The speaker was Joshua Friedman, the co-chief at Canyon Partners, which manages $20 billion. He was speaking at Grant’s Spring Investment Conference, which I attended in early April.

Friedman used the imagery of the old bell curves. There is the normal bell curve and the “new normal” curve with fatter tails. In plain terms, it means more crazy things will happen. It means outliers will become more common. It means the unexpected will happen more frequently. Wildness lies in wait, as Chesterton had it.

In many ways, markets have always been this way, as the late Benoit Mandelbrot observed. For instance, financial theory – based on the old bell curve – predicts that a market move of 7% or more in a single day will happen once every 300,000 years. Yet the 20th century alone had 48 such days. “Truly, a calamitous era,” Mandelbrot writes, “that insists on flaunting all predictions.”

What to do?

Michael Harkins, a respected investor at the firm of Levy, Harkins & Co., said to avoid “cash sinkholes.” Exhibit A was Alcoa, a “capitalist catastrophe,” as he put it. Every dime the company earns and more is consumed in costly, capital-intensive projects that generate no free cash.

Harkins likes blue chippy names – Tupperware (NYSE:TUP) (“a cash machine with 85% of sales outside of the U.S.”), McDonald’s (NYSE:MCD) (“a cash machine… competitors are leveraged up”) and American Express (NYSE:AXP) (“a cash machine with pricing power”).

He also pointed out that investors have short memories and that the market is constantly wiping the slate clean, ensuring that cash sinkholes and “capitalist catastrophes” continue to capture the affection of new investors.

The aforementioned Friedman had an idea as well. “Go long optionality,” he said. Invest “not only in cheap assets, but assets where you get optionality cheaply.”

What is optionality?

One way a stock has optionality is if it can deliver big results when certain seemingly unlikely things occur. I think of it as the payoff if that fat part of the tail happens. Think of a publishing company that publishes the next Harry Potter. Or a movie studio that makes the next Avatar.

My best idea on cheap optionality in today’s market is low-cost, pure-play natural gas stocks in North America. Natural gas prices are low, drifting around $4 for last two years. If you buy a natural gas stock that makes sense assuming natural gas prices stay at $4, then you ought to do OK even if natgas continues to drift along at $4.

But the optionality you get is if natural gas prices get to $6, which they must do someday. When is anybody’s guess. But when they do, then the stock doubles. Or if natural gas prices get to $8, then the stock doubles again. You have a stock with a giant free call option on higher natural gas prices.

These are the kinds of stocks you want to buy in this market: Low downside, but huge upside if what seems unlikely or unexpected happens. (Nobody is predicting $6 gas anytime soon.) The promise of small steady gains is not worth the risk in a market with fat tails and that can roll back years of small gains in a few bad months.

Bet on the unexpected, as long as your downside is covered.

Sincerely,

Chris Mayer
Penny Sleuth

Get Big Results with “Optionality” was originally featured in the Penny Sleuth.

I listened to several presentations at the Enercom conference this week. One important message from companies operating in the Gulf of Mexico: in the wake of the Minerals Management Service reshuffling, the regulatory framework is in chaos. Nobody among the regulatory bureaucracy seems to want to take responsibility for approving any drilling permits. This is needlessly ruining many investment plans and hurting the region’s labor market.

Producers of goods and services, whether they are in oil and gas, farming, or manufacturing, or transportation, keep prices low (in contrast, the Fed is cooking up new ideas to raise prices of goods and services by printing and distributing new, unearned claims on the economy’s production). Producers respond to shifts in consumer preferences by expanding or contracting capacity.

It looks like we’re facing a temporary supply glut in natural gas (in storage, not necessarily in the ground). Now that we’re past the peak of cooling season in North America, producers might find themselves competing for storage at lower and lower prices.

