A Regular Fool's Retirement Portfolio: The Energy Future

Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I'm in the middle of rolling over a 401k from my former career, and I'm asking readers to follow along as I invest in some of the world's best companies. Go here to see my portfolio in action, and click on my profile to the right to see other posts about this topic. Will you learn more from my successes, or my failures? Only time will answer that question, but I hope my investing journey helps you make great decisions and avoid my inevitable mistakes.  

Cheap fuel built our world; it's time to move on

Coal and oil have powered the world for centuries. These plentiful and cheap energy sources are a big reason mankind has flourished. The ability to generate electricity cheaply and travel across the globe quickly has benefited society in boundless, immeasurable ways. 

Yet while there has been much that has improved the quality of our lives as a result of cheap energy, and there is much debate about both the levels and source of it, these cheap fossil fuels have played a role in climate change. Add in significant geopolitical implications behind the location of some of the largest oil reserves, and there are many reasons why a shift away from traditional sources and locations of fossil fuels is the right step. And this has created some great long-term investing opportunities as well.

The future of energy is diversity

Controversial in its own right, fracking has unlocked access to significant domestic sources of natural gas. And while there is debate about how much carbon is released into the atmosphere in the drilling process, there's little argument that natural gas burns much cleaner than either coal or diesel, and it doesn't require military intervention to get to it.

Ultra Petroleum (NYSE: UPL) has a misleading name; the company is the leader in low-cost natural gas production. And while the north American energy boom has been great for consumers of natural gas, E&P companies have been hammered as evidenced by Ultra's most recent earnings report. The simple answer is historically cheap gas means historically low profits:

<img alt="" src="http://media.ycharts.com/charts/816c917d9ec2ba54612426e8f3be38d5.png" />

UPL EPS Diluted Quarterly data by YCharts

Ultra's earnings are directly tied to the price of natural gas, and those prices should continue to climb on the back of growing demand. As the concern over climate change has led to more use of NG over coal to generate power, its use as a transportation fuel could be a serious market mover over the next decade.

Natural gas to move American commerce

Clean Energy Fuels (NASDAQ: CLNE) is at the heart of a serious push to move on-the-road shipping to natural gas. With a deep list of CNG customers in its core "return to base" market, Clean Energy is making a leveraged bet that shippers will adopt LNG en masse over the next couple of years due to cost advantages and reduced emissions. America's Natural Gas Highway, its partnership with Pilot/Flying J, will reach over 300 locations in the next couple of years (with more than 75 ready to go today), giving Clean Energy a serious "first mover" advantage over traditional fuelers like Shell, whose recent partnership with TravelCenters of America is targeted at only 100 locations in "the next couple of years."

If Clean Energy can leverage that first mover status into fueling contracts with giant shippers like UPS and manufacturers like Procter & Gamble, the growth potential is stunning.

But the keys to the kingdom may be in the hands of Westport Innovations (NASDAQ: WPRT). Westport's technology fixes the problem that has plagued natural gas for heavy trucking for years: adequate power. And with its joint venture with Cummins just launching the ISX12 G engine series that targets long-haul trucking directly, the next couple of years could see both Clean Energy and Westport move from leveraged growth bets to serious profit machines. This isn't a guarantee, but it's worth the risk to invest a small portion and wait it out.

Beyond gas

If you haven't heard of Elon Musk by now, you haven't been watching the financial news at all for the past year. This real-world Tony Stark is helming some of the most innovative companies in the world, including privately held SpacEx, his own Tesla (NASDAQ: TSLA), and Solar City (NASDAQ: SCTY), founded by brothers who happen to be Musk's cousins. While Musk is a brilliant, driven leader whose vision is central to both companies, Solar City and Tesla are bigger than just Musk.

Solar City's model of using financing to sell customers (homeowners, governments, and businesses) solar systems promising lower costs than the "grid," isn't new, but it's the first company to expand its footprint nationally. This is important for large customers and gives it pricing power versus smaller players. But the real magic for investors was described by Musk: It's basically a decentralized utility that's growing like a Silicon Valley start-up. When one considers that it's contracts are measured in decades, it's reasonable to project a bright, sun-powered future.

Tesla shares may have gotten ahead of the market, and I'll admit that I've sold shares recently, liquidating half my position. But I did so with a commitment to watch, and learn better how the market will -- over a sustained period -- price it. I may not be able to buy shares again for below $90, but when I do add more, it will be with a better understanding of how the market will value it. Most importantly, if I didn't own shares today, I would start a position at this price. This is just too good a story to watch from the outside, and Tesla could easily become much larger than the $12 billion company the market thinks it's worth today.

Foolish bottom line

The world's demand for energy isn't going to stop growing, and no matter how much oil is out there, alternative sources will play a role in the way we power tomorrow. For me, all of these companies have a chance to be a big part of that future.

What do you think? Tell me in the comments below.

 

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Jason Hall owns shares of Tesla Motors , Westport Innovations, Clean Energy Fuels, Ultra Petroleum, and SolarCity. The Motley Fool recommends Clean Energy Fuels, Tesla Motors , Ultra Petroleum, and Westport Innovations. The Motley Fool owns shares of Tesla Motors , Ultra Petroleum, and Westport Innovations and has the following options: Long Jan 2014 $30 Calls on Ultra Petroleum, Long Jan 2014 $40 Calls on Ultra Petroleum, and Long Jan 2014 $50 Calls on Ultra Petroleum. 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!

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