Author: Clark Gates and Robert Preston of Craigmillar, LLC
Covestor model: Global Clean Energy, Clean Tech
Disclosures: None
The month of June was not favorable to the markets and even more difficult for much of the clean energy sector. Our stated benchmark, the WilderHill Clean Energy index (NYSE: PBW), was down sharply for the month of June and is down 13.4% year to date through the end of June.
The Craigmillar Energy Model was also caught in the recent down draft. As of end of day June 30, it’s up 1.67% year to date, while Covestor’s benchmark for our model, the S&P Global Clean Energy Index, is up 1.96% for that period. The S&P 500 is up 5% in that period.
The components of WilderHill Clean Energy index reflect popular companies that produce wind, biomass and solar energy. This index also includes energy efficiency technologies for those individuals who may want to do with less. Most of the energy tech benchmarks are focused on this process and their performance numbers have been less than stellar.
Our portfolio reflects the evolution of energy as it moves away from carbon. The degree in which this occurs is based on the performance of the economy. During good times, companies tend to invest in longer payout projects. During tough times, companies will not invest long-term but would rather shovel coal instead of build a windmill. This was why we sold SunPower (NYSE: STP) and purchased a Solar ETF in June. We believe the risk in owning one company (SunPower) is higher than owning a composite of solar companies. We felt the risk in solar has generally gone up, so we have reduced the concentration of our solar allocation.
Energy production is on the rise both in the US and the rest of the world. Norwegian consultancy Rystad Energy, which analyzes world energy production, foresees the U.S. combined oil and gas output surpassing the past peak in 1972. U.S. oil production is expected to reach 7.4 million barrels a day versus the bottom of 5.4 million barrels a day back in 2008. The declines over those years have reversed – even coal is at its high since the mid-1990s.
Also, the New York State’s top environmental official seems to be on board with hydraulic fracking. The emergence of shale gas has kept U.S. gas prices far below what is priced in Europe and Asia. Gas fired electricity is displacing higher carbon based fuels like coal. Even the chemical sector is benefiting from low gas prices. These shifts in our relative dependence will have far-reaching consequences. Think how energy stability might affect our economy and markets.
For example, the recent petrochemical project by Shell (NYSE: RDS.A) and Dow Chemical (NYSE: DOW) is planning a new ethylene cracker in West Virginia. This is a game changer and reflects the positive implications of shale gas to global oil prices and US economic growth. This new facility has raised confidence, as the current conditions of shale gas are viewed positively by Shell in resolving the issues with communities, state and national regulators. This is positive for shale gas and also positive that the industry sees upcoming demand for energy from an improving economy.
We have invested in this type of industrial trend in the portfolio. We expect the growth in shale gas to power the economy. Many industrial processes, whether producing plastics or steel, require cheap energy to compete with lower wage cost imports. As mentioned many times before, energy is the currency of nature and energy is what drives our economy.
One difficulty in managing portfolios is understanding whether the economy is moving into expansion or contraction. Nevertheless, we believe the long-term decarbonization trend has been monotonic during most recent economic events. We expect this trend to continue and have positioned our portfolio accordingly, with the aim of continuing to outperform our stated benchmark.
Sources:
WilderHill index performance from Bloomberg: https://www.bloomberg.com/apps/quote?ticker=ECO:IND#chart 12/31/10 close $105.5, 5/31 close $97.13, 6/30 close $91.38
“America’s Newfound Energy” Liam Denning, Wall Street Journal 7/6/11 http://online.wsj.com/article/SB10001424052702304803104576427861663105224.html