This is getting reflected in the price of the front-month natural gas futures contract, recently breaking below $4 per million BTU (MMbtu):

Here is a chart of the spread (or difference) between the front month price and the price for the 12-month futures contract. This is far more important for producers because they rely heavily on hedging to mitigate price risk. The chart shows that as recently as a year ago, producers could sell forward their gas at a $3 per MMbtu premium to the spot market. Recently, this premium fell to just a 50 cent premium:

This collapsing premium will drive the gas rig count lower. Only the very lowest-cost producers will be able to drill gas wells profitably with prices for delivery in mid-2011 at $4.50 per MMbtu.

I’m looking at short ideas in natural gas service industry — specifically, drilling and completion — because I don’t think the stocks have yet discounted how sharply earnings could fall in a weaker rig count environment.

If you’re interested in taking the short-side trade against natural gas servicers, not all opportunities are created equal. I’m still working on my due diligence right now, but I’ll share my latest insights with you in the near future.

Best regards,
Dan Amoss, CFA
Penny Sleuth

September 1, 2010

A New Natural Gas Short Opportunity was originally featured in the Penny Sleuth.

In the past, I’ve written about the importance of owning pipeline players in your income portfolios. I’ve also told you how important natural gas will be as both an investment and an energy source for years to come. But this second point can’t be taken lightly…

While there’s been a recent flurry of talk on reviving nuclear energy and new offshore drilling for oil, natural gas has been left in the dust — as far as speculation goes.

Over the past several years, the amount of recoverable natural gas in the U.S. has taken off. According to Natural Gas Vehicles for America:

In 1990, total U.S. recoverable natural gas resources was 1,172 trillion cubic feet (Tcf). That was about a 60-year supply at the 1990 level of natural gas production. Since then, we have produced about a quarter of that gas (314 Tcf ). In 2006, the Potential Gas Committee estimated the size of the recoverable natural gas resources was 1,525 Tcf — an 80-year supply.

The reason we can use a quarter of our massive tank of natural gas and end up with more is because of that all-important word: “recoverable.”

Recoverable just means that we can access it right now, with today’s technology. In 1990, the resource finders of the day couldn’t look deep in mountains quite like we can today with 4-D seismology. They also didn’t have horizontal drilling, which makes up a great deal of recent U.S. natural gas production.

All of these technologies have kept natural gas prices down lower than oil, which didn’t benefit from new technology to quite the same extent. But because of some very obvious facts in this country, like high energy importation, rising oil prices and an ever-growing consumption base, natural gas will have its day. And anyone invested early enough stands to benefit from this inevitable natural gas hike.

Take a look at this chart:

As you can see, crude oil has been climbing nonstop since the market crash in 2008. Natural gas, on the other hand, has meandered along, with a nice, but too short of rally late last year.

The bottom section of that chart shows the crude oil-to-natural gas ratio during the same period. While that might not seem like much of a concern, it is.

You see, historically, that ratio sits between 6- and 8-to-1. Today, that’s at around 22-to-1. That means it takes about three times as much natural gas to buy a barrel of crude oil now than it did in most of recent history. That’s a very positive sign that natural gas is cheap compared with crude.

And there are a handful of small-cap natural gas plays that stand to profit – plus pay you a handsome dividend in the process. Among them are Delta Natural Gas (NASDAQ: DGAS), WGL Holdings (NYSE: WGL), and RGC Resources (NASDAQ: RGCO).

I’m not ready to actually recommend any of these three plays just yet – but I do have some actionable natural gas picks in my Lifetime Income Report portfolio. To learn more about how natural gas fits into my “Retirement, Plan B” strategy, just click here.

Sincerely,
Jim Nelson
Penny Sleuth

April 16, 2010

Why Natural Gas Is Trading at a 50% Discount Right Now was originally featured in the Penny Sleuth.

Oil peaked at $147 per barrel in July 2008 — right before the house of cards came crashing down on the global economy. Once banks started to fail and credit dried up, other businesses slowed production and laid off workers. This created a massive trickle effect on the overall economy.

Big corporations and individual consumers alike were using less energy. That meant the prices of every energy-related commodity plummeted.

