Q3 portfolio review: a floor for clean energy developers?

Tom Konrad, Contributor
October 09, 2013 |

In the third quarter, clean energy stocks in general continued their upward trend, turning in a 27 percent gain for the quarter and a 64 percent gain for the year as a whole, as measured by my benchmark and most broadly held clean energy ETF, Powershares Wilderhill Clean Energy (PBW.) This brings PBW back up to levels last seen in September 2011.

The broad market and my model portfolio of Ten Clean Energy Stocks for 2013 have also done well. My small cap benchmark (IWM) is up 10 percent for the quarter and 31 percent for the year, while my model portfolio is up 10 percent for the quarter and 21 percent for the year. I am disappointed, however, that my model portfolio now looks virtually certain to under-perform its sector benchmark for the first time since I started writing about in 2007, and the odds don't look good for beating the broad market, either.

Sectors

While some of my under-performance can be attributed to my long-term avoidance of the solar sector and stocks which are household names (which has served me quite well over the last several years,) the poor performance of renewable energy developers and internationally listed companies (mostly in Canada) have also been a significant drag on the model portfolio.

Along with my model portfolio, I also included a list of six alternative picks of clean energy companies I liked, but which I did not include in the main list because I felt they were not as well valued as the others. I intended that readers who were uncomfortable with any of my top ten picks to substitute from this alternative list, instead. For instance, some of my picks are rather illiquid, and so larger investors would be unable to buy them without moving the share price too much. Similarly, readers who were not unwilling or unable to buy stocks which only trade internationally could put together a portfolio of nine U.S.-listed stocks.

The chart above shows what the effects of such substitutions would have been, and also shows the performance of the clean energy sub-sectors (Efficiency, Efficient and Alternative Transportation, and Renewable Energy Developers) that account for at least four stocks among the sixteen.

As you can see, readers who decided to only use the highly liquid stocks from the two portfolios (the "Liquid" portfolio) or the U.S.-Listed stocks (the "Domestic" portfolio) did somewhat better than those who decided to use my ten top picks. This is typical of the early stages of investor interest in a sector: The easy to buy and research stocks advance first and investors become familiar with a new (to them) sector. If investors' renewed interest in clean energy stocks persists, we can expect its effects to spread to less liquid, lesser known, and more esoteric parts of the sector.

You can't get much more esoteric than my collection of small and micro-cap Canadian renewable energy developers with listings on the Toronto Stock Exchange (TSX): Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF), Alterra Power (TSX:AXY, OTC:MGMXF), US Geothermal (NYSE:HTM, TSX:GTH), and Ram Power Group (TSX:RPG, OTC RAMPF). This group declined an average of 22 percent for the year (including the effects of the declining Canadian dollar.) All have operations outside Canada, but only one (US Geothermal) also has has a U.S. listing, and has significantly outperformed the other three. The three TSX-listed developers were down an average of 34 percent for the year, although they were up 1 percent in the 3rd quarter, while US Geothermal is up 16 percent year-to-date, despite having been, in my opinion, less undervalued in January.

I think the enthusiasm for U.S.-listed clean energy stocks is largely driven by the resurgence of solar and other "story" stocks such as Tesla Motors (NASD:TSLA.) Investor enthusiasm for the Tesla story may also deserve credit for some of the strong performance (30 percent for the quarter, 53 percent for the year) of the transportation-related stocks in my portfolio (which does not include Tesla).

Developing a Bottom

I included the four developers in the lists because, at the start of the year, I felt they were all trading at significant discounts to what their assets would fetch on the open market. Most stark of these was Finavera, which had recently reached a deal to sell most of its wind farm developments to Pattern Energy Group (NASD:PEGI). Unfortunately, two of the four wind developments Finavera was planning on selling turned out to be nearly impossible to permit, and then and a few delays shrunk my C$0.80 valuation at the time to just C$0.22, about what the stock was selling for in January. At C$0.13 it's still a good value, but we're unlikely to make a profit on this one.

The news at the other three developers, US Geothermal, Ram Power, and Alterra Power, in contrast, has been better, yet only US Geothermal has advanced. All three have been producing power and positive cash flow, yet can't seem to catch investors' attention. Yet given the current valuations, they don't need investor attention to produce handsome returns from current prices. Including Pattern, there are a number of publicly traded renewable energy power producers would could buy US Geothermal or Ram Power outright and increase their cash flow per share. Given the exercise of Pattern's over-allotment option, the company has over $60 million it can use to purchase renewable energy companies projects.

