Japan Is Changing The Energy Market
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Japan is known as the land of the rising sun, and for good reason. The country has some of the best renewable energy feed-in tariffs in the world. Beyond wind and solar, the country is changing other industries. Recently, imports of crude oil and heavy fuel oil have seen a strong boost. Beyond buying the Nikkei, there are many ways for energy investors to invest in Japan.
The Oil Story
Unlike natural gas, fuel oil and crude oil are relatively easy to transport. The volatile price of crude oil, coupled with growing Chinese demand, can easily make these fuels very expensive. Nevertheless, there is an important growth story here. U.S. refiners are big beneficiaries of Japan's growing heavy fuel oil imports.
Growing U.S. crude oil production has given Valero Energy (NYSE: VLO) a large supply of cheap crude it can refine and sell for higher prices overseas. To gain better access to cheap North American crude, Valero will take ownership of 5320 new rail cars over the next two years. On the sales side the company has a number of refineries along the West Coast and the Gulf of Mexico that give it good access to the world's crude oil tankers.
Japan's increased imports of heavy fuel oil and crude oil are more of a stop gap measure than a permanent solution. The market is well aware of this and is pricing Valero at a price to earnings (P/E) ratio around 7. Even though Japanese demand is expected to decrease at some point in the future, Valero's low valuation makes it attractive. Its debt load is reasonable, with a total debt to equity ratio of 0.37, and it has an encouraging return on investment of 12.8%.
Japan can decrease its dependence on other countries by substituting natural gas, heavy fuel oil, and other fuels with fixed solar panels. In an effort to help institutionalize this change, the government is investing $203 million in an experimental battery to help stabilize grid-scale renewable energy production.
The solar manufacturer Sunpower (NASDAQ: SPWR) is a great way to invest in Japan's growing renewables market. The company sells high efficiency panels with strong warranties. These panels are a great fit for the space-constrained island nation. Through partnerships with local companies like Toshiba and Sharp, the company's Japanese shipments were up 30% quarter over quarter. Going forward this growth is only expected to continue.
With a profit margin of -9.9% and an earnings before interest and taxes (EBIT) margin of -5.3% Sunpower still has a way to go, but it is a strong firm with growing prospects.
What about Coal?
Japan's use of coal has stayed roughly constant since the Fukushima disaster. With its high feed-in tariffs and investments in grid scale batteries, the government has decided to focus on renewable fuels.
While the coal miner Peabody Energy (NYSE: BTU) does not have its eye on Japan, other Asian nations are critical sources of growth. India imports large amounts of coal, and this is not going to change anytime soon. Also, rising natural gas prices in the U.S. are increasing domestic demand for Peabody's coal.
The firm's gross margin of 25.1% and EBIT margin of -0.9% are healthy compared to other miners stuck with lower-yielding mines. By 2014 falling inventories and strong Asian demand are expected to push Peabody's earnings per share (EPS) up to $0.72. While the company looks somewhat pricey with a forward P/E ratio around 22, its global network of mines will grow its earnings even farther.
It appears unlikely that Japan will completely disown nuclear energy due to its military benefits, but it will probably play a diminished role in the nation. Valero is a good way to play Japan's increased imports of refined crude products. While the nation spends the next couple years building new power plants and revamping its infrastructure, Valero will profit.
Sunpower is another company with positive prospects in the nation. Its highly-efficient solar panels have been a hit, and there is no reason for this to change. Peabody Energy's Australian coal mines are a play on India instead of Japan, and India's growth is expected to power the company until 2040 or latter. Given India's strong long term growth, Peabody is another good company to take a look at.
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Joshua Bondy owns shares of Peabody Energy. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!