This spring, things started to turn around… The unemployment rate quit falling at such a rapid rate. Inventories were too low in many industries, creating a ramp up in production again. Energy prices climbed…

Since the start of this year, the price of crude oil has nearly doubled. In just the last six months, heating oil jumped as much as 90%. These two commodities are still cheap as far as we can tell. But they aren’t the real story…

Two other commodities are still low, but won’t be for long…

Coal and Natural Gas Are Commodity Buddies

Back in June, Greg Guenthner told you about coal’s recent history. Coal, being the most widely used fossil fuel in the U.S., took an extra-hard hit during the past several months. It’s down nearly 70% and hasn’t recovered in the slightest.

Demand will flood back into the system. In fact, that’s already happening. We have no doubt that the coal play we let our Penny Stock Fortunes readers in on is the best way to take advantage of the coming coal boom. But there’s another energy commodity about to shoot even higher, even faster…

Natural gas prices have utterly collapsed. After trading above $13 in June 2008, natural gas fell the whole way down to $2.70 today. Its decline happened as gradually as can be. Most of the financial world has been trying to time the bottom for months. But it keeps falling.

We don’t know if this is the bottom, but it can’t be far from it. It doesn’t matter to us even if it’s not. You see, we found the best natural gas seasonal laborer in the world, and we can just wait it out… no matter how long it takes.

Before we get into any specific natural gas play, we need to know how big natural gas’s recovery will be…

Why We’ll See Natural Gas 209% Higher By Year-End

Natural gas and coal go hand in hand. They are oftentimes found together in the same place. Natural gas hides beneath and between coal beds. It’s not uncommon for a coal company to come in and mine the same site an oil and natural gas driller just left.

When one of these two is no longer in demand, it usually spells trouble for the other. That’s one of the main reasons natural gas has taken such a hit. But just as they fall together, they rise together.

We already laid out the reason coal will see a price spike in coming months and years. Natural gas is just as lucrative, if not more…

Natural gas demand is continuing to increase around the world at an unprecedented pace. Many nations are starting to choose NG over traditional coal and oil in power plants. It burns about 29% cleaner than petroleum and 44% cleaner than coal.

And because of its recent price collapse, it’s now the cheapest choice for customers. Why pay more for coal or oil when you can get natural gas for $2.50 per thousand cubic feet?

The supply side of the coin is even more compelling…

The U.S. imports around 17% of its natural gas — almost all of which comes from Canada. Unfortunately, Canada’s natural gas reserves are drying up. Daily Canadian natural gas production peaked in 2001. We’re already back down to 1995 production levels, and falling.

Natural gas production here in the U.S. has also fallen off a cliff. Most drillers can’t drill for a profit at these prices. So they aren’t. We have almost no production right now. We’ll eventually burn through stored natural gas reserves. When they go too low, it will spur a panic.

This panic will be enormous. Natural gas is simply too cheap. It hasn’t been this cheap for decades. The average oil-to-natural gas price ratio is about 9.3. Now it’s at about 29.

It wouldn’t take much for prices to shoot upward from here. To reach the 20-year average natural gas-to-oil ratio, NG prices would have to climb 209%.

That doesn’t take into account the future boom in demand. It won’t take long for it to correct itself…certainly before the end of this year.

This panic is inevitable, and there are a number of penny stock plays that could take advantage of it… Union Drilling (NASDAQ: UDRL) and Pioneer Drilling (AMEX: PDC) are two that could be worth looking at right now.

Sincerely,
Jim Nelson

September 23, 2009

Natural Gas’ Triple Could Give Us a 416% Gain By Year-End was originally featured in the Penny Sleuth.

Of course, this may seem like common sense. But it does make a statement about the necessities in life. Most areas these days are heated with natural gas… Meaning, you are mandated to pay for natural gas to live.

Here’s a small-cap technique to use this pay-to-play mandate in your favor…

Natural gas is much cleaner than other fossil fuels. Coal and oil are just about as dirty as it gets. For the same amount of energy when burned, natural gas produces 29% less carbon dioxide than petroleum and 44% less than coal.

