Gary's Note: Byron King's mad as heck, but he's going to have to take it a little bit more. Geothermal should be taking off by now and sending his portfolio's stocks way up, but that just hasn't happened yet. Read on. Then send your pointed questions and comments to email@example.com.
Whiskey & Gunpowder By Byron King July 23, 2009 Pittsburgh, Pennsylvania, U.S.A.
Geothermal Frustrations, Part I
Hot rocks? This is Part I of a discussion of geothermal energy and investing. Part II will appear tomorrow. It's a work in progress. I've been mulling this over for quite some time. There are some things that I want to get off my chest and share with you.
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Longtime readers of Energy & Scarcity Investor know that I love geothermal energy. It's my inner geologist channeling its way out. And my inner technologist, too.
I seldom miss a chance to learn more about geothermal. Based on what I know, I often say and write good things about geothermal power and many of the publicly traded stocks that embody the geothermal space.
When Agora Financial launched ESI back in November 2007, among the first investment ideas that I recommended were five geothermal stocks.
Waiting for the Geothermal Godot
What's not to love about clean, green systems that draw "free" — sort of — energy from the earth's heat? Yes, indeed. I love geothermal. But with apologies to Samuel Beckett, I'm getting tired of waiting for that geothermal Godot who never seems to show up.
Here we are a year and a half on and the five geothermal stocks in the ESI portfolio are all down from our entry point. Sure, they've bounced up and down over time. Small-cap stocks do that, especially ones with roots as Canadian juniors. Somebody plugs them at some conference or in a newsletter, if not Barron's magazine or The New York Times. Then the stocks go up. Pretty soon, they drift down. The backstory doesn't stick.
That's not how it's supposed to work. The original idea for the ESI-5 was that with more investment, drilling and development work, the geothermal companies would do better. They'd grow more valuable organically. The stock market would respect that. Over time, the stock prices would rise. That's not what happened.
What's going on? The companies SHOULD be getting more valuable, right? Time has passed and the five companies are spending money on acreage, drilling and development, right? (Yes.) They've got deals with utility companies to buy their electric power, sooner or later, right? (Yes.)
Plus, we've got the federal and state governments mandating low-carbon energy. It's straight up the alley for geothermal. We've got "renewable portfolio standards" (RPS) too. These are legislative mandates for utility companies to buy green power — a built-in market for geothermal. There's even an RPS bidding war going on. It's like each state wants to outdo the others in raising its RPS numbers.
So if you're a geothermal company, these ought to be your salad days. There's nothing quite like selling a product that other people have to buy under penalty of law, right? Of course, this ought to offend your free market sentiments. But that's another discussion.
There's more… We've got tax breaks galore for renewable energy targeted point-blank at geothermal. Plus, at the other end of the tax code, where the funds get spent by the legislature, we've got $350 million of recent government grant money just for geothermal. $350 million? That's probably more research money than there are smart people who can spend it wisely. Still, the money is there.
The $2.5 Trillion Gorilla in the Room
This is vital. Because, you see, a lot of Americans — and a lot of people in the rest of the world — are counting on credit card-carrying American shoppers to jumpstart the global economic engine all over again.
But it isn't going to happen. And you don't want to bank your investments on the idea that it will. Or you'll risk even bigger losses than many Americans have suffered already.
So where's that geothermal boom? What has happened to geothermal in the past year? Why are the stocks down? Let's mention the usual reasons, just to get them into the sunlight.
Well, there was that stock market crash thing. Stocks tumbled, including the geothermal guys. There was a bit of a stock rebound this spring, but not much for geothermal. (Better to be a big bank, right?)
Then for the past nine months, we've had a continuing credit crunch, slowing things down for the geothermal players. We're experiencing the Great Recession, which has reduced electricity demand and put a damper on overall energy investment and risk taking.
Then there's the natural gas glut that has taken much of the cost-competitive edge off of geothermal power, as well as other alternative energy systems. Ask T. Boone Pickens about his windmills.
The bottom line is that the stock market is NOT giving much present value to future geothermal plays. Hence the stock prices are down. Why is that?
With all the inherent technical advantages of geothermal power (like "free" energy from the earth), plus the government policies and tax breaks, the companies in the business — including the ESI-5 listed above — should do better in the stock market. But that's not the case, even though the deck is stacked in favor of green power, especially geothermal. Where in the heck is the return?
I'll pick up this discussion in Part II, tomorrow.
Thanks for reading.
Until we meet again, Byron King
The hits just keep on comin' in Vancouver! PLUS… a new Trade of the Decade…
Today was everything a cantankerous Whiskey editor could want, Shooters. The Whiskey Bar panel discussion was a hoot. And almost immediately afterward I attended a small, intimate ceremony in honor of 10 years of The Daily Reckoning and the prime reckoner himself, the inimitable Bill Bonner.
