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Rethinking ROI in the Energy Sector

Saturday - 4/27/2013, 5:18am  ET

If you're an investor, you likely consider return on investment, or ROI, as a key metric in your assessment of a stock. Certainly, it's an important number. But what if the 21st century and a shifting global paradigm demand a new way of analyzing energy stocks? What if ROI itself needs to be redefined? Traditional investment analysis may leave you overlooking some critical elements of a stock's future prospects for growth.

That's what Michael Liebreich wants you to know. He's the Chief Executive of Bloomberg New Energy Finance, or BNEF, which just held its annual Summit this week. The place was jam-packed with thinkers, needle-movers, and game-changers. All of them want investors to understand that the old ways are going the way of the dinosaurs.

New energy ROI
I asked Liebreich why you, as a private investor, should consider revising your process. After all, there's so much for you to think about already. Why shake up the special sauce, and then add ingredients to it while you're at it?

In his answer, Liebreich addressed you directly. He figures you're probably a contrarian, or you wouldn't be reading this. He noted that some folks think new energy is a bubble, but he thinks you know better. He said he trusts you to see the opportunity in front of us.

Liebreich believes that there are four new realities in the energy space that change everything about the way we look at it: unconventional oil and gas, energy efficiency, cheap, clean energy, and uncertainty. And we all know how investors love uncertainty. But rather than allow these things to cripple you, Liebreich would have you consider a new energy ROI: resilience, optionality, and intelligence. These attributes will make an investment worth considering in light of the four new realities.

Liebreich pointed out that there's a transition under way to a different energy architecture. He estimates that we'll have a good helping of natural gas and renewables, with some nuclear -- mainly the nuclear facilities we already have -- and then some biofuels (probably from waste), electric vehicles, power storage, and a smart grid. That's the future.

Now, he asks, "does the transition take 20 or 70 years? There's a lot of uncertainty in that." Shale gas is a big piece of where we're headed, but you have to stay anchored, he said. Now we have $4.26 natural gas, and all analysis shows it'll be at $5 or $6 by 2020 or 2025. While natural gas will continue to play a big role in our energy mix, other things are hugely important, as well.

So how do you make money? Right now, says Liebreich, we're facing a world with too much capacity in renewables. Solar, wind, and other renewable sources will be a part of our future energy mix, but manufacturers have invested heavily, and are hurting right now because of this overcapacity. "That means that someone is buying cheap," said Liebreich, "and that person is sometimes called Warren Buffett." That's right: The oracle of Omaha has seen the writing on the wall, and he's splashing his money all over clean energy.

Liebreich observes that maintenance costs are coming down, making renewables good assets for institutional investors, yet these folks aren't yet investing for various regulatory and other reasons. But he's confident that investment is coming. He can't say what will happen to share prices -- and anyone who says otherwise is selling something -- but he sees tremendous opportunity there.

Specific players
Liebreich took it well when I held his feet to the fire: I asked him for names. I wanted to know which companies he thought embodied the new ROI ethos, and were thus positioned to manage massive disruption with elegance and agility. Liebreich was game. (Note to readers: Liebreich is not commenting on these companies' future valuation. He is merely observing that they are leaders in integrating the new ROI principles.)

He said that Lockheed Martin is "a major player in energy and around resilience," and said that most people haven't figured that out yet. I admit, I didn't know it. But Lockheed Martin has its fingers in all sorts of new energy pies, from power reliability, to smart metering, to energy efficiency.

Liebreich said that electric vehicles are going to be tremendously important, as well, in that they also add resilience to the electric grid. Tesla is making giant strides in this arena, and just made a major announcement today about new programs to make its consumer experience even better. The company is offering new warranties on batteries, loaner cars to customers with their own in the shop, and more.

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