But natural gas is an important energy type even if it’s not simply burned. And it doesn’t take much of an imagination to see how more “green” legislation is on the way.

In 2007, Congress worked its way through a bill mandating a ridiculous amount of ethanol to be produced by 2022 — 36 billion gallons. That’s roughly five times more ethanol than is currently produced. And it takes a lot of natural gas to produce that ethanol.

In the U.S., corn is the largest source of ethanol. To grow corn, it takes a lot of fertilizer — about 22 million tons of fertilizer is consumed every year. The price of fertilizer is 90% dependent on the price of natural gas. On top of that, ethanol plants are powered by natural gas.

While natural gas is greener than what we currently use, there is still one more reason for the natural gas price hike: demand.

If you take a look at the accompanying chart, you can see the expected growth of natural gas in electricity generation. Coal is still the No. 1 energy source, but natural gas is about to blow away oil, nuclear and renewable energies.

The demand for natural gas is only going to strengthen the industry. One way to play this growth is to buy a natural gas producer. However, figuring out which ones will pop is guesswork at best.

What we have today is not a growth story. It’s a true profit story. You see, as strong as natural gas is, we aren’t going to be placing any bets on future prices. Instead, we found the one segment of the natural gas industry that thrives when the price of natural gas is both up and down…utilities.

Gas utilities perform well no matter what the price of natural gas is. These companies pass on costs straight to consumers.

It’s smart business for these distributors. They simply profit from their services, not what the speculative prices are.

Fortunately for us, the overall utility market is fragmented. I know that doesn’t sound like a good thing, but it is…

If we had a national utility, we’d end up with a megacap stock that would have too much attention. With attention comes slow to no gains. That’s why you won’t see us recommend any blue chips here at Penny Sleuth. But, a fragmented industry, such as this one, leads to many small caps to choose from — many of which are extremely undervalued.

The second important aspect to consider when looking at utilities is the monopolistic attributes these companies have. To get into this business, you have to front a lot of costs. You have to secure the product — in this case, natural gas — make sure there’s a large enough customer base, and work out the policy issues — which can be quite a hassle depending on the state and municipality.

You don’t normally have a choice of which supplier you want to get your natural gas from. You just get it from whichever utility company is supplying the rest of the community. That gives almost all of these businesses an advantage. It is also the reward for the upfront costs.

On top of that, many of these companies are considered Master Limited Partnerships, which give them another market advantage — they are tax-free.

With the many small-cap utilities to choose from, it’s important to do your research. It takes plenty of digging to find the right one.

Sincerely,
Jim Nelson

February 25, 2009

Green Energy’s Beneficial Impact on Natural Gas was originally featured in the Penny Sleuth.

Many of them have been expanding gas production too quickly until recently, because they were accessing outside capital in the form of debt. But ever since natural gas prices tanked, most have announced that they will “spend within cash flow,” or limit drilling activity to reinvesting the cash flow that they generate.

I’ve spent a lot of time in recent weeks reviewing E&P capital spending plans, and I think the market is underestimating just how quickly U.S. natural gas inventories could contract, given the recent collapse in drilling activity.

The Jan. 23 natural gas inventory report from the EIA revealed a 176 billion cubic foot inventory draw despite severely depressed industrial demand.

E&P companies were financing new drilling projects with debt in 2007 and early 2008, but it did not lead to an inventory glut. This reflects just how intensely the industry needs to drill to meet demand. Now that debt-financed projects are a thing of the past, we can expect to see a significant negative supply response.

For the most part, the E&P industry in the U.S. is very disciplined — perhaps more so than OPEC. E&P companies are responding to the lower natural gas price by slashing drilling and well completion activity in this depressed gas price environment. At $4.50 per thousand cubic feet, the spot price of gas is below marginal cost for most producing fields.

At today’s low prices, it makes economic sense for E&P companies to defer new projects. The U.S. natural gas supply originates from thousands of wells scattered all over the country.

