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I have been watching with interest from the sidelines as alternative energy stocks have skyrocketed in recent months, partly wishing that I was riding the wave and partly quite content in the knowledge that there will be plenty of opportunity to make money in alternative energy in the future. My biggest concern at this point is that not all alternative energy stocks are created equally, a good number of them will fail, and ultimately which ones succeed may come down to politics. I don't yet feel confident enough to separate the wheat from the chaff, particularly as many alternative energy companies are not yet profitable, so I will continue to watch with interest and research companies that I feel stand out from the crowd.
So if I'm not yet investing in alternative energy, what am I focusing on? While I fully expect renewable and green technologies to play an increasing role in energy production in the future, I am still a firm believer that coal, oil and natural gas will remain the major sources of energy in the intermediate term. I also expect nuclear power to feature strongly, but that is a topic for another day.
You see, the problem with alternative energy, while highly desirable, is that it is expensive. In comparison, coal is cheap - very cheap. Yes, it is dirty, yes, the environmentalists don't like it, and yes, there is pressure to reduce its use in the US, but I don't feel that any of those issues are going to matter until alternative energy can begin to compete on price.
The other huge issue is that China is the world's largest coal producer and consumer, and they are not going to stop burning coal any time soon. In fact, China plans to build stockpiles of the fuel in the eastern province of Shandong to ensure supplies and help stabilize prices. At this point China is self-sufficient in coal, but there may come a time soon when it is a net importer of coal.
If you are looking for a coal play that bets directly on China, then Yanzhou Coal (YZC) fits the bill. Yanzhou is one of China’s largest coal suppliers producing high-grade, low-sulfur coal, which burns cleaner and therefore fetches a premium price. Yanzhou Coal (YZC) is principally engaged in underground coal mining, preparation and processing, sales, and railway transportation of coal. The company is organized into three operating divisions: coal mining, coal railway transportation and methanol and electricity power. The company operates six coal mines: Xinglongzhuang coal mine, Baodian coal mine, Nantun coal mine, Dongtan coal mine, Jining II coal mine (Jining II) and Jining III coal mine (Jining III), as well as a regional rail network that links these mines with the national rail network.
So Yanzhou Coal (YZC) is in a great position to benefit from China's growing demand for coal, and also from any additional infrastucture investment, but what are the fundamentals like? Despite the recent upward movement in the share price, I believe that Yanzhou Coal remains a value stock with plenty of potential upside.
The company has low debt, has shown excellent growth in recent years, and pays a 4.2% dividend. Yanzhou Coal (YZC) currently trades at a P/E of 7.4 and a price/book of 1.8 with a current ratio of 2.83. The company boasts a return on equity of 26.9% and a gross margin of 50%. The company currently trades at $14.85 and I would be looking for a 12-month price target of $25-27.
Disclosure: At the time of writing the author held shares in Yanzhou Coal (YZC).
Quicksilver Gas Services (KGS) is in the business of gathering and transporting natural gas and liquid natural gas through its pipeline assets and processing facilities in Texas.
These services are provided under fee-based contracts, whereby the Company receives fixed fees for performing the gathering and processing services. Quicksilver Gas Services (KGS) does not take title to the natural gas or associated natural gas liquids that it gathers and processes and thus avoids direct commodity price exposure. This is what sets Quicksilver Gas Services (KGS) apart from similar pipeline companies.Quicksilver Gas Services (KGS) currently trades at a trailing P/E of 13.81, and pays a dividend of 11%. The company has demonstrated good levels of earnings and revenue growth, depsite the economic slowdown, and I anticipate a 12-month price target of $18-20 as the economic outlook improves in the second half of the year. My major concern about the company is the increasing level of debt that the company is taking on.Disclosure: At the time of writing the author did not hold shares in Quicksilver Gas Services (KGS).
Dorchester Minerals LP (DMLP) is the owner of natural gas and oil royalty properties. The company has practically no debt, high insider ownership, proven reserves and additional mineral interests.The price of DMLP stock is mostly influenced by long-term oil and natural gas prices, and as such has suffered in recent months falling to a 52 week low of $14.80. DMLP currently trades at $17.74, well below the 52 week high of $36.49, which I believe presents real value as energy prices will resume their upward trend over the long term. While you are waiting for the stock price to recover, Dorchester Minerals LP (DMLP) boasts a generous 12.2% dividend yield.
While I fully expect renewable and green technologies to play an increasing role in energy production in the future, oil and natural gas will remain a major source of energy in the intermediate term. Dorchester Minerals LP (DMLP) currently trades at a trailing P/E of 7.4 and I anticipate a 12-month price target of $25 as the economic outlook improves in the second half of the year.
Disclosure: At the time of writing the author did not hold shares in Dorchester Minerals LP (DMLP). As a Limited Partnership, capital gains are factored differently, so please consult with a tax adviser prior to investing.
Yanzhou Coal Mining Co. (YZC) is China's second largest coal mining company, with over 2 billion tonnes in reserves, and has recently expanded into Australia. The stock price of Yanzhou Coal Mining Co. (YZC) has been hit particularly hard over the past 6 months or so, and will in all likelihood continue to fall in the short term. However, I believe that the company has excellent longer term prospects.
China consumes more coal than the United States, Europe and Japan combined and continues to build new coal-fired power stations. While coal is considered to be the dirtiest of all energy sources, the environmental impact is less critical in the immediate future as greener technologies are just not economically viable in China at this time. Obviously this will change in the future, but for now China will continue to burn coal and lots of it.
The company has low debt, has shown excellent growth in recent years, and pays a 3.5% dividend.
Yanzhou Coal Mining Co. (YZC) currently trades at a trailing P/E of 4.2, below book value, and a price of $7.05. I anticipate a 12-month price target of $13 as the economic outlook improves in the second half of the year.
Disclosure: At the time of writing the author did not hold shares in Yanzhou Coal Mining Co. (YZC).
With an 80% net profit interest in XTO Energy (XTO) projects that span three states, including the prolific Anadarko basin, Hugoton Royalty Trust (HGT) provides good exposure to the natural gas sector, while at the same time giving the investor significant royalty income.
The price of HGT stock is mostly influenced by the long-term natural gas price, and as such has suffered in recent months falling to a 52 week low of $14. HGT currently trades at $16.98, a far cry from the 52 week high of $37.86, which I believe presents real value once natural gas prices resume an upward trend.
While I fully expect renewable and green technologies to play an increasing role in energy production in the future, natural gas will remain a major source of energy in the intermediate term. Hugoton Royalty Trust (HGT) currently trades at a trailing P/E of 5.98 and I anticipate a 12-month price target of $20 as the economic outlook improves in the second half of the year.
Disclosure: At the time of writing the author held shares in Hugoton Royalty Trust (HGT).
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