This week Industry Focus dips into the mailbag to answer questions from our listeners, covering topics from natural gas vehicles to oil services sustainability to sinking solar stocks.
A full transcript follows the video.
Sean O'Reilly: It's an all-mailbag episode on this energy edition of Industry Focus.
Greetings, Fools! I am Sean O'Reilly joining you here at Fool headquarters in Alexandria, Virginia. We are changing things up a bit this episode, as we'll be taking an entire time to answer your questions that were sent in to IndustryFocus@Fool.com. Joining me for this energy edition is Motley Fool analyst and competitive cornhole player Taylor Muckerman and Motley Fool contributor and serial bicyclist Tyler Crowe.
How is it going, guys?
Tyler Crowe: Going pretty good, man.
Taylor Muckerman: Not competitive, but champion cornhole.
O'Reilly: Champion?! You guys won?
Muckerman: We won yesterday. Yeah.
Muckerman: Three hours of cornhole on the office dime.
O'Reilly: For those of you that don't know, The Motley Fool has a very eclectic culture.
Muckerman: "Competitive" is one of the Motleys [company values].
O'Reilly: The company sponsored a cornhole tournament where we were down in one of our rotundas and -- how many people competed?
Muckerman: Sounds fancy: "We were in our rotunda."
O'Reilly: There were 50 or 60 Fools down there.
Muckerman: I would say 50 because there were about 26 teams.
O'Reilly: Yeah. There were snacks and you guys won. Congratulations.
Muckerman: Four or five rounds.
O'Reilly: Did you guys get trophies?
Muckerman: We got these miniature bluetooth speakers. They work pretty well. Up to 30 feet away.
O'Reilly: Good. Well, congratulations.
Muckerman: Thank you.
O'Reilly: We've got four listener-submitted questions, which I've broken down into three sections based on subject matter. First up concerns natural gas vehicles. Alex, from down in Lubbock, Texas, writes:
I'm a listener of your show, and thank you for sharing your knowledge and views. I'm invested in CLNE. As you would know, performance has been abysmal. Do you have any thoughts on the wild swings, their current performance, the future of this company? I think they're spending to grow and many companies have converted and are using natural gas vehicles, but many analysts are negative and recommend a sell rating. Would you recommend divesting, or holding, and why?
Thank you, Alex from Lubbock, Texas.
What do you guys think?
Muckerman: Yeah. Thanks, Alex. For all the listeners; that's CLNE, Clean Energy Fuels (NASDAQ:CLNE).
Crowe: Clean Energy Fuels is the company that is looking to build the gas station fueling infrastructure for natural gas vehicles.
O'Reilly: Is this the T. Boone Pickens-sponsored company?
Crowe: Sponsored? He's got a loan. He gave them a loan. Everybody sounds like it's his company. He gave them a loan.
O'Reilly: OK. Got it.
Crowe: Let's be a little cautious when you say it's T. Boone Pickens' company. The idea behind it is, with natural gas as an alternative transportation fuel, to make that possible we have to have the fueling infrastructure to make that happen. Clean Energy Fuels is one of the leading companies in terms of the development of that system.
Going toward Alex's question, is it seeing a lot of sell ratings on the stock right now? The thing that I got more than anything when you look at analysts' ratings in comparison to something like Clean Energy Fuels: Clean Energy Fuels is a very long-term development stock. You're basically building out a massive infrastructure and for that to happen, it's going to take a very long time to do.
When you look at analyst ratings, most of the time it's a 12- to 18-month time horizon.
O'Reilly: And they're usually late to the game. They've got these sell ratings after it's down a bunch.
Crowe: Right. If you look at it from that perspective, you have to reconcile your investing time horizon with what analysts are normally looking at. If you're looking at this as a 10-year prospective investment, there is certainly still a lot of potential there.
However, if you are only looking at that 12 -to 18-month time frame like a lot of analysts are, it's probably not going to look as great because it's going to take so long for them to develop that infrastructure in the amount that they have to spend to grow. To do that over that amount of time is probably going to mean over the 18 months it's not going to be exactly the most profitable company.
O'Reilly: Any thoughts, Taylor? They are growing fast.
Muckerman: Yeah. They're hitting on their internal goals, but investors -- especially in the short term -- like to see profits, and they're not producing any of those. Right now, my worry in the short term especially is... LNG isn't competitive as it was a couple years ago with gasoline and diesel. Oil prices are so low and gasoline prices have followed suit.
For all intents and purposes, the flip-flopping continues. People are saying $30 is now inevitable, whereas a couple weeks ago people thought the bottom was here. If oil prices stay this low, you might not see as many new orders come through for engines that run on LNG, or natural gas. You might not see as many customers coming through because a lot of these bigger engines can run on either. Locomotives are being built that can run on diesel, or LNG.
