CONTENTS

Click on a heading to be brought to the section that interests you.

1. The Potential of Alternative Fuels

2. A Traditional Fuel is New Again

3. Growing Transportation Innovation Gets More Mainstream

4. Game Changing Potential

5. Alternative Fuels in the Paradigm Portfolio

5.1 Mesa Energy Inc. (MSEH)

5.2 Honeywell (HON)

5.3 Diamler AG (DDAIF)

6. Recommendation

7. Current Alternative Fuels

8. Positions

9. References

THE POTENTIAL OF ALTERNATIVE FUELS

Companies in the Alternative Fuel category are actively involved in providing viable alternatives to traditional oil and coal. Examples are: a clean energy source that has been used for a long time but has huge potential for growth; a hot transportation technology that is growing exponentially; and a speculative future technology that has the potential to be a game changer.

No one needs to be reminded of the urgency of developing alternative fuels considering the horrendous Gulf oil spill. The Deepwater Horizon rig has damaged the Gulf of Mexico forever. This event has added a real-world level of seriousness to the discussion of alternative fuels. These fuels would provide cost efficient, safe, and readily available alternatives to traditional coal and oil sources. The application of these alternative fuels ranges from automobiles, trains and airplanes to electrical power plants.

A TRADITIONAL FUEL IS NEW AGAIN

A clean, domestic energy source that has been used for a long time but has huge potential for growth is Natural Gas. Of all the major fossil fuels – oil, coal and natural gas – natural gas holds a distinct ecological and geopolitical advantage. The cleanest burning of all the three, natural gas emits far less greenhouse gas and other pollutants when compared to oil and coal (see Figure 1 below).

Figure 1: Pollution Driven by Fuel, © Swiftwood Press 2010.

Currently, natural gas can come in the form of Liquefied Petroleum Gas (LPG, commonly known as propane), Compressed Natural Gas (CNG), Liquefied Natural Gas (LNG). It is used powering electric plants, heating homes, and, to a growing extent, fueling fleets of trucks. About 85% of the natural gas used in this country is domestically produced, as opposed to about 60% of oil being imported.

GROWING TRANSPORTATION INNOVATION GETS MORE MAINSTREAM

Figure 2: Hybrid Market

Hybrid cars and trucks represent a hot transportation technology that has seen exponential growth since its introduction in the late 1990’s. JD Power, a trusted independent analyst, predicts a three-fold growth for hybrids by 2015[1]. This is conservative compared to other predictions, as shown on the chart below, courtesy of hybridcars.com.

And one of the most exciting developments I have seen is the recent announcement by Ford that, for the first time for any American automaker, they will be selling their hybrid model 2011 Lincoln MKZ sedan for the same price as the comparable gas model. While not a cheap car at around $35,000, it will be a no-brainer for those buyers which to choose considering the savings at the pump, let alone the improved performance in acceleration one gets in a hybrid engine. Other auto makers will likely follow suit to stay competitive.

In the chart above, Figure 2: Hybrid Market, the black line represents hybrid sales continuing at their current pace since hybrids were introduced in 2000. In the five-year timeframe, J.D. Power forecasts are far below the line, while others (e.g., D.O.E., Freedonia Group, and BoozAllen) anticipate wider public acceptance of hybrids.  Click the chart to see the full aricle about the hybrid market forecast.

GAME CHANGING POTENTIAL

Hydrogen holds potential as a serious alternative for the powering of automobiles. However, it has many technological hurdles to overcome before it can become commercially viable.  Promising work by chemical engineers at Purdue University in Indiana has led to the development of a new technology that will store hydrogen for fuel cells. Arvind Varma, the chemical engineer behind the project, said:

“This is the first process to provide exceptionally high hydrogen yield values at near the fuel-cell operating temperatures without using a catalyst, making it promising for hydrogen-powered vehicles.”[2]

In addition, scientists at the Massachusetts Institute of Technology are working on ways to catalyze the splitting of water molecules using electricity. This process will then use solar and wind power and be able to effectively store energy for later usage. Daniel Nocera, the lead chemist behind in this project says:

Solar energy is the only feasible long-term way of meeting the world’s ever-increasing needs for energy, and that storage technology will be the key enabling factor to make sunlight practical as a dominant source of energy[3].

ALTERNATIVE FUELS IN THE PARADIGM PORTFOLIO

One of the most promising areas of the U.S. to profit from natural gas development is in the Marcellus Shale formation in the eastern U.S, and Mesa Energy is well positioned to be a significant player. While many of the emerging alt-fuel technologies are still being conceived in the labs of the world’s top universities, private firms like Daimler and Honeywell are emerging as strong participant in alt-fuels, and their labs are working to integrate these technologies into new and old products.

