Company

Bay Street: Patience needed to harvest gold from green

Sunday, March 15, 2009

OTTAWA, March 15 (Reuters) - It will take more than government incentive plans and bargain prices for stocks in Canada's green energy sector to flourish, and investors will need patience if they are to hit pay dirt.

While the long-term outlook for companies working with solar, wind and water power is promising, the business now is being buffeted by the recession, a credit crunch and tumbling fuel prices.

What's more, critics say a federal stimulus plan is too stingy and fails to renew a wildly popular program to spark clean energy production.

For a sector heavy with cash-hungry junior and mid-tier companies, crumbling stock valuations serve a further blow, cutting off a source of project funding.

"All these beaten-up renewable, publicly traded companies are amazing value right now. That's not to say that they still can't go down further, because this market is now driven on psychology, not cash flow fundamentals," said Jacob & Co power equity analyst John McIlveen.

"But I think power, especially renewables, will always skate back onside because, after all, you've got 20-year take-or-pay contracts."

The companies range from producers of renewable energy to technology developers, whose tools help clean waste water or smokestack emissions. Some of the stocks have soared on hopes of a clean energy Holy Grail, only to tumble as the market melted down.

Under long-term power supply pacts, buyers must pay whether or not goods are delivered, creating a long-term hedge against market declines and volatility.

Annual returns on 20-year contracts typically range from 10 percent to 25 percent, often beating returns from major stock indexes, McIlveen said.

But predicting the near term is far more challenging as an unforgiving market punishes missteps.

Solar cell maker Arise Technologies (APV.TO) is an example. Its stock sank 14 percent this week after disappointing results reflecting slower demand.

WHEN WILL CASH FLOW?

Another question centers on how much help the government can give and who will get the money. Canada set up two C$1 billion ($790 million) five-year funds in its recent budget, for clean technology development and green infrastructure.

"The question mark around government-driven stimulus is how quickly is the spending going to happen," said Research Capital alternative energy analyst Matthew Gowing.

Federal funds must be matched by the private sector, so incentives favor big producers with deeper pockets, McIlveen said. That is little help to juniors facing a chilly reception from skittish capital markets.

"Most of these plans are designed for a normal market... But we don't have a normal market and what we need is some temporary measures," he said, suggesting loan guarantees may be a way to help.

Gowing said some Canadian companies will seek richer rewards in the United States, where President Barack Obama has pledged hefty incentives for renewable energy in his $787 billion stimulus package.

That means geothermal energy producers with U.S. operations could cash in. That group includes US Geothermal (HTM.A), Sierra Geothermal (SRA.V) and Western GeoPower (WGP.V). Biomass energy producers such as Boralex Inc (BLX.TO), with several U.S. wood residue thermal power plants, may also benefit.

Research Capital is bullish on Canadian wind power producers, a group including Canadian Hydro Developers (KHD.TO), and Catch the Wind (CTWs.V), whose technology helps optimize wind turbine performance.

Ultimately, fear could be a stronger catalyst for the alternative energy sector than stimulus funds.

"What I do believe the western world saw last summer, when you saw oil at $150 a barrel, was a glimpse into the future. And they didn't like it," said Ted Lattimore, chief executive of solar-powered light maker Carmanah Technologies (CMH.TO).

He told a recent CIBC World Markets investor conference that people seem to be fearful that the recent sharp drop in oil prices won't hold.

"They seem to be fearful that ... (oil is) going to go up. I would say for the entire alternative energy field, that's good news."

($1=$1.27 Canadian) (Reporting by Susan Taylor; editing by Janet Guttsman)