www.fool.com/investing/high-growth/2006/03/09/searching-for-an-energy-revolution.aspx Robert Aronen
March 9, 2006
The run-up in oil and gasoline prices over the past few years has caused a renewed interest in alternative energy, both in the United States and around the world. For both economic and environmental reasons, many companies are looking for new ways to meet our energy demands. Will one of them create a world-changing solution to our energy woes?
Over on the renewable energy discussion board of the Motley Fool Rule Breakers newsletter service, Fool co-founder David Gardner challenged folks to find a Rule Breaking company within the world of alternative energy. (As he wrote in chapter one of Rule Breakers, Rule Makers, David defines a "Rule Breaker" as a company that shakes the earth when it is born.).
Like most conversations surrounding energy, however, it's difficult to stay focused -- the discussion gets bogged down in politics, environmental concerns, and personal beliefs. To organize my discussion, I'm keying in on companies involved with four concepts in alternative energy: emissions reduction, energy conservation, power generation, and transportation fuels. Which concept and which company is most likely to change the energy markets in a significant and permanent way in the foreseeable future? The answer may surprise you.
In residential and commercial buildings, the same situation exists; there have been numerous power-saving products on the market for years: energy-saving windows, doors, insulation, and roofing materials -- but adoption has been limited. The LEED (Leadership in Energy and Environmental Design) Green Building Rating System is working to make efficient buildings more common. Several large projects have recently been completed, and many more are under construction. Yet "green" buildings are still expensive, one-off projects, and nowhere near the mainstream -- at least for now.
The world has not switched to solar power because it is several times more expensive than coal. Depending on the degree of government subsidy, solarizing a home can cost as much as $35,000 and take homeowners more than 20 years to recoup the installation cost. Yet there is a ton of buzz surrounding solar energy stocks like SunPower (Nasdaq: SPWR ) , Evergreen Solar (Nasdaq: ESLR ) , and SuntechPower, and the stocks have been on fire during the past year.
Rule Breakers do not usually follow typical valuation metrics, but SunPower, Evergreen, and Suntech are all priced to the stratosphere. SunPower trades at an enterprise value-to-sales multiple of 29, while Evergreen and Suntech trade at similarly sky-high multiples of 22 and 21, respectively. Of these three, only China-based Suntech is generating any earnings. To top it all off, these folks compete with deep-pocketed giants like BP Solar and Kyocera.
For clean power, wind is the cost-competitive alternative. It is still more expensive than coal-fired power, but with the cost of wind power at about $0.05 per kilowatt hour, power companies can make a profit using wind turbines. The pure-play company in this area is Vestas from Denmark, but it competes worldwide with GE Wind Energy, Mitsubishi, and Siemens.
Don't get me wrong, I expect consumption of clean power to grow at a healthy clip, but no leader has emerged from the pack to really shake the earth or drive profits to the bottom line for investors. Indeed, Energy Information Administration (EIA) statistics show that clean power may take a while to catch on -- renewable energy possesses only a 6% market share in the U.S. Renewable energy consumption grew less than 1% between 2003 and 2004, not even keeping pace with the overall growth in energy consumption.
That's why the real story still lies in the crusty old oil patch. In 2005, worldwide consumption of petroleum products averaged 83.3 million barrels per day (bpd), and worldwide production averaged 84.1 million bpd (link opens PDF file). This tight market has driven up prices at the pump. Fear of supply disruptions, political instability, and production declines in many oil-producing regions have all conspired to drive a search for alternatives.
Why are the oil sands so important? Estimates of total liquid hydrocarbons remaining in the ground worldwide typically range from 1 to 2 trillion barrels. In contrast, the Alberta oil sands contain between 1.7 and 2.5 trillion barrels of hydrocarbons. EIA data indicate that 180 billion barrels of oil are recoverable from Canada's oil sands under current market conditions with current technology. This places Canada only behind Saudi Arabia in world oil reserves.
Suncor was the first company to produce syncrude from the oil sands, and the company reports a resource base equivalent to 11 billion barrels of conventional crude oil. It has been profitable for many years, has doubled production over the past five years, and plans to increase production by 50% over the next five years. Suncor evaluates investments for future expansion on the basis of $28-per-barrel crude oil. So while a drop in oil prices would certainly hurt the company's bottom line, only a complete collapse in the market would slow it down.