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Sustainable energy indices mixed, broad markets gain while commodities retreat (week ending 7/18)

Author: Mark Henwood

Emerging Markets, EAFA, and S&P500 all rose this week partially on reduced pressure on commodities (DJP) which fell 7.8% for the week.

Biofuels shares responded mid-week to news that Verasun (VSE) was keeping 330 MGY per year of new capacity idle. As I wrote in my post for the week ending June 13th with tight margins it comes as no surprise that producers are reducing production plans . With ethanol consuming somewhere around 30% of corn supplies the cost of corn should respond to a reduction in ethanol production. Reduced ethanol supplies should be supportive of stronger ethanol prices. At some point an equilibrium will be reached.

Later in the week UBS upgraded the ethanol sector to a buy on “improving margins”. VSE’s price (and others) responded strongly gaining 21% on Friday and ending the week up a huge 49% at USD 6.12/share. With this big change I thought the margin on producing ethanol would have materially improved. True, corn has been dropping significantly since the start of July with the December contract closing Friday on the CBOT at USD 6.28/bushel. But ethanol has been falling also in July, with the December contract closing Friday at USD 2.36/gallon leaving the “corn crush” margin at the same slim USD 0.2/gallon it was in the middle of June when Verasun’s stock price was below USD 5.0/share. I’m not sure I understand the improving margin argument.
The LED-Lighting strategy continued to disappoint falling an additional 9.9% for the week with a cumulative decline of 35% since we started tracking the sector at the end of March. Orion Energy Systems Inc. (OESX) lost 38.7% of its value for the week after it reduced its guidance for 2009 to a 25-28% growth rate, down from its previous 50% expectation. With its long term potential, I’m looking for signs this strategy may be fairly priced after this year’s big correction.
Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. He also is an investor in sustainable energy stocks and has positions in Renewable Electricity.

Biofuel and Solar fall over 4%, other indices mixed (week ending 5/30)

Author: Mark Henwood

Broad market indices (Emerging Markets, EAFA, S&P500) all rose this week. Camino’s PurePlay™ indices were mixed with Renewable Electricity showing a 0.8% gain. Commodities (DJP) declined 2.6%.

Solar was the story of the week with our 34 member index decreasing 4.2% amid huge volatility.

The market moves this week were evidence of investors valuing companies based on government subsidies packages. On the 28th and 29th we saw reports that reductions in German subsidies might be greater than originally expected. And at the close of business on the 29th our index was down 9.2% for the week. Then on Friday reports came out that feed-in tariff reductions would be roughly in line with previous expectations – Solar rises 5.6% and closes out the week down only 4.2%.

Solar investors are also being influenced to an increasing degree by moves in oil prices. Over the last 365 days Solar and oil (measured by the OIL ETN) have been loosely correlated at .28. Over the last 30 days, however, the correlation coefficient has risen to .39 despite the fact that Solar’s electric market place isn’t driven to any significant degree by oil prices. Remember, only a portion of delivered electric prices are energy, and in most markets only a small portion of that is related to oil. So the data is showing that behavioral factors and regulator policy are important influences on valuations.

Biofuel had a down week dropping 4.5%. I don’t think this was a result of declining oil prices but rather was due to some specific company issues. Biofuel correlation (365 days) with oil has been a low .175 and has not trended upward recently.
Schmack Biogas (SB1.DE) led the decline after reporting a very weak quarter and a significant management change. The 54% decline in sales for the company raises some big flags. Pacific Ethanol (PEIX) was also down a significant 15.3% giving up most of the gains associated with its recent operating profit. While the company has been able to close its preferred stock offering, the offering has caused investors to rethink the pricing of PEIX.

Renewable Electric, up 0.8% for the week, continues to be the sustainable success story for 2008. The index is now down 2.3% for the year, outperforming both the S&P and matching EAFA. Of the broad benchmarks, only Emerging Markets, up 0.7% for the year, has performed better.

Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. He also is an investor in sustainable energy stocks and has positions in Renewable Electricity.

Biofuel Rises 6.6%, other indices mixed (week ending 5/23)

Author: Mark Henwood

Broad market indices (Emerging Markets, EAFA, S&P500) all fell significantly this week. Camino’s PurePlay™ indices were mixed but with Biofuels up sharply. Commodities (DJP) advance 1.6%, up 19.6% for the year.

