Only Renewables Gain Again (Week Ending 5/2)

Author: Mark Henwood

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

The Solar index, comprised of 34 companies, followed last week’s 0.2% loss with a 2.0% decline. 15 stocks increased and 19 stocks declined. In contrast to most weeks, no stock increased or declined by over 20% and nothing caught our attention to report here. The solar ETFs both declined, 3.5% in one case and 2.2% in the other. With a 74% overlap I suspect this much difference is more random than a sustained trend

The Renewable Electricity index managed a 0.4% increase with 8 stocks climbing and 15 retreating. Most notable on the increasing side was Energy Developments (ENE.AX) advancing 11.8%, continuing to recover from the 30% sell-off on April 14th. I discussed this sell-off in the Week Ending 4/18 summary and noted that some traders, myself included, saw the 30% move as a significant over-correction.

Biofuels followed last week’s loss with a 0.4% loss. There were 5 advancing stocks to 10 stocks falling. On the plus side Aventine (AVR) posted an impressive 22.0% increase for the week as a result of its first quarter results. In my view some of the key factors cited by Aventine for its improved operating performance included (1) wider spreads (fuel revenue – corn cost), (2) decreased conversion costs, and (3) benefits of the wet milling process on by-product production.

On the negative side the company reported a significant USD 21.6 million mark-down for its student loan ARS position. Considering that the company engages in significant long and short derivative transactions to hedge its physical and contract positions, I trust management is focusing sufficient attention on crucial risk management controls. I hope there are no similarities between investing in ARS student loan notes and commodity derivatives.

In contrast, Pacific Ethanol (PEIX) had a rough week in the market declining 11.7% despite an appearance by the CEO on Fast Money on the 25th and the start-up of the 60 million gallon per year Burley, Idaho plant. In defense of corn based ethanol Mr. Koehler noted that ethanol is the only significant alternative to petroleum based transportation fuels. More on this below.

Fuel Cells posted a smaller 0.7% decline this week with 4 stocks advancing and 3 stocks declining. YTD the index is down 31.3% for the year. This technology continues to struggle with product, fuel source, and profitability issues. Another view of the fuel cell industry discusses the sector in more detail.

Ethanol’s significance: How significant are the ethanol companies? Let’s take a look at Aventine. In their 1st quarter release the company reported producing 47.7 million gallons of ethanol. That’s roughly equivalent to 12,000 barrels of oil per day. In 2006 that would have ranked Aventine as the 50th largest oil producer in the US (EIA 2006 Annual Report). Granted, while that’s only 2% of the production of the largest US crude oil producer, it’s still pretty significant.

Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. All index computations and constituent changes cited above are available at Camino. He also is an investor in sustainable energy stocks. Mark has a position in ENE.AX

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