What Big Oil Says About Green
Two Readers Ask About Clean Coal
Green Mountain Pays Off Big for Subscribers
Last week, I attended the latest Chief Executives’ Club of Boston meeting as part of a sizable press contingent covering a speech by Chevron Chairman and CEO David O’Reilly. O’Reilly is a Chevron lifer, having joined the company in 1968 after gaining his engineering degree from University College Dublin in his native Ireland.
Last year, Chevron (CVX) produced about 923 million barrels of oil and oil-equivalents from its operations in 20 countries and generated a total of $265 billion in sales from its various units.
So it’s no surprise that O’Reilly spent much of his time making the argument for oil, including calling for the opening of the U.S. continental shelf to drilling, which he says would yield 35 billion barrels of oil and equivalent natural gas. He also blasted as “smoke and mirrors” a proposed cap-and-trade carbon system and pledges to reduce American greenhouse emissions by 20% in the next 11 years. Such actions would help put America “on a straight path to a pre-industrial standard of living,” he told the crowd.
I don’t agree with O’Reilly, but I understand his resistance to radical changes in energy policy–after all, a move from oil and natural gas is largely a net losing proposition for oil companies. A cap-and-trade program, for example, would force oil companies to spend $68 billion to get their refineries up to code, according to the congressional testimony of another oil company executive. And opening up offshore drilling isn’t necessarily much of a salve–35 billion barrels would meet American energy needs for a total of four years, nine months.
But when O’Reilly turned from defense to addressing alternative energies is when he really got across some fine insights. Since energy security is one of the nation’s primary goals, he said, the country needs to depend less on foreign oil and to diversify its reliance on one source of fuel by expanding more into wind, solar, geothermal and nuclear.
That doesn’t mean there won’t be any need for oil anytime soon. According to O’Reilly, the energy demands of the United States (our oil usage is 50% higher than it was in 1989) and of the growing world demand (bound to be at least 30% higher in 20 years even with aggressive alternative energy investment) means we need a portfolio of energy sources including fossil fuels for the next 50 years or more.
To black gold adherents, this may seem a call to load up on some value-priced oil company stocks (if so, CVX is at a price-to-earnings ratio of 7, and pays a 65-cents quarterly dividend). But as editor of the Cabot Green Investor, this accentuates what a tremendous opportunity there is for Green.
According to the latest data from the U.S. Energy Information Administration, wind and solar–the two most promising alternative technologies–contribute less than one half of 1% of U.S. energy generation. Add in the ethanol that gets blended into our gasoline, all the hydroelectric from the great projects of the early 20th century and existing geothermal, and the renewables group kicks in just 7% of U.S. energy needs (nuclear contributes another 8%).
Clearly, with even Big Oil conceding the pressing need for alternative energies to be in the mix, the future market for Green technologies is huge. How much does Chevron believe this? It’s now the largest non-public utility producer of geothermal energy in the world and is one of the largest installers of solar panels in the United States. Even Big Oil is going Green.
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The Boston CEO Club is perhaps the most vibrant of the Chief Executives clubs around the world (though I am told Chicago’s is also quite active). Last week’s meeting drew well over 200 high-level executives from area companies including Bob Kraft, owner of the Patriots football team; Peter Lynch, Vice Chairman of Fidelity; and Ronald Sargent, Chairman of Staples.
Also in attendance were a number of local politicians, including former Massachusetts governor (and unsuccessful New York gubernatorial candidate) William Weld and current state treasurer Timothy Cahill, plus an sizable contingent of Jesuit priests from CEO Club partner Boston College–the most I’d seen in one place since I graduated from B.C. 15 years ago.
I had the pleasure of sitting next to a couple of executives who are also long time Cabot newsletter subscribers. Since I didn’t intend to write about them at the time, I’ll keep our conversation unattributed.
We touched on Cabot’s long background in giving impartial investing advice and the excellent track record of my fellow editor Paul Goodwin and his Cabot China & Emerging Markets newsletter. And of course, they asked about Green, specifically about the state of carbon sequestration (still in experimental stages) and the outlook for cleaner coal technologies.
