By Jim McTague
DO UNTO BP AS YOU WOULD DO UNTO GOLDMAN ...Whodathunk that another corporation could give capitalism an even bigger shiner than the sirloin-sized one delivered by Lloyd Blankfein and his bond-market sappers?
The Big Spill by BP /zigman2/quotes/207305210/composite BP +4.74% (ticker: BP) and its drilling surrogate Transocean /zigman2/quotes/208905612/composite RIG +6.25% (RIG) has the potential to be the largest man-made ecological catastrophe this side of World War II -- so you can expect the pols to place a moratorium on new wells that will last for many decades.
This, at least, has been the bipartisan knee-jerk reaction to spills in the past. Congress and regulators will pummel BP with extreme prejudice, just as they're pummeling Goldman. And an angry public won't object as the Gulf of Mexico becomes a sea of sludge that fouls the economies along its 3,000-mile-plus coastline.
Publicly, President Barack Obama still embraces an energy-security strategy that calls for fuel from multiple domestic sources. However, his enthusiasm for this approach is not unbounded. White House press secretary Robert Gibbs told me Tuesday that he wouldn't rule out a reversal of the president's March 31 decision to open new coastal areas for drilling.
This raises a dilemma for oil-sector investors: Where can you safely recycle your petrodollars until the slick dissipates?
I RECOMMEND PUTTING THEM INTO GARBAGE . The fortunes of biofuels, a sector in which many a visionary has lost his kit and caboodle, will rise as Big Oil's get dirtied. Investors -- even the little guys -- can place a relatively safe bet on biologically based gas additives like ethanol by purchasing shares of garbage haulers. According to James McDermott, a managing partner with venture firm US Renewables Group, an energy-investment firm, each ton of garbage can be converted into 120 gallons of biofuels.
That means that the top ten waste haulers in the U.S., with 80% of the market, have the potential to produce 10 billion gallons of fuel each year. Furthermore, because garbage is so cheap, McDermott says such enterprises need no government subsidies to compete.
I heard McDermott's convincing argument at the Milken Institute Global Conference in Beverly Hills, Calif., on April 28. He recommends that venture investors stick to these low-cost providers of biofuel feedstock because there's a never-ending search by scientists to produce ethanol for next to nothing, using materials ranging from algae to common weeds. Corn, the source of most of our domestic ethanol, is very dear compared to garbage.
As McDermott notes, the advantage of garbage is that "All of the planting, watering, and logistics rides on the back of someone else's fully amortized supply network." Should McDermott be wrong, then you still have a foot in trash removal, an attractive growth play, owing to our wasteful ways.
The most prominent publicly traded entities in garbageland are Waste Management /zigman2/quotes/207732466/composite WM -1.19% (WM), Casella Waste Systems /zigman2/quotes/206246338/composite CWST -4.25% (CWST), Waste Connections /zigman2/quotes/201848482/composite WCN -1.15% (WCN), U.S. Ecology /zigman2/quotes/206007764/composite ECOL -2.28% (ECOL), Stericycle /zigman2/quotes/202722990/composite SRCL -2.98% (SRCL), and Republic Services /zigman2/quotes/205979971/composite RSG -2.17% (RSG). All of these stocks -- even Casella, the smelliest of the bunch, with it's negative earnings -- are trading near 52-week highs, because the market is infected with celebrity-itus. Warren Buffett and Bill Gates both own Republic Services; Cascade Investments, controlled by Gates and wife Melinda, is the hauler's largest shareholder. The Gates Foundation also owns nearly 16 million shares of Waste Management.
Even so, there's still an argument to be made for buying in. Anthony Fritz, a Gabelli & Co. analyst, told me that while the sector was hit hard by the economic slowdown, with trash volumes declining, volumes should bottom by mid-year and begin to rise in the second half. And as JPMorgan wrote on April 20: "The waste group trades at 7.5 times and 7.1 times estimated '10 and '11 Ebitda (earnings before interest, taxes, depreciation and amortization), slightly below historical averages...levels that provide room for upside."
And thanks to the Big Spill, garbage might be added to the fuelstock sooner than you think.
Bill O'Keefe, CEO of the George C. Marshall Institute in Arlington, Va. -- which does technical analysis of scientific issues that affect public policy -- says the U.S. ethanol industry has the potential to produce between 16 billion and 20 billion gallons of fuel annually. The Obama administration already has mandated the use of 36 billion gallons of ethanol as a gasoline additive by 2022. So production is well behind projected, pre-Big-Spill demand. Also, the next generation of cars probably will be dominated by gas-electric hybrids that use reformulated gasoline. This is the next logical technological step toward energy independence, O'Keefe says. He adds that 80% of all our energy will continue to come from fossil fuels, pending development of more efficient batteries.
So, we shouldn't get insanely pumped up about the possibilities. But the boost in biofuel consumption could give new meaning to the term "peeling out."