5 Energy Stocks for the Future

Wishing may be a viable strategy in kids' movies, but on Wall Street, it's a dud. We too often tend to invest on wishful thinking, even when the odds tell us that the scenario for which we're hoping likely won't come to pass. Witness alternative energy. As each new technology arises, investors pounce, hoping that this time, they've found the green, renewable solution that will free us from oil, coal, and other CO2-spewing fuels.

Misplaced wishes
Remember corn-based ethanol's promise to free the United States from foreign-oil bondage while simultaneously lowering greenhouse-gas admissions? It sounded like Nirvana ... except that Nirvana had to be fortified with a $0.45-per-gallon tax credit for all ethanol, and a $0.54-per-gallon tariff and 2.5% ad valorem tax on the imported stuff. Domestic ethanol's sails were further trimmed by Congressional mandates requiring yearly increases for blended gasoline to top out at 15 billion gallons of ethanol by 2015, up from 10.5 billion gallons in 2009.

I'm not sure anything more could have been done to guarantee ethanol's success. Nevertheless, the fuel's proven as lucrative for investors as Beanie Babies have been to collectors: 

Source: Yahoo! Finance. Verenium executed a 1:12 reverse stock split, and its five-year price was adjusted accordingly.

Ethanol failed to grant many people's wishes -- but perhaps wind will be different. Perhaps it can do to coal, which fires 45% of the nation's electric power, what ethanol was supposed to do to oil. 

At first blush, the numbers are intriguing: According to the U.S. Department of Energy, rates for wind-generated electricity installed today are comparable to conventional wholesale electric power prices of $0.025 to $0.035 per kWh. Alas, when subsidies are stripped away, the price of wind power jumps considerably higher.

The ugly investable reality
Face it: Coal and oil are here to stay. To quote the World Energy Outlook 2008 Edition's executive summary: "Fossil fuels account for 80% of the world's primary energy mix in 2030 -- down only slightly on today. Oil remains the dominant fuel, though demand for coal rises more than any other fuel."

The cost of subsidies and mandates is another reality. When government grants a subsidy, it loses revenue, something the federal government is hardly well-positioned to forgo these days. The White House predicts that the U.S. federal deficit will grow to $1.6 trillion in the current fiscal year, while upping the 10-year tally of deficits to $9.1 trillion, bringing it in line with the Congressional Budget Office estimates. 

Green energy is only adding to the red ink. This year's massive stimulus package earmarked $39 billion for the Department of Energy, and contained an additional $20 billion in tax incentives for clean energy projects. And let's not dismiss the president's campaign promise to spend $150 billion over 10 years to develop new energy technologies. How much more can we afford?

The reality is that that big energy requirements demand "black energy," and a lot of it. Black energy, in turn, demands big companies offering economies of scale, while providing a buttress against volatility. The following fossil fuel firms are the biggest domestic coal and oil producers by market capitalization. They're well-cushioned (all endured the depressed energy market in that prevailed in the early 2000s), and conservatively capitalized (none has a debt-to-equity ratio above one). In addition, they all pay and grow dividends and will likely continue based on current payout ratios:

Sources: Capital IQ (a division of Standard and Poor's) and Reuters.

Wishing is a harmless exercise, as long as it doesn't conflict with the reality of investing. We might wish that we had a cleaner, cheaper mass-energy source, but in reality, we currently don't. Old-school fossil fuels are the reality, and no amount of wishful thinking will change that. Invest accordingly.