They're going to choose the cheapest fuel, and right now oil is a lot more competitive than it was just a year ago.
O'Reilly: Got it.
Crowe: Some of the things, looking in that long-term perspective, you have to take into account that some of the markets that they're targeting aren't exactly the largest markets out there. In reference to them, it's a big deal. I think a great example of it is refuse trucks. Basically, the garbage disposal.
Muckerman: Waste management is all-in on LNG.
Crowe: That's about 2 billion gallons per year of diesel equivalent, or CNG equivalent. For Clean Energy Fuels, that's a really big market. The promise of it is pretty good because of all the waste trucks that are being built today, or the ones that are being bought -- and this is from a Clean Energy Fuels investor presentation -- 60% of all refuse trucks sold today are compressed natural gas.
O'Reilly: So that bodes well for the future.
Crowe: Again, very long term, you have to be very patient with this stock. You have seen this company go down from 2012 to 2013, everybody got on the idea of natural gas changing the way...
O'Reilly: In oil the competition was high. Ergo...
Crowe: Right, and everyone thought that natural gas was going to completely change the way that we do things in the United States without realizing how long it was actually going to take for it to really take effect. You've seen the price of Clean Energy Fuels over the past couple of years drop precipitously, but at the same time the actual business fundamentals of the company have not changed.
Muckerman: Yeah. You're seeing cash loads being pushed further out into the future. When they're discounted you get a lower share price and a lot of investor sentiment on a stock like this.
O'Reilly: Naturally. Moving on to our second segment: dividend stability. A fellow Sean writes:
"Dear Motley Fool; Thanks for the great Industry Focus show. I listen to every single one and it is very helpful."
Crowe: You're welcome.
O'Reilly: You're welcome, Sean.
I had been following some fracking companies during the oil downturn. A few months ago I bought EMES, a share at about $40. It went OK for a while and then it dropped sharply. I bought more as the price dropped because I thought it was cheap. It kept falling until I can't buy more, and now it's at $17, which scares the heck out of me. Now I'm even worried about if this company can survive the current downturn. For example: If oil stayed at this level for two years do you think the company may go bankrupt? Should I hold on to the stock? Thank you very much. Best, Sean.
Crowe: First, EMES is Emerge Energy Services (NYSE:EMES), for the listeners out there who don't know the stock ticker. It's a supplier of frack sand to the United States horizontal drilling movement.
O'Reilly: Which is essential.
Crowe: It's basically one of the most essential drivers. The biggest question I saw was, "Is it going to go bankrupt, or can it survive if we were to see sustained low oil prices over the next couple of years?" One of the things that makes Emerge Energy Services unique is that it is a variable-rate master limited partnership.
What that means is, in any given quarter, if there is any available cash left over from its operations after it's paid its maintenance capital expenditures, interest, or anything like that; all that's left over is given out 100% to its shareholders. It fluctuates over time. If you're looking for an investment that may not have a consistent dividend payout, it's actually pretty good.
That allows the company to have a little financial flexibility. You see a lot of companies in the master limited partnership space who have these fixed dividends.
O'Reilly: They're committed to it and they're in trouble.
Crowe: They're committed. Then when you say you have a fixed dividend and then you cut it, it looks worse than saying, "We're a favorable rate; it's going to change over time." It gives everyone that option. It also gives the company more flexibility. It's not going to compromise itself by taking on debt just to pay a dividend.
Muckerman: I'm a big fan of that. Silver Wheaton pays out up to a certain percentage of its previous 12 months' cash flow. You know that it's fluctuating with the business, rather than paying a high dividend in lean times.
O'Reilly: As opposed to issuing stock, or taking on debt to pay a dividend.
Crowe: The one thing that does give promise to Emerge over the long term -- maybe I'm being too cherry-picking here -- but if we look at the past six months of results where we've had pretty low oil prices, more importantly for Emerge, it's not necessarily oil prices. It's actually drilling activity in the United States and completing activity; how many wells are getting completed.
It has gone down significantly over this time, but if you look at their financials they've actually still remained profitable, still remained cash flow positive over that six-month time frame. They've been able to scale back their capital expenditures. They've been able to make the cuts necessary to survive this downturn quite well.
O'Reilly: How's the balance sheet?
Crowe: From a debt to capital...
O'Reilly: You're talking about free cash flow.
Muckerman: Current ratio is over 2, quick ratio is over 1. The next year or two should be all right. If I remember correctly, without knowing this company all that well, their debt maturities are mainly due in three and four years. The next one to two years, they don't have a lot of debt coming due. They can keep generating cash; hopefully, for the entire industry this doesn't last three to four years. Liquidity-wise they should be all right.
