Tag Archives: nreum

Pattern Energy – An Attractive Value

“}); $$(‘#article_top_info .info_content div’)[0].insert({bottom: $(‘mover’)}); } $(‘article_top_info’).addClassName(test_version); } SeekingAlpha.Initializer.onDOMLoad(function(){ setEvents();}); Management Agreement with Pattern Development gives good upside. Q1 2015 was a fluke. Their narrow focus on wind energy allows them to operate with lower costs. Before I start with the article, I would like to acknowledge that yes, I am the guy who wrote the most recent Seeking Alpha article about Pattern Energy (NASDAQ: PEGI ), in which I presented my bear case. I started working on this as a short, but then after some astute comments on the article and further research, I have come around to seeing that there is significant upside optionality here with little downside. Unlike the other yieldco’s, Pattern has a management agreement in place such that once the market cap hits $2.5B, the management of their parent company (Pattern Development) will drop down into Pattern Energy for free. When this happens, instead of earning a fixed Return on Capital like the other yieldco’s, Pattern can use their development expertise and relationships to earn potentially much higher returns on capital, and at worst they will continue earning the fixed 9-10% ROC. I would expect them to develop localized wind solutions like their Fowler Ridge development for large data-centers and other tech-focused facilities that need a reliable source of clean energy. Secondly, their first quarter was ridiculously unlucky due to El Nino winds illustrated below, particularly on the panhandle of Texas and Southern California. Anyone like myself selling the stock due to this performance was and is sadly mistaken. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Lastly, since they focus almost exclusively on wind energy projects, they can maintain a low overhead due to specialization. From an industrial organization perspective, there are likely costs of operating developments with different technologies, which benefits competitors like Pattern who stick to their bread and butter. Alternative energy companies delving into new and unknown technologies has been risky, as shown in the WSJ recently: www.wsj.com/articles/high-tech-solar-pro… . In conclusion, the management agreement coupled with El Nino winds provide good upside and a good buying opportunity, and not a good selling opportunity as I originally thought. Their fixed purchase agreements with their customers gives them good downside protection. Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in PEGI over the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article. Share this article with a colleague

E.ON – Strategically Positioning Itself For A Green Future

Positioning themselves strategically; inflection point in stock price. Geographical exposure to accelerating green energy trends. Preferred pick amongst large-cap European utilities. E.ON ( OTCQX:EONGY ) reported a record annual loss for 2014 as it took impairment charges associated with writing off its Italian and Spanish businesses as discontinued assets in its FY14 results on 11th March. These divestments are part of a refocusing its core businesses and portfolio optimization. E.ON’s announced in Dec 2014 that it will divest carbon interests and look to refocus business on renewables, smart grids and energy efficiency in a bold move to reposition itself in an industry strongly influenced by green energy trends. The European Union has set a target of 20% for the share of energy consumption to come from renewable energy sources by 2020, with each member state agreeing to a national target outlined in the 2009 EU Renewables Directive. Initial doubters of the credibility of the commitment have been proved wrong with the steady progress made by member nations. By 2012 the EU achieved 11.0% share of energy consumption generated from renewables . E.ON is particularly exposed to these trends as its home market is Germany which has undergone a transformation since the 2011 Fukushima crisis. It has set itself a target of generating 80% of electricity from clean sources by 2050 . Furthermore, technological advances in renewables have seen the costs of generating renewable energy falling, particularly for solar energy. This the shift towards renewable energies looks set to continue and we believe E.ON’s recently announced new strategic positioning will bring long term benefits to the company and its shares. Within Europe, E.ON has exposure to the regions that appear to be most affected by trends towards green energy. The company’s earnings are mainly generated from Germany with the UK and Sweden the other largest sources of earnings within the EU. Germany and Sweden generated ~24% and 60% of their electricity consumption from renewables in 2012. Furthermore, the UK government has been supportive of new green energy projects approving a number of projects in recent years as it tries to meet EU targets for 2020. In 2014, E.ON grew EBITDA by 20% in wind and solar and overall 18% of EON s EBITDA came from renewables . This looks set to continue as they stated they would pursue disciplined capex with > 70% of 2015 capex in Wind, Solar, Distribution Networks & Customer Solutions. The recent new refocused strategy and its exposure to countries in Europe that provide more favorable conditions for renewable energy growth should benefit the company in the medium to long term. E.ON has stated its preference towards wind and solar energy. Positioning towards renewables not only aligns it to wider energy regulation but also to technological trends. UBS stated in a report published in 2014 it believes solar and smart grid technologies will be at the forefront of wider change in power generation . It emphasizes “Solar is at the edge of being a competitive power generation technology” and that “power is no longer something that is exclusively produce by huge, centralized units owned by large utilities”. The falling cost of renewables technologies has coincided with the expected rise of the electric car and improvements in battery technologies. UBS predict a 50% reduction in the cost of batteries by 2020. This will allow homeowners to own battery packs to store energy and power their electric vehicles. Michael Liebrich of Bloomberg New Energy Finance stated that renewable energies have become “fully competitive with fossil fuels in the right circumstances” and their competitiveness looks set to strengthen in coming years as technological advances continue. Therefore, the positioning of the business towards renewables looks smart and it should help E.ON trade on higher valuation multiples, such as P/E. Renewables trade on higher multiples compared to traditional energy business due to stagnation in these traditional businesses and the potential for growth in renewable energy along with higher profit margins. Risks during the strategic overhaul should be taken into account as there is degree of uncertainty over divestments and the valuation of the new company that will be spun-off in 2016. Divestments have continued into 2015 with the sale of its Italian coal and gas power plants and reports suggesting it is looking to sell its North Sea exploration and production assets for around $2bn. Other business risks include its exposure to Russia which generated 7.4% of EBITDA in 2013. Furthermore, gas prices which continue to stay low or trend downwards will affect company earnings as E.ON repositions its business model. Analysts appear divided on whether EON’s transformation is too radical and whether the strategy will be successful. The stock has underperformed the wider European market and Stoxx 600 Utilities index over the last 5 years due to its poor performance, see graph below. It is valued attractively given this underperformance and current poor ROA at 0.96x P/B (cf sector 3.2x) with EV/EBITDA of 4.2x . Its dividend yield is 3.9%, slightly higher than the sector with a pay-out ratio of 60% which is easily defendable given a reasonable net debt to EBITDA ratio of 2.4x. It has also announced it will keep a fixed dividend to bridge the transition to its spin-off. (click to enlarge) The big question is can a traditional utility reinvent itself as a green energy services power house. We believe they can and implementing the strategy earlier than its competitors will allow E.ON to position itself competitively within a transforming industry. Its aims to decarbonise its services at a faster rate should be attractive to investors and raise it from current low stock valuation multiples. Furthermore, the less capital intensive its business becomes the greater the cash flows it will generate and the more it will be able to boost investment and shareholder returns in the future. Renewable energy is shaping the utilities sector and we believe E.ON’s recent strategic overhaul positions it perfectly to benefit. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Time To Exit Junk Bond Funds?

