Slider, you're correct that I was looking for continued strong oil and gas prices over the last couple of years. In fact, they've remained quite strong. I don't know how the smaller companies do in this kind of market because it's too difficult to get enough data to analyze these smaller companies, particularly on management quality.
My main energy investments include Unocal, Chesapeake Energy, AstroPower, and FPL Group. These stocks have done rather well since I've held them--up about 25 percent, mostly because of the performance of AstroPower. These are all long term investments, based on unique characteristics of each company:
Unocal owns patents on reformulated gasoline for low pollution areas, such as California. Unocal has been sued by Exxon and others who claim the patents are invalid, but the federal courts, including the Court of Appeals, have upheld the patents. Unocal receives royalties of about 1-1/2 cents per gallon. Unocal also has one of the best records for discovery of new oil and gas fields, and its properties are well distributed around the world. In a period when worldwide demand for oil and gas is increasing, Unocal seems positioned better than most oil companies to take advantage of rising fossil fuel prices. What happens if Russian oil holds down prices? That probably will happen, but it's also true that worldwide demand keeps increasing, and the Russians, like the Arabs, are not interested in selling oil and gas at discount prices.
I like Chesapeake's ability to hedge. They know their stuff, and they've made money on it. They also were able to increase their reserves by buying properties, paid for in part by their successful hedging.
AstroPower has patents on the production of solar photovoltaic cells made from crystaline silicon in sheet form. This gives them a competitive edge on ALL the other manufacturers, including Kyocera, Siemens, and BP. The company has expanded production facilities in Europe (where people seem more interested in this form of electrical energy than in the U.S.), but they easily sell every bit of their production worldwide. Recently they contracted with a large California developer to install rooftop units (in place of standard roofing materials) as standard equipment in a new housing development. At existing electricity prices in California, the AstroPower units are economical with a payback period of about 4 years. Furthermore, the whole concept of decentralized electricity production has grfeat benefits from the security point of view.
FPL Group, besides being the main source of electric power in Florida, is the largest operator of wind farms in the U.S., and probably in the world. Most of their wind farms are in places like Kansas and California. They are planning a facility of about 850 mw in West Virginia. Wind energy is competitive with electricity from oil and gas at today's prices.
All these investments are long term. The only one which might appreciate greatly (e.g., double in price) in the next year is AstroPower. The others ought to see annual growth in net income in the range of 10 to 20 percent. In a market where AVERAGE earnings are much less than that, and where overall economic growth is of the order of 4 percent, these energy stocks aren't too bad an investment. Of course, I understand that true gold speculators expect a lot better than that. To each his own.
Art |
