Eco Investor September 2015

Editorial

Many Sectors Worse Off Than Cleantech

For several years environmental investors have been smarting over the Government's sabotage of the cleantech sector, but government risk is only one of many risks faced by investors and the cleantech sector is far from alone in having big problems to overcome. Even sectors with strong government support are facing huge issues and their investors have lost billions and may lose more. With many sectors of the stock market in long term pain, parts of the cleantech sector can even be seen as a safe haven.

A quick look at some of the other stock market themes in trouble shows how widespread and deep the pain is.

One sector that has always enjoyed huge government support around the world is the oil and gas sector. But with supply rising much faster than demand, the oil price has collapsed to a decade low and commentators say it could be part of a long term dip.

Oil and gas companies around the world are in agony and this includes Queensland's new liquefied coal seam gas export industry. Over the years the Federal and Qld Governments have bent over backwards to get this industry off the ground and multinational and Australian companies have responded by investing billions in massive greenfield export plants plus wells and pipelines to feed them.

But the oil price, which affects the LNG price, is now about half what it was when the companies made their investment decisions. The collapse has come part way through construction just as some of the plants start-up and shipments begin. Share prices have tumbled and investors are in deep pain.

Santos owns 30 per cent of the US$18.5 billion spend to build an export facility at Curtis Island and will likely make its first LNG this month. The plant generates positive free cash flow at US$40 per barrel of oil, but that is around the current oil price. Santos' share price has fallen 51 per cent since January 2011 when it made the final investment decision to build the plant. Last month the seven year managing director resigned and asset sales are in order along with a possible equity raising.

The five year oil price. Source: Bloomberg

Origin Energy has also been caught. The company reported a loss of $658 million against a profit of $530 million in 2013-14. That's nearly a $1.2 billion reversal. Origin is selling its majority stake in Contact Energy to reduce net debt by $3 billion.

Origin expects is APLNG joint venture at Curtis Island to begin LNG production from the second quarter next year. But it also said "APLNG will have free cash flow available for distribution to its shareholders at approximately A$55/bbl oil on average from FY2017." That A$55 is just under US$40 at the current exchange rate.

Origin owns 37.5 per cent of the US$20 billion project. Since it made the final investment decision in July 2011, its share price has fallen 31 per cent and has halved from the highs it achieved soon after the decision.

The other Curtis Island LNG developer, BG, has seen its share price on the London Stock Exchange fall over 20 per cent since it made its final investment decision in October 2010.

Another sector with strong government support and shareholders in pain is iron ore.

Over the past five years the iron ore price has collapsed from US$150 per tonne to around US$55 per tonne. The problem is rising supply and falling demand from China. Through the media we've heard the shouts from the Federal Treasurer, but there is not much the Australian government can do. We've also heard the shouts from the WA Treasury, and from the board rooms of BHP and Rio Tinto and numerous smaller ASX companies and their many shareholders. The pain looks likely to continue.

Yet another sector loved by governments and especially the current Coalition government is coal. Like iron ore, coal is a backbone of the Australian economy. Yet we are told the industry is in structural decline. The price for thermal coal is down a third on what it was 10 years ago. It is down 70 per cent on its peak seven years ago. The commentators say it will only get worse. The long term share prices of the world's biggest coal companies are seriously down, including Adani, Anglo American, Glencore Xstrata and again BHP and Rio Tinto.

The 14 year thermal coal price. Source: InfoMine.com

And yet another government-loved sector in pain is gold. Over the last five years the price of gold has fallen a mere 13 per cent, but a much more dramatic 38 per cent since its all time high only four years ago. As much as governments love gold and gold companies, all the gold in Fort Knox would only lower the price further.

A technology sector that is much loved by governments and is very comparable to cleantech is healthcare and biotech. Certainly the current Australian government loves healthcare so much it wants to pump $20 billion into a medical fund for research and commercialization while strangling venture capital for other technology sectors and trying to drag cleantech out the back to shoot it.

But even the government can't help the sector.

A recent Australian Financial Review article lists some key issues affecting investor confidence. Called Booming Biotech Bypassed, it discusses how hard it is even for successful early stage local biotechs to raise capital and how some are bypassing local investors and going straight to the US capital markets. It says the top 40 listed biotechs declined 4 per cent last year.

Sound familiar? It has been a perennial cry of Australian technology companies and over 30 years of government intervention in the venture capital and institutional capital markets has not been able to fix it.

One fund manager, Jason Kolbert of Maxim Group, is quoted as saying that "Australian institutional investors look at biotech as voodoo". This also sounds like Tony Abbott's and Joe Hockey's views on wind farms and anything environmental.

Those views have shaken investor confidence and wrecked havoc among the speculative cleantechs.

So, yes, it would be great if the current government supported cleantech, or was even neutral, but government support is not a guarantee of success, and many of the bigger cleantechs are doing well without it.

Tony Abbott became prime minister in September 2013 but most cleantech stocks started trending down when he became Leader of the Opposition in December 2009 and stopped the passage of the Carbon Pollution Reduction Scheme.

But in that time a good number of the larger environmental companies have seen their share prices go up. Among them are Energy Developments, Tassal, Reece Australia, TFS Corporation, Qube Holdings and Pacific Energy.

Even among the newer and energy related cleantechs that have listed since those two dates, there are some trading above their listing prices and some well above. Among them are Beacon Lighting, Meridian Energy, Mighty River Power and Energy Action.

Among the newer non-energy stocks, the share performance of Bellamy's Australia is a standout. Among the older non-energy stocks, Nanosonics and Orocobre are also standouts.

The declines in oil, gas, coal, iron ore, gold and Australian biotech are all before the current weakness that hit global markets and the ASX at the end of August.

The declines tell us that governments are great to have onside, but they don't guarantee success. In the current global economic environment, successful investing is about avoiding many of the sectors that governments have traditionally loved.

The success of local cleantechs tells us that some companies can succeed despite government hostility. In the current political environment in Australia, successful cleantech investing is not about riding a political or market wave but about stock avoidance and stock selection - picking the right ones and avoiding the wrong ones. It sounds like normal investing but the standards to get it right and the costs of getting it wrong are much higher.

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