Camino Energy

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

Author: Mark Henwood 

For the last two months I have been providing commentary on sustainable energy stocks for Neil Dikeman’s cleantechblog.com  This is a great site and provides insightful commentary on topics I’m interested in.  

My commentary has been getting picked up and republished at some other well know sites.    

We lost three this week. 

Recent press highlighted some of the difficulties in the carbon trading market caused by the UN providing greater scrutiny of carbon credit projects.   One of the effects seems to be the bankruptcy and April 4 delisting of AgCert.   AgCert was engaged in methane capture projects to produce carbon offsets.  So if your looking for AgCert in our database,  they aren’t there.  We only cover the public markets.

The news is not all bad for carbon traders over the last year.

Of the four remaining carbon credit companies we track, investors have seen great returns for Climate Exchange.   Camco and EcoSecurities, on the other hand, have had huge losses.   In the middle, Trading Emissions has treaded water.   

We have suspended coverage of two other OTCBB companies, AlgoDyne Ethanol and Orion Ethanol, due to very low trading volume.  If our data service is able to report on these companies we will reinstate coverage.

Camino has reconstituted and rebalanced its PurePlay™ indices effective March 29, 2008.  

Solar:  Two companies, centrotherm  (CTN.DE) and Day4 Energy  (DFE.TO) were added.  DayStar (DSTI) was removed due to its decreased market cap. 

Renewable Electricity:  Five companies,  Ibedrola Renovalbles (IBR.MC), Goldwind (002202.SZ), Hanwei (HE.TO), Novera (NVE.L), and EarthFirst (EF.TO) were added.   Repower (RPW.DE) was removed due to its control by Suzlon.

Biofuels:  US BioEnergy (USBE) was removed due to its acquisition by VeraSun (VSE).

Fuel Cells:  No changes were made to the constituents.

By Gary Simon

The fuel cell sector has been underperforming on investors’ expectations for some time.  The basic picture is this:  In the last ten years, 32 public fuel companies in North America and Europe have raised $4.2 billion in equity, lost all but $840 million of it, sold about $1 billion worth of fuel cells, and spent about $3 billion received in government grants and contracts. So far not a single fuel cell company has shown profits.

Given this history, the question is whether there is anything which will brighten this picture.  It may be good news/bad news story.  The initial wave of fuel cell investment went into a technology called proton exchange membrane or PEM fuel cells.  That technology is not looking so good today.  While it is lightweight, inexpensive to build, and compact, it requires pure hydrogen to work.  The hydrogen economy is simply not showing any signs of life.  This is a serious setback for the PEM companies, since no one is making hydrogen easily available or inexpensive enough for the PEM fuel cells to have much of a market.  That’s the bad news.  Will that change?  The big signposts to watch are the fortunes of Ballard (BLDP) and Plug Power (PLUG) as the leaders of this pack.  In fact their stock prices have plunged over 90% from their peaks, so “leader” is a term used advisedly.  But together they have about $66 million in annual revenue.  There also may be a substantial market for PEM fuel cells in portable power applications.  MCEL and MKTY are bellwethers in this space.

The main competitor to the PEM is the solid oxide fuel cell or sometimes called a ceramic fuel cell.  It does not need hydrogen, but can run directly on a variety of conventional light fuels such as natural gas and propane.  While it had been dismissed as a technology for the far future, several companies have made advances faster than expected.  That’s the good news.  Ceres Power (CWR.L) and Ceramic Fuel Cells Ltd. (CFU.L) are the bellwethers so far in this race.

Standing alone with an entirely different approach to all others is Fuel Cell Energy (FCEL) with its molten carbonate system.  It so far has been the leader in annual losses, with $70 million lost in the last 12 months.  It needs volume to get to breakeven, and 2008 through 2010 will be very telling years for progress on profitability as FCEL has gotten more orders than ever before.

But as much as one can find about the 32 public fuel cell companies, it only begins to paint the complete picture of what is happening in this industry.  There is at least an equal number of small private fuel cell companies churning away, hoping one day to make it to the public market.  It would not come as a complete shock if one of these upstarts overtakes the current leaders and sets the new standard for market performance.  Several of these went the IPO route in the last two years (Protonex PTX.L, Smart Fuel Cells F3C.F, Neah Power NPWS.OB, IdaTech IDA.L).   None have yet shown any breakout performance, so the question is whether they hurt or help those remaining private companies with public market ambitions.

The fuel cell industry is not for the faint of heart, and there is no way to say that a general turnaround is in sight.  More than likely, the good news will be coming from some small innovative companies that have not yet gotten much recognition.

