Wellington West Analyst Sean Peasgood covers the geothermal, plasma gasification and "Smart Grid" subsectors of the alternative energy (AE) market. He believes there's room to make some dough in each of them but believes investors may need to be patient as these growing markets gain traction. "As these (geothermal) projects come online and are proven out, the reward to investors is going to be large," Sean says. He even reveals some names to help you earn your reward in this exclusive interview with The Energy Report.
The Energy Report: Sean, can you tell us a little about yourself and your coverage area at Wellington West?
Sean Peasgood: I've been covering the technology and clean-technology sectors with Wellington West now for about 10 months. Before this, I was with a bank-owned dealer for about four years covering the technology sectors as an associate analyst. I now cover the alternative energy space, focusing on geothermal, plasma gasification and the Smart Grid markets.
TER: Could you give us an overview of those alternative energy subsectors and their respective outlooks?
SP: Let's start with geothermal. While the stocks in this sector have been relatively weak over the last few quarters, we have a positive long-term view on the space. It takes significant capital and time for these projects to come online. I believe that early stage investors will benefit as projects generate significant free cash flow in the future. Eventually, they will look more like utilities and less like exploration companies. Investors who get in today will benefit from capital gains in the short term as projects come online and then from dividend-yielding equities in the future.
Given the baseload nature of geothermal, we believe utilities are more interested in signing attractive power purchase agreements (PPAs) than relying on more intermittent sources of renewable power, such as wind and solar.
We also cover the Smart Grid market, which is essentially the deployment of Internet protocol (IP)-based communication networks across the existing power grid. The goal is to increase efficiency, enhance control and provide visibility across the grid for utilities. The lack of infrastructure and maintenance upgrades over the last several decades, along with increasing demand for power, have reduced the reliability and quality of power not only in the U.S. but around the world. This problem is only being exacerbated as the world looks to add renewable energy sources to the grid. While some of these upgrades have already begun, we believe this deployment will take place over the next 5 10 years. This should translate into strong revenue and earnings growth for a variety of IP communications-infrastructure companies both wireless and wired.
Finally, as I stated, we cover the plasma-gasification market, which is an emerging alternative technology being used in waste-to-energy projects, as well as producing cellulosic ethanol. Plasma gasification reduces emissions and produces a synthetic gas that can be used to generate power. In cellulosic ethanol production, this synthetic gas is fermented and converted to ethanol. There are a number of projects getting underway in North America, and we're seeing interest for this technology in India and China, as well.
TER: Given the speculative nature of these alternative energy plays, what type of investor should be looking at this sector?
SP: I think investors should look to balance their traditional energy exposure by adding newer alternative energy companies to their portfolios. In many cases, these new technologies are just emerging; so, while they have more risk than more traditional energy plays, when they begin to gain traction, investors could be handsomely rewarded. That said, there are ways investors can reduce this risk exposure. For example, investing in early stage geothermal companies is, obviously, more risky than investing in some of the larger players that have a portfolio of projects and stronger balance sheets. We believe risk-averse investors should look to the larger players in the market to gain exposure to these growing markets.
Investors in the geothermal market need to have a multiyear time horizon, as development can take several years. As these companies bring projects online, I expect the share prices to continue to increase as a reflection of lower exploration and development risk. Then, as they start generating stable free cash flow, they will trade more like utilities and, eventually, provide dividends.
TER: What's the timeframe on that?
SP: Generally, projects take about three to four years to develop. Depending on who you're looking at in the space, most companies that we cover I'm talking about Magma Energy Corp. (TSX:MXY) and Ram Power Corp. (TSX:RPG) have a portfolio of projects that will come online over the next few years, leading to a steady increase in megawatts (MW) online. Ram, in particular, has a 32 MW project in Nicaragua that will come online in the second quarter of 2011, which will immediately provide them with an increase in their top and bottom lines. Two quarters later, they're going to bring an additional 32 MWs online, meaning the company will be generating 72 MWs in total by the end of 2011.
The Energy Report: Sean, can you tell us a little about yourself and your coverage area at Wellington West?
Sean Peasgood: I've been covering the technology and clean-technology sectors with Wellington West now for about 10 months. Before this, I was with a bank-owned dealer for about four years covering the technology sectors as an associate analyst. I now cover the alternative energy space, focusing on geothermal, plasma gasification and the Smart Grid markets.
TER: Could you give us an overview of those alternative energy subsectors and their respective outlooks?
SP: Let's start with geothermal. While the stocks in this sector have been relatively weak over the last few quarters, we have a positive long-term view on the space. It takes significant capital and time for these projects to come online. I believe that early stage investors will benefit as projects generate significant free cash flow in the future. Eventually, they will look more like utilities and less like exploration companies. Investors who get in today will benefit from capital gains in the short term as projects come online and then from dividend-yielding equities in the future.
Given the baseload nature of geothermal, we believe utilities are more interested in signing attractive power purchase agreements (PPAs) than relying on more intermittent sources of renewable power, such as wind and solar.
We also cover the Smart Grid market, which is essentially the deployment of Internet protocol (IP)-based communication networks across the existing power grid. The goal is to increase efficiency, enhance control and provide visibility across the grid for utilities. The lack of infrastructure and maintenance upgrades over the last several decades, along with increasing demand for power, have reduced the reliability and quality of power not only in the U.S. but around the world. This problem is only being exacerbated as the world looks to add renewable energy sources to the grid. While some of these upgrades have already begun, we believe this deployment will take place over the next 5 10 years. This should translate into strong revenue and earnings growth for a variety of IP communications-infrastructure companies both wireless and wired.
Finally, as I stated, we cover the plasma-gasification market, which is an emerging alternative technology being used in waste-to-energy projects, as well as producing cellulosic ethanol. Plasma gasification reduces emissions and produces a synthetic gas that can be used to generate power. In cellulosic ethanol production, this synthetic gas is fermented and converted to ethanol. There are a number of projects getting underway in North America, and we're seeing interest for this technology in India and China, as well.
TER: Given the speculative nature of these alternative energy plays, what type of investor should be looking at this sector?
SP: I think investors should look to balance their traditional energy exposure by adding newer alternative energy companies to their portfolios. In many cases, these new technologies are just emerging; so, while they have more risk than more traditional energy plays, when they begin to gain traction, investors could be handsomely rewarded. That said, there are ways investors can reduce this risk exposure. For example, investing in early stage geothermal companies is, obviously, more risky than investing in some of the larger players that have a portfolio of projects and stronger balance sheets. We believe risk-averse investors should look to the larger players in the market to gain exposure to these growing markets.
Investors in the geothermal market need to have a multiyear time horizon, as development can take several years. As these companies bring projects online, I expect the share prices to continue to increase as a reflection of lower exploration and development risk. Then, as they start generating stable free cash flow, they will trade more like utilities and, eventually, provide dividends.
TER: What's the timeframe on that?
SP: Generally, projects take about three to four years to develop. Depending on who you're looking at in the space, most companies that we cover I'm talking about Magma Energy Corp. (TSX:MXY) and Ram Power Corp. (TSX:RPG) have a portfolio of projects that will come online over the next few years, leading to a steady increase in megawatts (MW) online. Ram, in particular, has a 32 MW project in Nicaragua that will come online in the second quarter of 2011, which will immediately provide them with an increase in their top and bottom lines. Two quarters later, they're going to bring an additional 32 MWs online, meaning the company will be generating 72 MWs in total by the end of 2011.
