The Dirty Path to Clean Energy

 | Aug 19, 2013 | 3:00 PM EDT  | Comments
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Stock quotes in this article:

sfy

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wpx

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apa

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rdc

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aci

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wlt

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btu

Winston Churchill is reported to have once said, "We can always count on the Americans to do the right thing, after they have exhausted all the other possibilities." These days, this is most true when applied to our nation's energy policy.

We talk of energy independence and lower-priced energy, but our policies would seem to steer us toward a different course. We are spending a lot of money on so-called green energy sources that are years away from providing a meaningful portion of our energy needs. At the same time, we are doing everything possible to discourage the development of our two most abundant energy resources, natural gas and coal, by discouraging fracking and the use of coal to produce electricity.

While I am a fan of the concept of renewable energy, I do not think I will live long enough to see a world where a significant portion of the world's energy use comes from renewables. Neither does the Energy Information Administration, as it projects renewables to account for less than 20% of the world's energy production in 2040. Eighty percent of the world's energy at that time will still come from carbon-based fuels, according to the recently released Energy Outlook 2013.

In my opinion, a faster path to energy independence and a higher usage of renewables is not going to come from the current system of government tax breaks, subsidies and grants but from a strong economy and high growth rates. A growing economy can produce the dollars that are necessary for the type of effort and spending that are needed to develop solutions to storage and transmission problems of solar and wind and develop biofuels that make sense on a large scale.

The fastest way to grow the economy, next to cutting taxes to zero, is to drastically reduce energy costs. It may seem counterintuitive, and this will probably generate some unkind emails, but the fastest way to exploit and increase renewable energy is to drill, pump and burn what we have now to reduce energy costs cross the board. It is the only way I can see to produce the capital needed to grow the renewables industry.

Eventually someone will figure out that we need to grow the economy and create jobs before we can solve our other problems. When that happens, we will see energy demand rise, and companies whose stocks are now languishing, such as Swift Energy (SFY) and WPX Energy (WPX), which can be purchased today at substantial discounts to tangible book value, should see their stock prices appreciate by several multiples. Larger-cap stocks such as Apache (APA) and Rowan (RDC) also seem cheap at this level, given that carbon energy usage will increase over the next 20 years, no matter what direction U.S. energy policy takes. Any market-based or sector-based selloff that drives energy stocks to lower multiples of asset value, earnings or cash flow should be treated as a long-term buying opportunity.

I think you have to view coal the same way. As Glenn Williams has pointed out, coal is the dirtiest fuel we have, and usage in the United States will probably continue to decline as a result of increased regulatory pressure. That's not the case for the rest of the world, and by 2040, coal will be the fastest-growing fuel supply used, according to the EIA report, and most of the growth will come from developing nations. We night not burn it, but India and China will, as they need cheap energy to drive continued growth. Coal demand here in the U.S. should bottom out and stabilize in the near future as well, since coal still provides around 40% of the nation's electricity.

At some point it is going to make political sense to ease up on the industry. The coal-mining industry employees 174,000 people directly in some of the economically weakest regions of the U.S. and thousands more whose employment depends on the industry. Coal is far from a perfect fuel, but it is part of bridge to an energy independent U.S. and stronger economy. Stocks such as Arch Coal (ACI), Walter Energy (WLT) and Peabody Energy (BTU) have a bumpy short-term outlook, but it's a pretty good bet that their stock prices will be a lot higher at some point in the next 10 years than they are today.

In my opinion, our domestic energy policy is overly focused on the renewables sector at the expense of economic growth. When that changes, the cheap coal and natural gas stocks of today will become market leaders.

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