Natural gas investments help us outperform – Craigmillar (VECO)

Authors: Clark Gates, Robert Preston of Craigmillar LLC

Covestor model: Global Clean Energy-Clean Tech

Disclosures: Long VECO

In May, the Craigmillar Global Clean Energy model outperformed our chosen benchmark – the WilderHill Clean Energy Index – due to stock selection, as the sector allocations are similar. According to Covestor’s calculations, our model was down 5.47% in May, while the WilderHill index fell 7.49% and Covestor’s benchmark, the S&P Global Clean Energy Index, was down 8.59% for the month.

During the down month we had some winners, like VEECO Instruments (NASDAQ: VECO). Primarily though, most of our positions were down for the month. Our emphasis on clean energy has been focused on natural gas, which has helped our outperformance versus the benchmarks.

The International Energy Agency (IEA) recently published a special report entitled “Are We Entering a Golden Age of Gas?”  There is no doubt that natural gas will be a greater contributor to the world’s energy mix over the next few decades. Not only will natural gas lower emissions, but it will also diversify the total energy supply, which will reduce the volatility in the price for energy whether for stationary or transportation purposes. Currently, shale gas has dominated the ongoing exploration for gas in the U.S. and will begin to rapidly expand to higher growing regions such as China and India.

Another advantage of natural gas is that it can be found in more locations than oil or coal. This will increase the competition for supply to meet global demand, thereby making the most efficient processes economic.  Even today the unconventional resources, such as shale gas, are equal to conventional resources.  Recently China has promoted gas use, as nuclear power has lowered its growth rate for electricity. Even the transportation sector in China has been promoting greater use of unconventional gas. Still, the power generation sector dominates gas demand. This demand is expected to rise 50% from 2010 and account for over 25% of world demand by 2035.

China is probably the most important country today with regard to the future of our global energy mix. Its current demand and expected growth combined with its existing energy policies will promote the strong growth in natural gas. China has established a five-year policy that fits nicely with our decarbonization thesis. Their path is to focus on energy efficiency and cleaner energy sources. Their two main goals is to reduce energy and carbon intensity.  In other words, they hope to produce more GDP per BTU and produce more BTUS with less carbon.  This strategy fits exactly with our investment strategy of finding companies that can achieve higher energy efficiencies and produce less carbon per production of energy. There are many ways to follow this path, and the most important is to consider all technologies and processes that lead to decarbonization. This has been the approach of our portfolios for over a decade.

Currently, we are mostly invested in the Industrial, Technology and Energy sectors of global markets.  One factor of our approach has been that during economic downtrends, newer technology has been more difficult to implement. Therefore, slower economic growth typically creates an environment non-conducive to outperformance of traditional indices. For example, the WilderHill Clean Energy Index has faltered over the last five years and continues to falter even today as the markets are hampered by sluggish economic growth.

We have positioned the portfolio to be more flexible to current economic conditions, which has allowed for our outperformance of this index. Nevertheless, if conditions continue, the Craigmillar Equity Fund will most likely trail the overall markets.  The change in economic conditions is difficult to predict and we only know by hindsight.  We have weathered these conditions so far and have outperformed our major benchmark. I am optimistic that the influence on cheaper energy due to shale gas may ignite more economic growth, which will lead to newer technologies.

We believe that investing in the technologies and processes that will provide the path to greater energy efficiency will outperform the major indices.


WilderHill index performance from Bloomberg: – 4/29/11 close of $104.99, 5/31 close of $97.13

“Are We Entering the Golden Age of Gas?” IEA.