Mesa Energy Inc. (MSEH)

Mesa Energy is a Texas-based company that owns two promising “shale gas” properties slated for exploration and development. The first property, Java Field in western New York, is on the northern end of the productive Marcellus Shale. The true extent of this play is not fully known, so Mesa is well positioned to benefit if underlying reserves pan out as expected. The second property, Coal Creek Prospect in eastern Oklahoma, includes 700 acres under lease, including successful test wells currently generating income for Mesa.

Many factors could affect Mesa’s success, most of which tie in to the cost of extraction. Java in particular will likely produce economically at relatively shallow depths. Also, the price of natural gas will greatly determine whether production can be done at a profit. Simply put, the more natural gas prices increase, which I think they will, the earlier the break-even point will be. Considered a “penny stock” due to its low price, Mesa is a speculative investment that may only be appropriate for a small portion of one’s portfolio.

Honeywell (HON)

The research we’ve described so far might seem based in minor experiments, but the  technologies  that come out of this research are yielding serious results for larger companies.  Companies such as Honeywell (HON) have already begun research into the scientific and financial potential for alternative fuels. Honeywell was awarded a 27 mil. contract in June by the Federal Aviation Administration to research the potential of bio-fuels in the aviation industry. Honeywell Vice President Ron Rich said during the announcement of Honeywell’s petroleum refining sub-corporation UOP that,

“To evaluate the use of aviation bio-fuels in aircraft engines, we will be working with Honeywell’s UOP business, a global leader in the development of refining process technologies.  UOP has developed technology to convert sources like algae and camelina into Honeywell Green Jet Fuel^TM, which meets all specifications for jet fuel and offers significant savings in greenhouse gas emissions.” [4]

Honeywell is a major player in the advancement and implication of alternative fuels, and a company that deserves close attention and consideration in the Paradigm Portfolio.

Diamler AG (DDAIF)

In the world of automobiles, prominent automakers such as Daimler AG have been exploring hybrid technology as a way to reduce the use of traditional fuel types and replace them with new technologies. This takes different forms for different automakers, but for Daimler AG, this means the usage of lithium ion batteries. Diamler AG holds strategic partnerships with other companies like Watertown, MA based A123. According to news sources A123, ” already makes batteries for hybrid buses made by Daimler AG and U.K. defense contractor BAE Systems. It is working with BMW AG on a hybrid-electric vehicle due on the market in late 2012, and with U.S. start-up Fisker Automotive on its Karma plug-in hybrid luxury sedan, due out later this year.”[5] These batteries are being used by Daimler for vehicles such as the newly announced transmission integrated electric engine.

Daimler plans to heavily invest in a new hybrid engine for Mercedes-Benz, “The company is to invest around EUR 40 million in total in the development and production of the new engine. The necessary machinery and equipment is to be set up in the new production buildings by early 2011. A total of 50 employees will be involved in the development and production of these electric engines at the site. The engines are expected to be used in Mercedes-Benz hybrid vehicles from 2012 onwards. The electric engine is a transmission-integrated version, i.e. the electric engine is built in as part of the automatic transmission and can develop an engine power of 15 kW and more. It boosts performance by interacting with the combustion engine and lowers consumption by recovering energy during braking, for example, which charges the battery.”[6]

RECOMMENDATION

As a cautionary note, these alternative fuel technologies are not catching on as quickly as some advocates would hope. When considering electric car technology, Analyst Jeff Siegel says:

“Despite the EV enthusiasm we’re seeing today in the marketplace, I don’t believe that electric vehicles can realistically achieve much more than a 3%-4% market penetration within the next ten years. And that’s being very optimistic. Now this has nothing to do with demand, or the reliability of the vehicles or the battery technology… In fact battery technology is absolutely going to advance by leaps and bounds over the next decade.”[7]

Still, these technologies are starting to chip away at an existing standard, a fact that will only increase as time goes on.

IMPORTANT INFORMATION

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article.

It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice.  Individuals should seek advice from their investment professional before making any important financial decisions.

CURRENT ALTERNATIVE FUELS

Methanol (M85),   Ethanol (E85), Biodiesel (B20) , Electricity, and Hydrogen.[8] The goal of these fuel sources is to optimize energy storage in a fashion that will be suitable for personal and business usage.

POSITIONS

Individuals involved with the Roen Financial Report and Swiftwood Press LLC owned or controlled shares of Advanced Battery Technologies Inc, Eaton Corp, FPL Group Inc, Mastec Inc, Norfolk Southern Corp, United Technologies Corp, Valmont Industries Inc, Memc Electronics Materials Inc and Waste Management Inc.

REFERENCES