NRP - Natural Resource Partners

[Packer16]

I heard an interesting take om energy prices from a guy from Oakcliff capital.  Since we have many O&G experts, I thought I would solicit their thoughts on his thesis.  He sees value in some coal companies that have low cost reserves like Alliance and NRP ever if a $20 per ton Co2 tax is added unto production costs.  He stated that the cost for subsidies is huge and will continue to be cut as countries use money for other purposes.  Here is his slides: http://www.slideshare.net/BryanLawrence1.  As you can see from slide 6, the cost without peakers is higher for the alternates @ 8 to 10 cents per kWH versus 4 to 6 cents per kwH for coal and gas.  The impact of paying these higher prices is about 10% of GDP per year (see slide 7).  There is another issue of intermittent power from these source which will add about about 4 cents per kwH.  Due to this issue, he has also observed that utilities will peak out at 25% of production from renewable because at higher levels, it really impacts the cost of energy.  He does not see further dramatic declines in alternatives pricing as we have seen in the past few years.  So he sees coal and gas being around for a long time.  He had an interesting metric to examine O&G companies with that is too look at the 5 -yr investment and subsequent increase in cash flow from that investment.  He explained the O&G industry as a capital allocation issue with XOM being the best.     

 

On to NRP, this and Alliance were two of his ideas.  NRP is an LP which is associated with an excellent capital allocator Christopher Cline.  It is a royalty company so it is not capital intensive and has been buying additional properties in the aggregates and O&G areas.  There is a bear case on VIC that states that the NRP is supporting the dividend with higher debt but I see the debt going to  pay for more assets.  I have been hesitant on this one as I am not an O&G guy. 

 

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[Liberty]

I'm no expert, and it's possible that the thesis is broadly correct, but I want to comment on one thing:

 

He does not see further dramatic declines in alternatives pricing as we have seen in the past few years.

 

I think that's a dangerous assumption to make.

 

http://i.imgur.com/Kafa6hP.jpg

 

The graph stops in 2012, in 2013 it's under 1.00, close to 0.75. I think all the rapid growth in wind and solar we've seen so far is nothing compared to what it'll be once the price is solidly competitive without subsidies, and that doesn't even mean that subsidies will be entirely cut (after all, it can be worth paying to avoid pollution - the price of coal doesn't include the price of smog/climate change/mercury poisoning/coal ash leakage/etc) or that a price won't be put on carbon.

 

And wind's even cheaper than solar in many cases, and the US hasn't even really started to exploit its offshore potential, or to do a serious efficiency push by changing incentives (some can be done with more efficient building codes/appliances/lighting/etc, some with effective behavioral science techniques (

)). It's usually cheaper to reduce power usage (aka negawatts) than to build new power plants. With the right incentives for utilities, a lot of that could start happening.

 

You could see things really change, especially if you combine smart grid technologies* that allow the power grid to handle intermittency much better with upcoming things like grid-scale liquid-metal batteries (

) and some good old interconnection between regional grids (high current DC lines to minimize losses) to ship power from places that are in surplus to those in deficit (which could include places with large hydro reservoirs, like Quebec and Norway, acting as buffers).

 

Another exciting thing that is just starting out is graphene-based solar. Graphene is basically carbon, and because it can generate more than one electron per photon absorbed, it could potentially have conversion efficiency of 60%+. That's not for tomorrow, but imagine a solar panel 3X more efficient than the top-of-the-line commercial panels available today, made of nothing more exotic than carbon. http://www.technologyreview.com/news/511751/research-hints-at-graphenes-photovoltaic-potential/

 

*f.ex. dynamic pricing and demand response (ie. if you have millions of smart hot water heaters and thousands of large refrigerated warehouses that go down a couple degrees/up a couple degrees during peak time within safe parameters, nobody notices but you shave off the summit by a lot, and even if you pay people for that, it's less expensive than new power plants, etc.)

 

Anyway, all that is not saying that there might not money to be made with coal, especially if you don't pay much for the assets, but I think the competition from non-polluting sources will probably move very non-linearly into the field and could seriously disrupt it, surprising conservative grid operators who haven't seen much change in decades. After all, cloudy Germany has 400 MW of solar capacity per million of population while the US only has 25 MW of capacity per million pop, and the US on average is A LOT more sunny.

 

But I'm not expert, this is just what I've gathered from reading. YMMV.

[Packer16]

I think his main issue is the intermittancy issue prevents these from being "baseline" sources of power and to allow them to work you need to have peakers which add an additional 4 cent per kWh.  So these projects would have to have really cheap down to 1 cent per kwH to compete.  Smart grid may be able to handle intermittancy but how do you generate solar energy in the dark or wind energe when it doesn't blow? 

 

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[Liberty]

I think his main issue is the intermittancy issue prevents these from being "baseline" sources of power and to allow them to work you need to have peakers which add an additional 4 cent per kWh.  So these projects would have to have really cheap down to 1 cent per kwH to compete.  Smart grid may be able to handle intermittancy but how do you generate solar energy in the dark or wind energe when it doesn't blow? 

 

Packer

 

There's always a limit, but that limit is pushed farther and farther away with a combination of these things. Dynamic pricing can reduce demand when there's less supply. Same for demand response technologies. Better interconnection can help because the wind is usually blowing somewhere or the sun shinning somewhere, it's rare that it's absent all over (in other words, if you look at your backyard, the sun and wind are very intermittent -- but if you zoom out a lot and look at it from space, average production is a lot more constant over large areas). Later, liquid metal batteries can help store many MWh of power for when you need it, and same with plug-in vehicles that can act as grid-storage (V2G technologies are looking into that). Thankfully, the sunniest days are usually those with the highest demand in power (A/C), so that helps, and offshore wind can be extremely stable if sited well (a lot less intermittency than onshore wind for the most part). Concentrating solar thermal located in deserts can be very predictable because it's pretty much always sunny, and with molten salt you can store heat so it generates power even at night.

 

So there's definitely a limit, but by the time we reach it, technology might have pushed it farther back and so on, so I don't think it'll be a limiting factor too soon.

 

Personally, I'd like to eventually see baseload shift to LFTR, more hydro, and EGS geothermal, but that's a bit off in the future..