Summary Junk bond funds have outperformed other bond classes and maturities over the last five years but will the good times end once interest rates begin to rise? An improving economy as we’ve seen with stronger job and wage growth could improve the ability of companies to repay their debt. Rising interest rates could ultimately make junk bond yields look less attractive. The struggling energy sector has been particularly rough on the junk bond group. As the Fed seems poised to raise interest rates at some point during the remainder of 2015 high yield bond funds and ETFs have enjoyed a solid run over the last several years when compared to other Treasury and corporate bond funds. Over the past five years, junk bonds funds like the iShares iBoxx High Yield Corporate Bond ETF (NYSEARCA: HYG ) and the SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ) have outperformed their investment grade counterparts across all durations. Junk bond funds have been increasingly popular among yield seekers looking to do better than the measly yields offered by Treasuries and CDs. But as the economic landscape begins to shift it’s worth asking the question if junk bond funds have seen their best days. The free money period looks like it’s going to be slowly coming to a close and so to may the comparatively solid returns offered by high yield notes. There’s evidence pointing in both directions so it’s worth examining the major ideas one by one. Junk bonds could correlate more closely to a stronger stock market and economy The argument that high yields trade more like stocks than bonds could be viewed as a positive sign for their outlook. The stock market has had quite a run over the last three years and while valuations are almost certainly stretched there’s not much evidence to suggest that a huge correction is imminent. That’s not to say that the straight line up should be expected to continue but the environment could be conducive to high yields continuing to outperform other bond funds. The economy could be in a similar spot. While GDP has been weak overall job growth and wage growth have been improving. Additionally, the JOLTS report that was issued last week showed that the number of open jobs advertised at the end of April – 5.4 million – was the highest number in the 15 year history of the survey. The government also indicated 280,000 jobs created in May. Even the unemployment rate which ticked up slightly could be an indication that job seekers could be reentering the marketplace. A stronger economy could indicate an improved ability for companies to pay off their debt making junk bonds attractive. The Fed seems to think that the economy is improving enough to warrant higher interest rates and economic growth could lead to a positive environment for junk bond performance. Higher interest rates could make junk yields less attractive Junk bond funds and ETFs are offering current yields in the 5-6% range. Those yields looked especially attractive when the 10 year treasury note was yielding just 1-2%. The 10 year note is now yielding 2.4% and could soon be heading towards 3% again. An increasingly narrowing yield gap could make the risk/return tradeoff of junk bond funds less attractive. Net outflows in junk bond funds have been increasing in the last several weeks as bonds in general have been selling off – an indication that investors could be viewing fixed income investments as less attractive in the face of rising rates. Junk bond default rates are rising The default rate in junk bonds climbed to its highest level in almost 6 years last month but we have the flailing energy sector to thank for that. Energy and mining accounted for 93% of all defaults in the 2nd quarter. Roughly 15% of the high yield universe comes from the energy sector so weakness in this area of the economy is having a significant effect on the overall group. Conversely, it means that the rest of the high yield universe is performing well. If you can stay away from energy the risk exposure to junk bonds could be much more limited. Conclusion We’ve been in a prolonged period where taking risk has been rewarded but the imminent rising rate environment could be the catalyst that reverses that trend. A stronger economy should help junk bonds but I believe overall that riskier investments will begin falling out of favor as investors seek safer alternatives like treasuries, defensive and health care stocks. High yields exposure to energy could further limit upside. While energy prices look to have stabilized $60 oil is squeezing the margins of many companies and many rigs are still sitting idle. Junk bond funds may have helped boost income seeking investors’ returns over the past couple of years but now might be the right time to take some of those chips off the table. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.