Many of the morning's speakers ended up on the panel discussion: Patrick Cox, James Howard Kunstler, Barry L. Ritholz…
Barry Ritholz? That's right: author of Bailout Nation. Much like perennial favorite and Whiskey panel member James Howard Kunstler, Barry's point of view doesn't quite line up with those of some of the other contributors. But Hell is eternity locked in a room with people who agree with you; Entertainment is a panel featuring both Barry Ritholz and Doug Casey. You should have heard it! (Actually, you can! As we've told you, we're recording the entire conference. And until Monday at midnight, you can pick up the full audio set at a discount right here.)
We plied the audience with alcohol to make sure we'd seem funnier and more attractive than usual. That little trick probably won't work for those of you who will be listening to this on CD...unless you take my strong recommendation to have a shot or two before watching.
Things started off calmly enough. Master of the ceremony Eric Fry allowed the panel members to introduce themselves: Barry Ritholz, Byron King, Doug Casey, Chris Mayer, James Howard Kunstler, a slightly tardy Patrick Cox and yours truly.
This was my first time on the panel and I was giddy with excitement. Surely this is what Cinderella must have felt like…had she been an anarchist wiseacre…and if the royal ball had been an anarchocapitalist newsletter panel discussion.
I just didn't have that much to say this time, however, Shooters. I was a pygmy among giants, men whose brains and fortunes towered o'er mine. But, boy, was it fun to watch. The memory will warm me in my old age.
Doug Casey pointed out that an awful lot of government could be done away with — just about all of it, in fact — if we just adhered to two of the basics: keep your word…and don't touch other people's stuff without permission. That means no lying, sticking to contracts, no theft, no coercion and no killing. Amazingly simple stuff with which I'm inclined to agree.
Barry Ritholz very much saw a place for government and regulation…and he made an intelligent, spirited defense of it…with cussin'! And he didn't back down amid the catcalls and hoots of derision from our playful, gubmint-hatin' audience. I like Barry. He's more of a New Yorker than I ever was despite a lifetime in the old whore. I'd sat in on his breakout session earlier where he recounted the time he told representatives from Goldman Sachs to get the **** out of his office (This is NOT on the CD).
Jim Kunslter and Patrick Cox didn't fight nearly as much as I expected. But there's always next year.
Both Chris Mayer and Byron King remained as composed and smart as ever. I don't think either one of them raised his voice much or got really angry. Next time we will be sure to make sure they do a few more shots just before the event.
Byron King did remind us of the old adage, however: once the Jews leave it's time to go. Once the Portuguese leave, it's too late.
We had no shortage of Jews onstage. I counted three! One of them was also Portuguese on top of being a Jew. We're doin' fine.
But I still plan on being preemptive here, Shooters. Allow me to explain…
At the start of the discussion, Eric Fry read the first question from the audience: "What is the new Trade of the Decade?"
When it came my turn, I gave my answer thus: "Trade your house in the U.S. for a house anywhere else."
That's right, Shooters. You heard it here second.
I know what you're thinking: "Leave the U.S. for parts unknown? That's crazy talk!"
Jim Kunstler actually believes that our best and brightest (like those of you reading this in my obscenely biased opinion) ought to stay and help fix things. But I'm too great a coward with too little to offer. I'm planning my exit.
A few Shooters stopped by to chat with the panel members after the shouting. One woman who had multiple passports and property in a few countries asked me if she should renounce her U.S. citizenship, expatriate herself and never look back. That's far too personal a decision for me to counsel. I would just point out, however, I am have every intention of fleeing the U.S. and becoming a hand on Bill Bonner's ranch.
And speaking of Bill Bonner…
It is the 10th anniversary of la belle The Daily Reckoning. Exactly 10 years ago, Bill Bonner began his noble experiment that has benefitted so many and last night in a small, intimate gathering we were able to honor the man and the occasion.
After the post-Whiskey panel milling, we walked a few blocks down the street to a hotel on the water. Two dozen or so Agora Financial employees, symposium speakers and guests ascended to a cozy room with an incredible view of Burrard Inlet. There John Ford and executive publisher Addison Wiggin regaled us all with remembrances of the early years of Agora Financial and the birth of The Daily Reckoning as well as stories of the man behind it all. When it was his turn to speak Bill kept his remarks almost painfully brief. Your editor loved every minute of it.
Till tomorrow, Shooters.
Regards, Gary Gibson Managing Editor, Whiskey & Gunpowder
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