Quite a few energy stocks have turned in solid results in recent quarters. Much of the progress is being driven not by higher selling prices, but by increased levels of operational efficiency and cleaner balance sheets. That has led to several opportunities for bargain investors who know where to look. A good place to start may be these three incredibly cheap energy stocks:
All three of these energy stocks have sizable long-term opportunities sitting at their doorstep. Renewable Energy Group and Green Plains have ample capacity to respond to growing demand, whether domestic or foreign, in biodiesel and ethanol, respectively. Kinder Morgan is well-positioned to capitalize on the next transformative shift in American (and global) energy flows. Are any of them buys right now?
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Renewable-fuel stocks are always cheap
Investors can find a lot to like on paper about the top renewable fuel stocks.
Renewable Energy Group is America's largest producer of biodiesel, which is chemically different from petroleum-based diesel and usually blended with diesel, and is a major player in renewable diesel, which is chemically identical to petroleum-based diesel. Green Plains is America's third largest ethanol producer, the largest producer of food-grade vinegar, and the fourth largest owner of cattle feedlots.
Both have encountered some turbulence recently in addition to the perpetual concerns over American renewable-fuels policy. Renewable Energy Group announced the abrupt resignation of its longtime no-nonsense CEO in the beginning of July -- the day after the stock hit a four-year high. Meanwhile, Green Plains and the rest of the ethanol industry struggled during the second quarter of this year, which is usually when margins recover from a seasonal low point during the first quarter. Overcapacity and "unusual activity" in subsidy markets subdued performance.
Despite the short-term hiccups, both energy stocks have an abundance of long-term opportunities available. The United States could consume billions of gallons more of both biodiesel and ethanol, although pleas to update policy have mostly been ignored. But the pieces are finally beginning to click into place.
Minnesota, a state that has historically set the tone for biodiesel standards, just announced that it will double summertime diesel blends beginning in 2018. That will require an additional 30 million gallons of biodiesel per year, and Renewable Energy Group is likely to step in to deliver given its presence in the state. If more states increase blending requirements to improve air quality, then the company could bring over 100 million gallons of spare annual capacity online.
More importantly, the blenders tax credit has yet to be reinstated after expiring on the last day of 2016. Although it's not guaranteed to become law again, it has historically been retroactively reinstated almost every year. If that were to occur again, then Renewable Energy Group would receive an enormous windfall -- enough to push first-half 2017 earnings to record levels.
Green Plains also has great growth opportunities in the ethanol market, although it's not waiting around. Recent acquisitions in vinegar production, which uses food-grade ethanol as the primary input, and cattle feedlots, which use corn byproducts from ethanol manufacturing as animal feed, have diversified income streams overnight. The company now generates 60% of all EBITDA from non-ethanol business.
That number will continue to grow as investments ramp up and acquisitions are integrated into the company. That's amazing news for shareholders, who will be insulated from down cycles in the ethanol market and raking in cash when margins are high.
Both of these energy stocks could be buys right now, although investors should base that decision on long-term opportunities and profitability, not valuations, which have always been ridiculously cheap.
American natural gas is leaving our shores
Kinder Morgan may not be cheap on current metrics, trading at 60 times earnings, but there's no denying it's historically cheap by others. For instance, the stock currently trades at 1.18 times book value, which is less than half the recent average. And Wall Street expects profits to soar in the next 12 months, which pegs the current stock price to about 24 times future earnings.
That's nice, but when I think about Kinder Morgan stock I'm not very much concerned about 2018. I'm thinking about 2020 and beyond.
Why? The United States is just beginning to build export terminals for liquefied natural gas (LNG), which is the only way to ship natural gas aside from land-based pipelines. The planned export capacity is enough to completely disrupt global energy flows.
Less than two years ago, the United States had almost no LNG export capacity. By the end of this year, capacity will rise to over 3.5 billion cubic feet per day (Bcf/d), and by the end of 2019 it will rise to 9.5 Bcf/d -- enough to make Uncle Sam the world's third-largest LNG exporter.
This is amazing news for Kinder Morgan stock. The expected level of LNG export capacity in 2019 will be equivalent to 13% of total domestic natural gas production in 2016. That means a lot more natural gas will need to be moved from field to processing center to export terminals, which means Kinder Morgan will see a lot more activity in its pipeline network -- even if it's not the one moving every cubic foot of gas. Throw in additional consumption from the rise in natural gas power generation facilities, and this is a no-brainer buy right now for long-term investors.
What does it mean for investors?
The incredibly cheap valuations for renewable fuels stocks may be shocking, especially compared with other industries, but they're actually always cheap. What does that mean? Well, investors probably shouldn't rely on valuation alone when making an investment decision, although there are solid arguments to own both for the long term. You may need a lot of patience, however.
Meanwhile, Kinder Morgan is trading at about half of its historical valuation as it heads into what very likely could be a golden age for American natural gas. As more product is moved from production assets to our shores, the company should be racking up fees from its expansive infrastructure network. I think the stock is a no-brainer to buy right now.
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