Decline rates of these wells are very steep. Consider that most new production comes from shale plays — where production can decline 70% in the first year after well completion.

So low natural gas production should balance the market later in 2009 — prompting a rebound in natural gas prices. E&P stocks should rebound even faster than gas prices, since they are already discounting years of unattractive prices.

Regards,
Dan Amoss

January 30, 2009

Natural Gas E&P Stocks Should Rebound Quickly was originally featured in the Penny Sleuth.

Its eyes will wander to Turkmenistan.

Back in October, while the world was busy putting out the fires of a financial crisis that still burns, little-thought-of Turkmenistan made a bombshell of an announcement. It seemed to gather little notice at the time. But it could become much more important as the Russian-Ukraine dynamic gets worse.

Gaffney, Cline and Associates, a British consulting firm, completed an audit of Turkmenistan’s Yoloten-Osman natural gas deposits. Based on GCA’s first results, the fields have a minimum of 4 trillion cubic meters of gas… and as much as 14 trillion cubic meters of gas, a truly staggering sum. The announcement put Yoloten-Osman among the four or five largest natural gas fields in the world.

The country’s biggest field was Dowalatabad, a rich and extraordinary field in its own right. Yoloten-Osman is at least five times as large.

And Turkmenistan has many gas fields not yet explored.

“Without doubt,” the Asia Times weighed in, “Turkmenistan is closing its gap with Russia and Iran, hitherto listed as having the world’s largest and second largest gas reserves… If the GCA results are confirmed, Turkmenistan will have reserves just 20% lower than that of Russia and outstrip Iran by far.”

Turkmenistan has the potential to rival Russia’s clout in natural gas and provide an alternative for Europe. By creating a pipeline from Turkmenistan, through Azerbaijan, Georgia and onto Turkey, the EU could bypass Russia entirely.

You can be sure the Russians won’t like that. Again, from the Asia Times : “[Russia] is no longer the superpower in the world of natural gas, as was widely regarded… Turkmenistan is, unquestionably, also a gas superpower of comparable muscle power to Russia.”

The effort to bypass Russia via a southern route is an old game. Tamerlane, the 14th century conqueror of Central Asia, wanted to do the same thing when he sought to divert trade from the northern Silk Road — controlled by the Golden Horde — to a more southerly course through Bukhara and Samarkand (in present-day Uzbekistan).

Today, the five Islamic republics that were once part of the Soviet Union are back on the center stage of geopolitics. Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan — all have huge oil and gas reserves. The names sound odd today, perhaps. But Americans will get to know their names as well as they know those of Iran, Iraq and Afghanistan.

The race is on to court these countries of the steppe, taiga and desert. In this, China may already have a lead, as it often seems to when it comes to securing energy supplies. Beijing is financing a $2.6 billion pipeline through which natural gas will flow from Central Asia to China. It’s doing its best to cozy up to the fab five.

Russia, too, is already close to them. Russia relies on Turkmen gas to meet its obligations to Europe, for instance. Russia and Turkmenistan have an agreement in place through 2009. But the powers that be in old Ashgabat have been sticking it to Russia. They’re making Russia pay up for its gas supplies. In 2007, Ashgabat raised the price to $100, from $65, per 1,000 cubic meters. Then in 2008, the price went to $130… and then to $150 in June 2008.

As the Asia Times remarked, “Russia will have to rework its bonding with its Central Asian partners.” It’s as if Turkmenistan just drew an ace face up — and now Moscow is starting to sweat it a bit. Turkmenistan now has even more clout to peddle with eager Americans, Europeans and the Chinese — all who want Turkmen gas and the opportunity to build out the infrastructure. Russia will have to play the game like everyone else. Turkmenistan is in the driver’s seat.

Sincerely,
Chris Mayer

January 12, 2009

Turkmenistan Emerges as Serious Natural Gas Player was originally featured in the Penny Sleuth.