I told them one of my favorite stocks in the cleaner coal space is Fuel Tech (FTEK), an Illinois-based company that specializes in finding ways to help power plants burn fuel more efficiently and cleanly. Despite ever-increasing consciousness about the damage that Midwest coal plant emissions do to air and drinking water quality in the East, the cleaner coal segment actually has been under pressure of late.
That’s because the Clean Air Interstate Rule (CAIR), which was implemented by the EPA in 2005, was declared illegal by a federal court last summer. CAIR mandates steep reductions in the amount of noxious chemicals coal plants could emit. The elimination of that rule sent the industry into turmoil.
To adapt to the CAIR-free market, Fuel Tech bought for cash on the barrel (it’s essentially debt-free) three competitors that had cheaper, entry-level technology optimizing how fuels are burned to reduce emissions. Combined with Fuel Tech’s technology, it means even basic implementation of the technologies can reduce nitrous oxide emissions by 50%.
Then, in December 2008, the same court that vacated CAIR reinstated it, with the proviso that the EPA rewrite the rule by 2011 to be technically legal. All of the sudden, Fuel Tech is seeing an upsurge in interest again from plant operators scrambling to be in compliance. The company is finding that the entry-level technologies they bought as a defensive measure now look to be generating trickle-up business to Fuel Tech’s more complex offerings.
As editor of Cabot Green Investor, I love uncovering companies with a firm hold in a niche area of Green, like Fuel Tech, which tend to hold up well in difficult markets while benefiting from sustained uptrends. I also love getting subscribers into growth stocks that benefit greatly from a bullish market, like the one we find ourselves in now. Last July, I identified Green Mountain Coffee Roasters (GMCR) as the next potentially great stock.
Coffee is a $70 billion retail market in the U.S., with 54% of Americans drinking an average of six cups a day. Overall, the market is a slow grower, rising just 2% a year. But the organic and fair trade segment of coffee has seen sales surge 32% a year for the past five years as consumers become aware of poorly paid farmers and the environmental problems with clear-cut coffee farms. Even with that growth, fair trade and organic is still just 3% of all coffee imports (only a small portion of coffee consumer in the U.S. is domestic, from Hawaii).
Vermont-based Green Mountain is the leader in fair trade and organic, with 25% of its product double certified as organic and fair trade, another 8% certified organic, and a further 14% farm-identified, meaning the company knows exactly where the beans come from, a crucial step in transitioning suppliers into fair trade and organic.
In New England and the Hudson Valley, McDonalds serves Green Mountain coffee co-branded with the Newman’s Own label. Green Mountain also owns a category-killing technology–the Keurig. For those that don’t know, the Keurig is a single serve coffee maker, offering coffee from basic Columbian decaf to rare exotics like Jamaican Blue Mountain. Green Mountain makes its own Keurig coffees and also licenses the rights to make K-Cups to others. Total sales hit $500 million for the year ended last September, part of an annualized 53% rise in sales since 2004.
Because of market conditions last year, I had subscribers keep Green Mountain on their Watch List, but since it never broke the price level of 40 that my technical analysis said was key, we never bought it. Just as well, since the stock slumped to 25 last fall. Still, I kept my eye on Green Mountain, and this April saw the fundamentals and the technical factors–including signs of fund accumulation and overextended short sellers–were dovetailing to form a potentially explosive combination.
I told subscribers to buy GMCR shares on April 15, and my model portfolio added it the next day at $51. On April 30, Green Mountain reported sterling sales of $193 million for its second quarter, up 60%, and announced that Wal-Mart will start selling its Keurig makers and K-Cups at stores nationwide.
Shares surged to $71 at the open that day and have continued chugging up to a recent price of $81, for a 59% gain for subscribers so far. And shares still look good to buy right now. I anticipate more big gainers in the months to come for subscribers to Cabot Green Investor. I hope you’ll consider signing on for the ride.
All the best,
For Cabot Wealth Advisory
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