Posts tagged “finance”
The biggest constraint to renewable energy growth in the US is the availability of tax equity to support project investment. There is not nearly as much tax equity investment as is needed to support financing and building all of the renewable energy projects in development – as a result the pace of project financing and construction is being severely constrained. Many new investors will begin to enter this tax equity investment space in pursuit of outsized returns with virtually no risk created by a significantly undersupplied investment market. These new tax investors will usher in a period of unprecedented growth in the construction of renewable energy projects.
The Strange Market of Tax Equity Investing
Investment in renewable energy comes from three sources. (1) Project Equity –the investment that actually owns the clean energy facility, this includes the risk of operation and the long-term value of the asset, and there are plenty of investors willing to participate as part of (or all of) this investment. (2) Debt – this is generally traditional project equity lending, and as with project equity there are plenty of lenders – big banks, small banks, private debt funds – ready to lend to all kinds of renewable energy projects. For these traditional sources of project financing project risks are increasingly well understood and, provided there is enough project revenue to cover debt repayment, this money is readily available. (3) Tax Equity – this third, and vital source of capital are investments made in the project that will be repaid primarily through tax credits and other tax savings to the tax equity investor. There simply is not currently enough tax equity to support the pace of growth in renewable power development in the U.S. CONTINUE»
Energy Trends Finance
In This Issue
Seadrill Limited (SDRL)
Magellan Midstream Partners LP (MMP): BUY
Global Partners (GLP): BUY
Changes to Previous Recommendation
Seadrill an Offshore Driller in Rapid Growth Mode
Seadrill Limited (SDRL) is currently the largest offshore drilling company in the world by market capitalization of roughly $19 billion (B), and with an enterprise value of $29 B. The company boasts an exceptional dividend yield of 9.0% – a dividend of $3.52/share.
In the 1Q of 2013, SDRL beat market expectations for both revenues and earnings. SDRL, like most of the industry, is in a rapid growth mode seeking to capitalize on the explosive worldwide need for safer, better quality rigs in the post BP Gulf of Mexico oil spill to drill in more difficult and deeper waters – ultra deep to capture higher crude prices.
This week I decided to analyze and recommend an energy company I feel is worthy of investing in. In the coming weeks, as we prepare to launch Energy Trends Finance — a service for investors, executives, and others involved in the energy sector — be sure to look out for similar analyses on companies across the energy industry.
Protect Your Downside
With all the crosscurrents in the markets, Europe in recession, Japan with no economic growth, and the U.S. registering slow GDP growth that keeps energy demand sluggish, and continued high volatility in oil and gas prices, I remain cautious in the energy sector. However, although cautious I am not absent from the market as I do believe that with a diligent and “defensive” investment philosophy one can achieve positive results over the long-term.
(Related: Three Reasons to Invest in Energy Long-Term)
Indeed, as I have outlined in several of my energy trend notes over the last few weeks, I remain bullish long-term in energy equities, as investors will continue to be attracted to energy equities due to long-term structural supply/demand imbalances that will continue to see demand – consumption increasingly outpace production growth.
Invest Defensively for the Long-Term
The key is to pick and choose wisely by not focusing on the overall broader energy market, but to seek out energy stocks that are “infrastructure” related as pipeline MLPs, or niche providers to the energy market as offshore rig providers, deep water drillers and specialty pump and valve flow systems.
In the current market of volatile share price swings, seek out companies with high dividend yields or MLPs with high distribution yields that will protect your downside by providing support to share prices in down turning markets. I’m talking about specialty companies with above average dividend yields, solid balance sheets, low debt, a sound credible and simple business plan, and — most importantly — high growth prospects. And that brings us to our energy investment idea this week: Magellan Midstream Partners LP (NYSE: MMP).
In our energy finance newsletter a few weeks back I wrote about some possible fallout after Energy Future Holdings (EFH), the massive private equity-owned Texas electric holding company and the result of one of the largest leveraged buy-outs ever, formally warned that it might need to seek bankruptcy protection.
Last week, EFH offered a restructuring plan to creditors in an effort to avoid bankruptcy. The restructuring offer will almost surely be rejected, but may lay the initial groundwork for some type of structured resolution outside (or even inside) of bankruptcy court.
A little more than five years ago EFH was created as the vehicle for the most expensive leveraged buy-out in history when a private equity group led by KKR, TPG and Goldman Sachs Capital Partners bought the Texas energy company at a price of $43.2 billion. The failure of EFH will be hugely important in terms of the direct impact on investors, lenders and the private equity market, but perhaps more important will be what this failure means for the broader energy landscape.
Oil Demand Shift
From 2000 the increasing industrialization of the developing world has been the primary catalyst driving the demand for global crude oil. Among non-OECD nations, China and India have led the charge, with Chinese oil demand growing at a torrid 6.7% per annum rate and India’s oil demand growing at 4.0% per annum. Overall non-OECD demand for oil has increased at a comparable rate of 3.6% per annum, with the Asia/Pacific region growing oil demand at roughly 2.7%. Developed nations, however, have seen diminishing oil demand with a negative -.04% per annum growth rate.
As I shall point out, the decline in OECD oil demand is not enough to offset the rising demand for oil from the developing world, so the net result going forward will be an increasing supply/demand imbalance. My analysis points to an increasing deficit — gap in global wellhead oil supply — to meet demand. CONTINUE»
The IRS issued an important piece of guidance related to clean energy finance this week. It is the annual inflation adjustment for the Production Tax Credit (PTC) and it increased the credit from 2.2 to 2.3 cents per kWh for full qualifying energy property like wind and geothermal, while the partial credit for sources like open-loop biomass and incremental hydro remained at 1.1 cents per kWh (also adjusted were the inflation factors for Indian and refined coal).
More important is what is still missing – despite widespread expectation for a first quarter release, the long awaited rules on how to determine the start of construction for purposes of determining what projects will be PTC eligible at the end of 2013 still have not been issued.
When the PTC was extended as part of the fiscal cliff deal during the holidays there was an important change in the method for determining whether a project would qualify for the credit. Historically, the qualification of property was based on the date the property was placed in service (and it’s worth noting that this rule is actually somewhat vague and the application sometimes very nuanced). Now, qualification is based on when construction for the facility begins. As long as construction starts before year-end, property is eligible for the credit.
The battle for market share in power generation is primarily between historically abundant and relatively cheap coal and environmentally cleaner but increasingly abundant Natural Gas (NG).
The increasing supplies of NG driven by the productivity of unconventional shale exploration and drilling has pushed NG prices lower over the last few years. With lower NG prices has come greater NG use as a fuel source in power generation.
While many in the media have sounded the death knell for coal as a power fuel source, and in the very long-term I think coal usage will gradually diminish, it will take years — perhaps even decades — for coal to be relegated to an insignificant role in power generation, but I am convinced it will occur.