At Pattern's current price of $23.29, it is trading at a forward dividend yield of 5.4 percent, at the low end of the 5 percent to 8 percent range of the five Canadian Power Producers discussed here. If US Geothermal's distributable income were valued on the same basis, it would be worth $0.66 per share for an 8 percent distributable income yield, based on management's projections for 2013 EBITDA and my interest estimates. Ram is in the process of remediating some of the wells at its San Jacinto-Tizate project, and this seems to be progressing well. When this is complete, the projects should be able to resume distributions to Ram. Hedge fund manager Keubiko valued Ram at $1 per share based on this one project in July.

Alterra is currently generating C$55 to C$60 million in annual EBITDA, and has debt service obligations of C$36 million for the next three years (after which they decline.) That leaves C$20 million of distributable income, or over 4 cents a share, which would lead to a value per share of C$0.54 at 8 percent, or C$0.86 at 5 percent, valuations which assign no value to the company's development projects and rapidly declining debt service in 2017 and beyond. Given the conservative nature of this valuation, I think C$0.86 is closest to Alterrra's true value, despite the fact that the stock is currently trading at C$0.30. Alterra would not need to be bought out to achieve this valuation, all it would need to do would be to start paying a dividend, and get a U.S. stock market listing (as Brookfield Renewable Energy Partners (NYSE:BEP)) recently did.

All three might reach higher valuations than I outlined above by continuing their strategies of developing projects and improving cash flows, but that would likely be a much longer term proposition.

Conclusion

With these developer stocks having stopped declining, and conservative valuations of their assets worth two to six times their current stock prices, I've been adding to my positions in Ram Power and Alterra. Potential buyers are multiplying as renewable energy power producers get access to cheap capital on the U.S. markets, meaning more money will be chasing a limited pool of assets. These under-priced TSX-listed developers should become increasingly attractive acquisition targets for the likes of Patten and Brookfield, which memorably bought Western Wind Energy earlier this year.

While such buyouts take time, an offer or two later this year could do a lot to bring my model portfolio's performance up closer to its benchmarks.

I plan to follow up with a discussion of recent news events affecting the rest of the stocks in my model portfolio soon.

Disclosure: Long FVR, AXY, HTM, RPG, BEP. Short TSLA calls.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This article was originally published on AltEnergy Stocks and was republished with permission.

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Ten clean energy stocks for 2013: first mid-term review

I missed my regular monthly update on my ten clean energy stocks for 2013 model portfolio last month, and many happen in individual companies since. For this reason, I be divided this half-yearly update in two parts. This part will look at the performance of the portfolio as a whole and the reasons why it is lagging the benchmarks. The next part, the performance of specific stocks will look at news.

Since the last update on the 5th of may, my portfolio made progress 3.0 per cent for a 10.5 percent in the first half back. The portfolio continues to however both measured the mass market of small-cap stocks on my scale the iShares Russell 2000 index (IWM) and the outstanding performance of the clean energy stocks, measured on the leading clean energy ETF, the power shares WilderHill clean energy index (PBW) left behind.

IWM inched 2.7 percent total 17.9 percent return, while PBW first half year back scored an extra 13.9 percent total 34.9 percent.

Clean energy boom

Leading clean energy stocks such as Tesla (NASD: TSLA), SolarCity (NASD: SCTY) and other solaren stocks such as first solar (FSLR) have investors attention and production were recently fishing by stellar returns.

The former seem high riding are, because they have put the naysayers in the shadow, through the provision of better than expected. Electric cars such as the Tesla model S may not be big financial investments, but by all reports, they are great cars. The skeptics could could well remind you that much more than total cost of ownership (TCO) of the car purchase is decision. If TCO all car buyers would ever taken into consideration, we would all be driving small business and municipal budget with an SUV would not exist.

The stronger solar stocks such as first solar gains have more to do with the extreme lows, in that in this sector declined in recent years. While excess capacity still threatens the industry has begun to consolidate and module prices, if not increase, have at least finished descent. The company, which is expected to survive the Shake-Out look like are recovered.

Both of these trends have led to a strong rally for clean energy stocks, which as we have not seen since the financial crisis.

Portfolio performance

Along with my model portfolio I also a list of six alternative tips of the clean energy companies, I gladly recorded that, but I do not in the main list contain that, rated because I felt they were not as good as the others. I wanted that readers who were uncomfortable selects ten with one of my top instead these alternatives to replace list. For example my picks are more illiquid, and larger investors would not be able to buy them without the share price too much movement. As well as readers who were not able to buy shares, unwilling or not could the only international trade a nine publicly traded US stock portfolio put together.