This company wants to lead the charge when it comes to liquid fuel conversion. And since I’m a relative novice in the world of gas-to-liquid (GTL) and coal-to-liquid (CTL) technology, I decided this particular company would be perfect to research.

The name of the outfit is Syntroleum Corp. (SYNM: NASDAQ). Syntroleum has developed technology that converts natural gas or coal into synthetic liquid hydrocarbons that are mostly free from contaminants that are commonly found in fuels made from crude oil.

The synthetic liquid fuel can be used by itself in traditional internal combustion diesel engines, which reduces emissions. Or it can be blended with traditional fuels to “upgrade” the fuel to burn cleaner.

And diversifying how the United States gets its energy is not just important now, Syntroleum claims, but it will also become vital in the near future. The U.S. Department of Energy predicts China will face shortages of 5.9 million to 8.8 million barrels of oil a day by 2015. This company realizes the tug-of-war that will ensue over the world’s limited oil supply, and like some of the ethanol and biodiesel companies we’ve looked at before, Syntroleum is looking to provide an alternative solution to crude-based products.

A New Way to Make Fuel

Syntroleum has the money it needs to fund operations for 2006-2007, but it has never built a commercial facility. One of the risks of a commercially-viable GTL plant noted in the company’s annual report is that some of the technology in use at Syntroleum’s testing facilities and other technologies being developed might not prove to be commercially applicable.

In other words, they can make the stuff but they might not be able to do it as efficiently as they’d like on a larger scale. Nevertheless, the company is moving closer to commercializing the product.

Syntroleum is involved in a joint venture with Bluewater Energy Services to develop and pay for the first ever air-based GTL plant that would operate offshore mounted on a barge. A feasibility study commissioned by the two companies expects up to 17,000 barrels of the product produced per day, along with 40,000 barrels of oil, according to Syntroleum’s annual report.

And while the company is still in the red, it has a strong cash supply that should carry it through its research and development stage.

Syntroleum reported revenues of $400,000 for the first quarter of 2006 from joint research development activities with the U.S. government and with licensees and from GTL fuel sales. Its net loss for the quarter was $12.9 million, coming to 23 cents per share — about the same as the net loss of 24 cents per share from the first quarter of 2005.

And with more than $60 million in cash, the company is well positioned to fund its research and development and demonstration plants until its first commercial plant is complete (it spent $6 million on research during the first quarter). Jack Holmes, president and CEO of Syntroleum, said that first quarter costs are in line with the company’s budget as the company focuses on reaching financial close on its first commercial plant by the end of 2007.

Risks and Rewards

With a price tag of $7.75 a share before the market opened this morning — and the company tallying a 77-cent loss per share — it is evident that many investors have faith in this company’s technology and its ability to successfully commercialize its GTL and CTL methods. So a volatile share price is what you’ll get from this $436 million company. Almost $10 separates the stock’s 52-week high of $16.50 with its 52-week low of $6.54. So any bit of good or bad news could greatly affect the share price until Syntroleum starts posting a profit, which would be in almost two years at the earliest once its first facility is operating.

And as was mentioned before, the company is still unsure if some of the technology used in making the synthetic fuels will be as effective in a large-scale environment. If Syntroleum finds it can’t turn much of a profit, it could be a long time before the technology is improved.

Aside from these obvious risks, there are a couple of redeeming qualities that you should check out:

First up is a contract with a behemoth in the oil industry. In 2004, the company signed an agreement with ExxonMobil providing Syntroleum with a worldwide license under ExxonMobil’s GTL patents to produce and sell fuels from natural gas or coal. The agreement also includes all existing ExxonMobil patents in these areas, as well as future patents for the next several years.