Gary Simon is a venture partner with Velocity Venture Capital in Folsom, CA (http://www.velocityvc.com) .   He is the CEO of Acumentrics and a board member of Jadoo Power.   Both companies are deeply involved in commercializing fuel cells.   Gary is also an advisor to Camino Energy.

by Mark Henwood 

Twelve months ago biofuels were dominated by companies producing ethanol from corn and sugar cane.   The situation is evolving with a growing number of public companies using bio-oil or bio-waste energy sources to compete with a broader range of fossil fuels.  In addition to ethanol producers we now have public biodiesel producers and bio-gas producers.   To reflect this progression we have renamed our index “Biofuels” and expanded it to include companies that use bio-waste, biomass, corn, sugar cane, sugar beets, or bio-oils to produce biodiesel, ethanol, or methane.

As a first step in refining the index we reviewed the market and our database to identify public companies with significant exposure to biofuels.   We then subjected the 77 potential companies to our standard PurePlay screens to identify the constituent companies.   Sixteen companies passed our energy source/product, exposure, size, liquidity, exchange, and business type screens.  We have removed Sunopta (STKL) from the index because of their very small (and decreasing) business exposure to ethanol.   Five biodiesel producers were added:  Biopetrol (B2I.DE), Brasil Ecodiesle (ECOD3.SA), Gushan (GU), Nova Biosource (NBF), and VERBIO (VBK.DE).  Two biogas producers were added:  EnviTec Biogas (ETG.DE) and Schmack (SB1.DE).   

Sixteen companies are insufficient to construct a properly diversified (5/50 rule) modified market capitalization index so the index continues as an equal weight tracking index.  We expect more companies will enter this area to compete with increasingly expensive transportation and gaseous fuels.   We also note that efforts to produce fuels from biomass, rather than bio-waste or bio-oil, have not yet produced a company able to pass our index screens.  In our view a breakthrough is needed to propel this sector beyond the confines of its current resource limitations. 

PS - by bio-oils we mean either plant or animal derived oils.  

JASO underwent a 3:1 share split effective closing 2/7/09.  The solar index was adjusted accordingly.

by Mark Henwood 

Since its peak on December 27, 2007 the solar index has dropped a massive 37% . 

To shed some light on whether this correction is sufficient to wring any excess out of valuations I took a look at the PEG ratio for the index.  Assuming margins remain fairly constant for the companies in 2008, I used sales growth forecasts as a proxy for EPS growth.  On December 12 the PEG Ratio using current earnings and sales growth was 1.35.  After the correction in the index and assuming sales forecasts haven’t changed much, the current PEG Ratio is .93.  Granted the ratio is just a rule of thumb for valuation, and that values of around one for growth companies are generally considered “fair value”,  it looks like the correction in solar is at or nearing the bottom.

Our fuel cell index kept pace with the broad S&P 500 index this year.   With no significant new entrants the same seven companies passed all our screens and remain in index and the index was rebalanced January 1, 2008.   We exclude Hoku Scientific due to their rapidly declining fuel cell business (six months revenue ending 9/30/07 was off 57% according to their Nov 07 10-Q), their hydrogen based technology, and their continued push into the polysilicon supply business.  

Companies using hydrogen as a fuel source continue their decline in market cap share.  We discussed this trend with Haitham Haddadin of Reuters on August 31, 2007 and Bob Keefe of Cox News on September 9, 2007 and we see no abatement as shown below: 

Source:  Camino Energy

What is the future of the fuel cell segement?  With Ballard’s exit from the auto market  it doesn’t appear to be the major transportation market.  In our view the longer term promise lies with companies using readily available fuels, such as natural gas, but the promise requires significant cost reductions and improvements in reliability.  If these happen, fuel cell’s inherent efficiencies, quiet operation, low emissions, and potential for heat recapture will help the technology find broader markets.

Renewable Generation has shown stong, consistent performance the last two years returning 19.2% in 2006 and 29.0% in 2007.   With low correlation to the broader US market (100 day beta of .328, 500 day beta of .523 against the S&P 500) this sub-sector looks like a good candidate for inclusion in portfolios.  

Recognizing the long term growth in renewable electric generation Camino has expanded its selection criteria to also include companies that supply generation equipment to renewable generators.   This expansion, and growth in the sector, has allowed 19 companies with USD 68.5 billion in market cap to pass all the Camino index screens.  With this number of companies we are now able to use our modified market capitalization methodology for this sector effective January 1, 2008.  Numerical and graphical values represent the spliced result of the previous equal-weight index and the Jan 1 modified market cap methodology.