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Valero Energy: Green Power Model Could Be Start of New Trend
by Dr Joe Duarte
June 29, 2009
How One Oil Refiner Could Change The Energy Landscape
Valero Energy (NYSE: VLO) is taking the green energy bull by the horns.
By outfitting a wind farm, consisting of 33 windmills, it expects to be
able to run a traditional oil refinery about half the time with green
energy, setting itself up as a leader in the industry. This is a
perfect example of how some in American business are still willing to
look ahead and make the most of what the current climate, no pun
intended.
Chart
Courtesy of StockCharts.com
When the U.S. Congress passed its “clean energy” bill last
week, the opposition from business leaders was quite loud. We weren't
too happy with it either, as the bill, rather than focusing on
functionality is heavily ladened with politics and punitive measures.
Even president Obama distanced himself from part of the bill over the
weekend, as it has a fair amount of protectionist intentions.
Furthermore, there is likely to be some significant fine print in the
bill that is likely to be very expensive, especially for consumers.
As we wrote in our “Market IQ” column on 6-26, even the Los
Angeles Times, not known for its conservative credential, had lots of
bones to pick with the whole the bill. One of the major issues is the
fact that carbon credits, at least in Europe, have failed miserably,
leaving polluters to continue their ways by buying and selling
certificates to one another. Another mainstream view is that refiners
will decrease their domestic activity, closing U.S. refineries, and
laying off workers, thus reducing state tax receipts, leading to higher
levels of unemployment, and perpetuating the current economic weakness.
To be sure, Europe’s experience has been a dismal failure. And
yes, there are likely to be some job losses if refineries decide to go
along the route of importing gasoline and diesel fuel from abroad in
order to avoid the rising costs of the energy bill. Yet, Valero seems to
have found a nice contrarian approach. The company says that it will
take about ten years to pay for the wind farm, which will be run by
three employees. And while the farm is expected to run fairly
economically, the company could get other benefits beyond the obvious.
According to The Wall Street Journal: “Valero says it will also receive
tax credits from the project and could potentially sell the
renewable-energy certificates from its wind power, which will displace
electricity that is mostly generated by burning Wyoming coal.”
How does Valero's strategy stack up? It stacks up well if you
look at it from one company's viewpoint. For one thing, refining only
produces 5% of the carbon emmissions in the U.S., while cars produce one
third. That means that Valero will be helping its bottom line more than
the environment. Yet, it’s an interesting model which could be put to
use in othe industries. Consider the potential for car manufacturing
plants that would be at least partially powered by solar or wind energy.
Consider the potential for small wind turbines placed on roofs of
homes. There is one small company in Michigan which is advertising such
a product already. In other words, what Valero may be starting is a
trend toward customized application of clear energy to power specific
needs, both public and private. That means that the Obama plan, and the
controversial “clean energy” bill passed by the House of Representatives
last week, may have already begun to influence U.S. corporate behavior.
One publicly traded wind turbine company, Vesta Wind Systems
(OTC: VWSYF), which trades in Europe, has been holding its own lately.
The American Wind Energy web site (www.awea.com) has listings for
fourteen U.S. and Canadian wind turbine companies that, in many cases,
offer smaller turbines which may eventually work their way toward the
domestic market. At this point, the AWEA lists $40,000 as the cost of a
turbine that could power the “average” home. The AWEA also notes that
although installing a wind turbine is less expensive than a solar
system, without taking advantage of tax credits and other incentives, it
could take more than twenty years to break even. But a well placed
turbine could pay for itself in fifteen years, which is about one half
of its expected lifetime. The flip side is that in some cases, electric
bills could fall to as low as $8 to $15 per month.
Chart
Courtesy of StockCharts.com
The Wilderhill Progressive Energy ETF (NYSE: PUW), which houses
clean energy companies has also found support near its 50-day moving
average lately, suggesting that some money is working its way back into
clean energy. PUW is a way to diversify some of the risk among several
companies in the sector. Still, clean energy remains risky, given the
potential for legislation changes and controversy, as well as the cost
of making the technology widely available, especially to homeowners at
the retail level.
Conclusion
Clean energy remains controversial, mostly due to the political
overtones that currently drive the dynamic. For one thing, the Democrat
majority in the U.S. House of Representatives rammed the bill down the
collective throat of the Republicans, only passing it narrowly.
The bill itself is not just controversial, but also likely to
face significant overhaul in the Senate. And, despite support from the
White House, its passage into law is still not guaranteed.
Yet, it's already affected the way business perceives green
energy. What we're noticing is that some companies are starting to
incorporate wind power into their business model, as a private source of
power to run their business.
In Valero's case, it makes sense. It costs $1.4 million per
month in electricity to run their Amarillo refinery. By adding
windpower, in a place where wind is a way of life, they'll be cutting
their power costs in half. That means that they will have more
disposable capital for dividends, plant expansions, acquisitions, and
more than anything to continue to run their business, likely in a more
profitable way.
This, to us, is the key. The Valero model is likely to be
adaptable beyond running refineries, especially in areas where it is
geographically feasible.
It could take some time to see a big growth phase develop. But
if the Senate passes the "clean energy bill" and the president signs it,
we expect a rush toward green power to coalesce and grow.
Politics aside, Valero's move into wind power could prove to be
a landmark development.
S & P 500 SPDR ETF (NYSE: SPY) Could Benefit From Week With Bullish
Tendencies
The S & P 500 SPDR ETF (NYSE: SPY) enters the seasonally bullish
pre-holiday period in a strong position. The question for investors is
whether the potentially positive action before the 4th of July holiday
means anything for the intermediate term.
Chart
Courtesy of StockCharts.com
The odds of a rally over the next few days are better than 50-50. That's
because there is a holiday ahead, and because the holiday comes at the
start of a new month, a traditionally bullish seasonal period for
stocks. It's not like Christmas, but the odds still favor the bulls in
the short term, barring the inevitable surprise that could be lurking
ahead.
Last week had two phases. In the first few days, the 20 the
50, and the 200 day moving averages, key market trend indicators, were
breached to the down side, fairly easily. On Thursday, what we’re
calling the second phase, stocks bounced back enough to move back above
those key lines. So going into Friday, the bulls showed that they had
something left. To be sure, at least some of the bounce was due to short
covering also.
So what lies ahead? The bulls have the burden of proof. If the
market is unable to rise on the back of the technicals, we could see an
acceleration of the downward trend that hit stocks early last week.
Volume may also be a problem, especially as the end of the week
nears. But the fact that the employment report will be released one day
ahead on Thursday could keep more traders around than usual, keeping
volume at a fairly decent clip.
The last day of the trading month, and the first week of a new
month tend to be bullish. Pre-holiday trading is usually bullish as
well. That means that this could be one of those weeks, especially with
the employment report out on Thursday, one day ahead of the first Friday
of the month, due to the July 4th holiday. All we can do at this point
is watch what happens, protect our gains, and be patient. There is just
too much at stake politically and economically for this to be a smooth
situation.
To subscribed to Dr Duarte's market Intelligence
reports, which are emailed daily "before the open" to subscribers,
please visit our website at http://www.joe-duarte.com
Contact information:
email: support@joe-duarte.com
Phone: 434
823-8181
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