year end energy update ?3


While ERII trends as I'd predicted, I thought now would be a good time to take a step back and update last week's comments on the big energy picture picture with respect to the stocks I cover.  In macro news, we've seen lots of gasoline vehicle bans, but France has become the first to ban oil & gas production as of 2040.  Existing licenses will not be renewed, not that it really matters; France imports almost all of its fuel anyway.  More importantly, the price of natural gas has collapsed again, falling 45% YoY and over 15% since its late November rally. 

That's actually good for the new picks that I've introduced.  CUI should benefit from increased use due to cheaper feedstock, assuming that adoption progresses as management has projected.  The situation is similar for CQH, which is insulated from gas pricing in terms of supply to customers, but benefits slightly from using it as an energy source as well.   Note, however, that its early monopoly is finally set to see some company in the form of the Cove Point LNG facility in Maryland.  I see this as not so much of a competitive threat just yet, and more of a good step in the establishment of a global market, especially in light of Australian regulatory actions.  That said, any developing market needs monitoring, but I think the current administration's attitude to toward pipelines will be another tailwind for Cheniere Energy Partners.

Westport is in the final stages of commercializing its HPDI 2.0 engine, and has established a secured $20M 2-year term loan at 9% interest to support that effort.  Payments will escalate as the loan progresses.  The JV with Cummins has also gotten crucial certifications from California for its L9N and B6.7N engines used in medium duty vehicles like buses and garbage trucks.  My WPRT top call was pretty well-timed for the short term, but the coming year should be truly make or break for WFS.

Similarly, it's tough to tell what's affecting the price of AES right now.  The market is ignoring the dividend bump and the recent divestiture of assets in the Philippines is positive, especially for the balance sheet, though it was expected and referenced in the last earnings call.  The diminished use of interest and depreciation in the now official tax cuts may be having an effect.  Another point that may be a misread is the developments in Brazil, where energy auction prices continue to plummet.  Perhaps that is being taken as a negative for AES Corp's Brazilian operations, but I think what should be noted for the long term is that wind and solar have now under-priced hydropower, which was the perennial leader.  Entities of all sizes across the globe are making adjustments for the shifts in production, and that should be taken as a long-term positive for AES and Fluence.

Those adjustments are what's driving some of what are said to be the final shifts at ABB Ltd.  Of course, ABB is much more than just power transmission.  Its work extends to more general engineering and robotics.  The value of that last field is highlighted by Emerson's failed bid to acquire Rockwell Automation, and the market is taking notice, especially in the U.S.  European ABB shares were actually down off the announcement, probably in recognition of the associated $225M in charges.  Of course, when the market is taking notice of positive developments is typically not the best time to buy them.  That's why I spent the last year noting better entry points for ABB shares and why I'm doing the same with CQH and CUI now, though the latter is especially speculative.  Really, I think that AES combines the best of both worlds for the long term, and I will be pounding the table about it should it drop any further.