When you compare it to equity it looks a little dangerous, but on a current asset versus current liability basis they're good for the next year or two.
Crowe: On terms of their ability to generate, not necessarily net income, but on an EBITDA basis for a long-term solvency, their net debt to EBITDA is about 2.2 times. That's rather conservative for a master limited partnership. It does bode pretty well for them over the long term.
O'Reilly: Got it. Before we move on, I want to make everybody aware of a very special offer for all of our Industry Focus listeners. If you found this discussion informative, and you're looking for more Foolish stock ideas, Stock Advisor may be the service for you. It is our flagship newsletter started more than 10 years ago by Motley Fool co-founders Tom and David Gardner.
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Moving on, our second question on dividend sustainability comes from Bain Petchev. "Hi, all! I loved your latest energy Industry Focus podcast. Great job!!" There's a couple exclamation points in there so you know he likes us.
Crowe: Thanks, Bain.
I have a question regarding Noble Corp (NYSE:NE). The stock fundamentals seem to be in great shape. It should be able to sustain the dividend, about 11% or 12% now, and all its drills are relatively new. However, due to oil slump, the stock is being pushed to $12, which is close to a 52-week low. In fact, it's close to the lowest level since the year 2002. Moreover, Barclays' recently downgraded severely all the drilling stocks, with a target price on NE of 10. My opinion of this stock is that it's in much better shape than its peers and it's been pushed down with the rest of the industry. I think the company can easily weather the storm and keep operating with a profit. What do you think? From, Bain.
Muckerman: I would caution you on saying "easily weather the storm." Just this week, you saw more auctions in the Gulf of Mexico and there's the lowest interest since 1986.
O'Reilly: Nobody's buying offshore leases at all?
Muckerman: Right now, the Gulf of Mexico has been a pretty solid boom for the U.S. oil production over the past couple of years, but you didn't see Exxon, you didn't see Chevron, you didn't see Shell, some of the key players.
O'Reilly: I would have thought that they'd throw out a line on a few.
Muckerman: No. I think less than $100 million was spent on these auctions.
O'Reilly: Just $100 million, though.
Muckerman: There was BHP Billiton, BP, and Anadarko Petroleum, I believe. A lot of the big names are left out. People are still nervous. These are long-term projects that costs billions of dollars. You would think, "Why not just throw a couple million at some leases?" There's development clauses in there where you have to go out there and provide your due diligence.
O'Reilly: The government says you have to do this.
Crowe: Within a certain time frame, you have to do something on that lease or you have to return it. Why are you going to spend a couple million dollars on something that you might not get to in 10 years?
O'Reilly: At this time, the companies you just listed are cutting their capital expenditures budgets by 50%, 60%.
Muckerman: And they're cutting off dividend increases, and they're cutting back share buybacks. I would be a little worried. I personally own Ensco, so I've been witness to the downfall of offshore drillers. Noble is a well-run company. They have young rigs, but this is the tail end of the oil spectrum as far as production is concerned. Especially when you can see onshore turn off and on fairly regularly and quickly.
Crowe: From Noble's business perspective, they did a really smart move a year ago by spinning off their older assets into what's called Paragon Offshore. In doing so it really cleaned up the balance sheet for them, it gave Noble Corp itself a fleet of relatively new rigs that is going to be much more marketable in the long term.
My biggest question -- and this is something I've been battling with, similar to what Taylor was saying -- as we look at oil prices, we thought shale development was going to be those marginal-cost barrels; the highest-cost things that were going to dictate the price of what oil was.
However, as we've seen over the past years, the price for developing shale has gone down drastically.
O'Reilly: They really stepped up to the plate with cutting costs.
Crowe: You have certain places in the Eagle Ford, or in the Permian Basin, where you're getting breakeven costs in the $40 to $50 range. When compared to an offshore project, that's much lower.
O'Reilly: Less risky as well.
Muckerman: Also quicker to market.
Crowe: You have a shorter development cycle, you have a cheaper breakeven price, and it begs the question -- we always thought that shale was going to be the ones that suffered the most when it came to today's prices. I'm starting to wonder if maybe there are other...
O'Reilly: It's the big, expensive, multiyear projects that are suffering.
Crowe: They could really see suffering over that time. That's my biggest question. Taylor is an Ensco shareholder, I'm a Seadrill shareholder; I have a stake in it. I still think there is a lot of possibility there. However, I'm starting to wonder if it's not quite as lucrative as it was a couple years ago.
Muckerman: The time horizon is being pushed back on a lot of that, unfortunately.