Biofuel was the story of the week with our 15 member index increasing 6.6%. Four constituents rose more than 20% with Pacific Ethanol (PEIX) increasing 30.6%. Pacific rose dramatically after its 5 AM Monday call where it reported an operating profit. Later in the week the stock dropped after the company reported it announced a preferred stock offering.
Part of the operating profit was USD 2.2 million in derivative gains which I feel should be treated cautiously. After all, a year earlier the company had a derivatives loss. Also, with current assets of USD 121 million and current liabilities of USD 168 million, operating earnings don’t look like they will be sufficient to close the gap so I’m not surprised by the financing. The market reaction seems to indicate a question whether this will be the last round.

Of all the sustainable energy strategies, Biofuel is one of the few, and the largest by far, to offer an alternative to petroleum fuels for transportation. So there seems to be some logic that rising oil prices might lift the stocks of Biofuel producers. As I mentioned I would last week, I ran a quick correlation of Biofuel to a readily investable crude oil proxy (Ipath’s OIL ETN) and found over the last year Biofuel and OIL were correlated a relatively low .17. This is even lower than Solar’s correlation to oil which came in at .26 over the last year. With oil and natural gas being used to produce relatively small amounts of electricity in key solar markets, the only logic I can see for the oil/Solar correlation is high oil prices sustain governmental and consumer support for “alternatives” even thought the alternatives are only loosely related to oil.

One good week hasn’t erased Biofuel’s losses this year and the index is still down 27.5% since Jan 1.

LED & Lighting is a new strategy being tracked at Camino. It consists of 9 companies that pass our screens and are producers of energy efficient lighting using LED, flourescent, or other technologies. I expect to discuss lumens next week.

Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. He also is an investor in sustainable energy stocks.

Solar and Renewable Electricity Gain (Week Ending 5/9)

Author: Mark Henwood

Broad market indices (Emerging Markets, EAFA, S&P500) all fell this week. Camino’s PurePlay™ indices were mixed, commodities (ticker DJP) rose strongly.

The PurePlay™ Solar index, comprised of 34 companies, reversed last week’s 2.0% loss with a 0.9% gain. The index members were mixed with 13 stocks increasing and 21 stocks declining. In contrast to last week, two stocks (ENER and CSIQ) increased by over 20%. Energy Conversion Devices’ eye popping 45.2% gain for the week was largely responsible for lifting the index. The company stock rose sharply in very heavy trading after its 7 AM press release on the 8th, and then more after their earnings call concluded later in the morning. The company reported great results for its Q3 with solar product sales up 193% from the previous year. In contrast to prior periods the company showed a profit. More on ENER below.

The Renewable Electricity index increased 0.7% with 11 stocks climbing and 12 retreating. No stock increased or declined by over 20% and nothing caught our attention to report here other then to note that the index’s relatively low volatility continues.

Biofuels followed last week’s loss with an additional 3.4% loss. There were 5 advancing stocks to 10 stocks falling. Biofuels are now down 35.2% for the year, the worst showing of our four strategies.

Aventine (AVR) reversed last week’s gain with a 23.0% decline contributing significantly to the index’s decline. I previously noted Aventine’s large USD 26 million mark-down for its student loan ARS position and noted the company is engaged in other complex financial transactions to hedge operational risk. The company’s value decreased this week by USD 52 million, not because of operational risks, but due to an analyst’s concern about liquidity on the 5th and Moody’s concerns and negative outlook on the 8th. Is there more financial risk to come?

Fuel Cells posted another loss of 1.1% this week with 3 stocks advancing and 4 stocks declining. No stock increased or declined by over 20%.

Energy Conversion: After its big price move, annualizing the company’s Q3 earnings results in a current period PE ratio of 68.

The question is can the company continue the growth necessary to support this price? To grow at the PE ratio, the company will need to expand its Q3 2008 production of 21.6 MW to a Q3 2010 production 61 MW. With its announced plans to increase annual production capacity to 300MW by the end of FY2010 it looks like it may be possible to keep pace. But there isn’t much room for error. Any problems that impact this rapid growth with likely be rewarded with sharp price movements. In our view the stock may be fully priced after this week’s huge gains.

Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. He also is an investor in sustainable energy stocks.