Second is the strength of the company’s patents and management. Kenneth Agee founded Syntroleum in 1984 and is still with the company, serving as chief technology officer and chairman. He is credited on many of the company’s patents, as well. In all, Syntroleum has 127 patents issued and pending. Agee obviously sees the potential in this technology and is willing to see it through…

Wasting Natural Gas

GTL technology could help eliminate a lot of unnecessary wasting of natural gas across the globe. Many oil companies burn off unwanted natural gas in order to extract crude. The process is called flaring, and it’s a nuisance and an environmental concern. Natural gas is flared because there is a limited market for it in the warmer climates where it is found and it is difficult to ship overseas to viable markets.

To get a good look at flaring problems in Nigeria, you can check out this National Public Radio write-up.

And Syntroleum has a stake in Nigerian oil as well. The company recently acquired two locations in Nigeria with discovered oil and gas reserves, and also claims to be in the process of buying more. Drilling of the first well will happen sometime around September.

And in November, the company signed two memorandums of understandings that will hopefully allow a GTL plant in Papua New Guinea. Syntroleum is looking to develop about 50,000 barrels per day GTL plant as part of an industrial complex dedicated to gas-based industries near Port Moresby.

Talks with Egyptian Natural Gas Holding through one of Syntroleum’s licensees to construct another GTL plant are also in the works. So, the company continues to seek out opportunities to commercially develop its technology.

There are two main reasons Syntroleum thinks it can succeed better than traditional GTL technology. The first is that its conversion process does not require pure oxygen, making it safer and more cost effective. This in turn helps to contribute to its second advantage: cheaper operating costs, opening the door for smaller plant sizes, including mobile plants that can be mounted on barges.

All of this hopefully ensures that Syntroleum’s commercial plant — which is designed to produce just 17,000 barrels a day — will be economically viable.

Coal

Syntroleum is also exploring ways to commercialize coal to liquid (CTL) technology. The company notes that the largest coal reserves in the world are located in the United States, Russia, India, China and Australia.

However, a lot of the coal in these reserves is expensive to get due to environmental concerns and how far some of the reserves are located from coal markets. And although the company’s CTL program is not as close to commercialization as its GTL technology, it is making progress.

In November 2005, Syntroleum signed an agreement to conduct laboratory-scale demonstration of its catalyst technology with coal. “This program is targeted at advancing early adoption of our proven FT technology in coal-to-liquids,” according to Syntroleum’s website.

And Syntroleum and Sustec AG, a private company based in Switzerland, have an agreement that provides for exclusive joint business development of projects integrating Sustec’s gasification technology with Syntroleum’s technology.

“The joint venture is aimed at converting coal and other carbonaceous materials such as petroleum-coke, residual fuel oil and biomass into ultra-clean fuels. Each company will own 50 percent of the joint venture,” announced Syntroleum. Jack Holmes, president and CEO of Syntroleum said, “We have long considered Sustec as the state-of-the-art leader in gasification technology. We believe this combination can now offer a truly unique and very compelling technology value proposition to the coal industry… Integration of coal gasification and FT technologies is increasingly being sought after in the United States, China, Australia and elsewhere. This joint venture presents a rare opportunity for companies pursuing investments in this important energy industry segment to access the complete technology package required to develop coal energy in an environmentally-friendly way.”

And Syntroleum throws some more convincing stats in the mix: According to a BP world energy review, the world’s 2004 coal reserves were estimated at more than 909,000 million tons. That’s a lot of coal that could be converted to clean fuels.

Analysis

Syntroleum is moving full steam ahead on its GTL projects, and coal shouldn’t be too far behind. It’s still a speculative pick, but the management is dedicated, the technology is in demand, and the price is right.

In its annual report, Syntroleum executives claim that its technologies can be cost effective assuming that oil prices prevail in the $35-$40 per barrel range, so with oil likely to remain much higher, the company should be able to adequately capitalize on its commercial efforts.

If you were to buy the stock between $6 and $8, you would need to buckle up for some price fluctuation for the next year or longer. I don’t think this is the kind of investment that is going to skyrocket in the next few months. However, through all the risks, Syntroleum could become a real player in the alternative fuel world if and when it starts turning a profit.

Other Alternative Energy Technology was originally featured in the Penny Sleuth.