O'Reilly: For our third segment we're going to have to go a little outside our circles of confidence. It's under the umbrella that not all solar investments are made equal. It relates to why not all solar segments aren't equally as profitable, or "sure things" for investors. The question comes from Leland Payne, just north of Dallas, in Fairview, Texas. He writes:
I bought SunEdison (NASDAQOTH:SUNEQ) stock earlier this year, but sold it, taking a small loss, when they announced they were buying Vivint. I was concerned about their very aggressive acquisition program relying on yieldcos which have been rejected by investors. SolarCity (NASDAQ:SCTY) has gotten a lot of positive acceptance by investors and analysts, but I believe it could be a house of cards as well. What is your take on solar stocks, and these two specifically? Leland Payne of Fairview, Texas.
Crowe: The thing is, when you look at a SunEdison, or SolarCity, the biggest thing with them right now is that they are similar to what we were talking about earlier with natural gas vehicles. These are very long-term developments. SolarCity is building out their asset base right now, which is basically their rooftop solar, and they're taking big losses on it because they're ramping up their sales force and doing a lot of things like that, incurring huge development and capital costs.
Muckerman: Yeah. I think operation costs are up 80% in the last quarter year over year. It's necessary.
Crowe: They have to because they're growing so fast and they need that available to them to continue on their current growth trajectory. The assumption is, as an investor looking at the long term, you're willing to take those losses today on the premise that five, seven, even 10 years from now, that is going to turn into a profitable solid, cash-generating thing.
The thing that I think makes SunEdison a little bit different than SolarCity in this aspect is that SunEdison has taken those stable, cash-generating assets they have and they've spun them off into these yieldcos, TerraForm Power and TerraForm Global. These are two things they can drop their stuff down so the development company -- SunEdison -- can go out, get the financing, construct the project, and then drop it down to their yieldco.
It's similar to a master limited partnership. Then the yieldco issues debt in stock and pays back investors in terms of a dividend, and normally SunEdison will receive a general partnership incentive distribution right from the yieldco. It's kind of like this circle of cash payments. It sounds a little complicated.
O'Reilly: It sounds risky though. It's predicated on the yieldco being able to issue securities of some kind -- either debt or stock at 5% or 6% earnings yields. If the market stinks, what are they going to do?
Crowe: To me, that seems like the biggest way of looking at the profitability, long term, of these companies. It's their access to cheap capital. If you're someone like SolarCity, or SunEdison, where you have to constantly take on debt to do these things, if those debt interest rates start to go up, then it certainly looks a lot less lucrative because you're making those long-term interest rate payments.
As an investor in SolarCity, that's something that I'm going to be looking at. Can they maintain those cheap debt ratings? The thing that bodes well for that is the revenue payments that will be servicing those debts, which are these power assets. Power assets have a tendency to have the lowest default rates across the spectrum.
O'Reilly: That's to the company's credit.
Crowe: To the company's credit. It's lower than auto defaults, it's lower than mortgage defaults, so having that low default rate insures that debt is going to be paid, which lends itself to cheaper debt capital.
O'Reilly: Anything to add, Taylor?
Muckerman: Something on SolarCity since I feel like we're going a little long. I mentioned costs were up 80%, but so were installations and their backlog in the last quarter. None of that is going to produce any revenue at the moment.
O'Reilly: You've got to spend money to make money.
Muckerman: They install for free. Their money comes on these lease payments.
O'Reilly: On the back end.
Muckerman: Right. So the revenue doesn't follow suit until these leases start accumulating, which you're seeing at a great magnitude.
O'Reilly: They give the solar panels to the customers of SolarCity for free and then they get the access power, right?
Muckerman: They could sell that back to the grid, but the customer is then going to pay SolarCity on a monthly/annual basis over the next 20 to 30 years. Rather than paying the power company, they're paying SolarCity for the power that SolarCity is essentially giving them the ability to harness from the sun. That's the future of SolarCity. It's not the installation cost or fee because they don't charge anything.
Muckerman: They're just going to keep rolling that in, and they have solar-backed leases that they sell to investors, backed by these future cash flows that they're expecting.
O'Reilly: Got it. That is it for us, Fools, on this energy edition of Industry Focus. If you'd like to have your questions answered on another mailbag edition of energy Industry Focus, we would love to hear from you. Just email us at IndustryFocus@Fool.com. Again, that's IndustryFocus@Fool.com.
As always, people on this program may have interests in the stocks that they talk about, and the Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear on this program. For Tyler Crowe and Taylor Muckerman, I'm Sean O'Reilly. Thanks for listening, and Fool on!
Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman owns shares of Ensco and SolarCity. Tyler Crowe owns shares of BHP Billiton Limited (ADR), ExxonMobil, Seadrill, and SolarCity. The Motley Fool owns and recommends SolarCity; owns shares of ExxonMobil and Silver Wheaton; and recommends Chevron, Clean Energy Fuels, and Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.