The above table shows, what would have been the impact of such replacements, and the performance of its clean energy subsectors (efficiency, efficient and alternative transportation and renewable energy developers) also this account for at least four stocks shows sixteen.

As you can see, a focal point of the most liquid stocks have produced the same half-year return as a model portfolio and a purely domestic portfolio would have performed only slightly better. But as a purely international portfolio quite badly made had driven partially by the 5.6 percent decline of the Canadian dollar: five of six listed shares trade in Canada as Toronto Stock Exchange has a large proportion of clean energy companies all over the world.

The core of the problem was that renewable energy developers: Finavera wind energy (TSX-V: FVR, OTC: FNVRF), Alterra power (TSX: AXY, OTC: MGMXF), US geothermal energy (NYSE: HTM, TSX: GTH), and RAM performance group (TSX: RPG, OTC RAMPF). This group dropped an average 23 percent for the year (including the effects of the declining Canadian dollar), despite a number of positive developments for the individual names. All are trading a a substantial discount to the value of their assets with Alterra and RAM power cash flow positive, and us geothermal profitable on a GAAP basis. Finavera, is now in the possession of its assets for sale and I expect that it the current stock price equal money more than double by the end of next year to have.

A bright spot was the performance of my taking alternative transportation and clean transport. I think less by tailwind of Tesla as individual factors in specific enterprises; I'll have the information in the next part of this update.

Conclusion

I hope that the current has clean energy rally continues. This is the case, I am sure that it will bring my less flashy yet more dust will go out for dinner. On the other hand, if the stock market starts excitement for renewable energy companies continue to spread, perhaps renewable energy developers a bit of fairy dust. I would rather fly and eat a little dust than drown in the mud.

The rally "Falter", or even reverse my picks should relatively better, as they have in the last few years. We hope that this happens not: my last years performance was small consolation for some rather gloomy times in terms of clean energy.

Stay tuned for my summary of the last few months of the individual stock news performance and company.

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Internal Department review proposal to the first US floating wind turbine

A Statoil Hywind turbine in place offshore. Credit card: Trude Refsahl, Statoil

The US Department of Interior (DOI) announced on 9 August that it will begin to build a proposal, what would be the nation's first floating wind farm check. DOI Bureau of ocean energy management (BOEM) is project forward with an assessment of the Statoil North America Hywind Maine. The planned wind farm is located about 500 meters deep approximately 12 nautical miles off the coast in the water, would a 12-megawatt capacity of four generators for wind turbines. The field the Statoil North America for a commercial wind lease approximately 22 square kilometres includes requested it expected the final Park, has, although the company States to closer to 4 km after determining its impact and wind environmental resources.

BOEM seeks public comments on environmental issues related to the proposed rental, construction and operation activities in the field of offshore by an announcement of the intention of an environmental impact statement prepare. Release a request for interest in the Federal Register is to request a maximum of 60 days of public comments posts of competitive interest rates and additional information about potential environmental impacts and other uses of the proposed lease area open. Accordingly, BOEM intends to prepare a statement that takes into account reasonably foreseeable consequences for the environment with the project Hywind Maine related. See press release of DOI, the Statoil proposal, the BOEM of public comment Web page and the Statoil-Hywind-demo Web site.

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Interior reports two major wind energy initiatives end review

The US Department of Interior (DOI) on 2 July announced that two large wind energy initiatives important environmental reviews in three States - completed Massachusetts, Rhode Iceland and Wyoming - the way for public comments and proof-reading.

DOI announced the release of the final impact on the environment instructions for a proposed wind complex in Wyoming, the up to 3,000 megawatts in power, so that the largest wind farm plant in the United States and one of the largest it would generate in the world. The proposed Chokecherry Sierra Madre wind farm would include up to 1,000 turbines and generate enough power for more than 1 million homes. The project would be built on public, private and Government land in carbon County (Wyoming). The Bureau of land management (BLM) checks the proposed wind project as well as a proposal to amend the Rawlins resource management the installation plan.

DOI also announced the publication of an environmental assessment for commercial wind leases and site assessment activities on the outer continental shelf offshore Rhode Iceland and Massachusetts. This step DOI positioned around the area as one of the nation's first offshore competitive leasing sales before end of the year to offer. The environmental assessment for the Rhode Iceland/Massachusetts wind energy sector are to inform decisions within the framework of the Obama administration "smart from the start" offshore wind energy initiative of the Bureau of ocean energy management (BOEM) to the future leasing. The wind energy sector comprises 164.750 hectares in the area of mutual interest of both countries identified. Leadership consider BOEM hosts public events on the 16 and 17 other interest groups and public comments on environmental assessment. See press release DOI.

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