Sunday, March 1, 2015

International investment heats up in the renewable energy sector

Solar-paneled roof of National Stadium in Kaohsiung, Taiwan, producing 1 megawatt of electricity

My appraisal practice has changed significantly in the last year. Whereas I spent the last few years visiting struggling or proposed luxury home subdivisions, hotels, tourist projects and golf communities in foreign countries, my clients have reduced their appetite for such risky ventures. Nowadays more than half of my work involves the valuation of land for solar photovoltaic energy production, AKA solar farms.

There seems to be a great appetite for cross-border investments in renewable energy infrastructure projects. Such projects are able to attract capital from investors not needing high returns, but focused rather on steady, long-term yield from contractual government or utility company payments that reimburse them. Renewable energy infrastructure seems a safe and easy investment compared to foreign casinos and luxury vacation resorts.

Each week brings one or more announcements of cross-border renewable energy deals. Last week, Swiss-owned Adiant Capital Partners sold a 37 megawatt UK solar farm to UK-owned Foresight Group. Canadian-owned Northland Power has announced a $177 million IPO for wind farms in Canada and Germany. Australian fund AMP Capital is entering the Japanese renewables market. The Blackstone Group (U.S.) has announced that its second energy fund, $4.5 billion in size, focusing on renewable energy assets worldwide, has been oversubscribed.

There is construction risk, of course, but many transactions are also structured as sale-leasebacks of the land the renewable energy projects are built on. And management risk of renewable energy infrastructure is nothing compared to commercial real estate, unless you have Homer Simpson pushing the buttons.

Renewable energy infrastructure is now so mainstream that Google and Apple are investing, including a Norwegian-owned project in Utah that I recently appraised, in which Google will be partially financing the development of a $157 million solar plant.

Another example of a multinational solar farm venture I evaluated was a duo of Ecuadorian solar farms to be developed by a German manufacturer financed by private money from the U.S. The deal fell through because the German CEO didn’t understand that his firm had to own or buy the properties they would be mortgaging and that licensing and power purchase agreements had to be finalized before the investor would commit funds.

Valuation methods for solar farm land

The approach of choice is the sales comparison approach, which works well in California due to the large number of publicly recorded transactions. Solar farm appraisers are not always so lucky to find verifiable sales, though, in foreign countries and “non-disclosure” U.S. states (such as Utah, New Mexico and Texas) and sometimes must turn to a land residual approach to valuation, in which land values are imputed by valuing the completed project and then subtracting development costs and expected entrepreneurial profit. The recent reduction in development costs has justified rising values of land with power purchase agreements and public approvals.

The role of technology in increasing solar farm land values

The last few years have seen escalating land values in the U.S. southwest for land which has secured conditional or special use permits for solar photovoltaic energy production as well as power purchase agreements with utility companies. The reason for this land price appreciation has been because the value of such land is a residual of the cost to develop it for solar PV use, and the cost of PV technology has fallen more than 50% in the last several years, but rates for electrical usage have not fallen.

Much of the deflation in solar PV development costs is the result of cheaper technology being imported from Taiwan and China. I have recently been on a research trip to Taiwan, for example, to study their solar PV and wind power innovations.

There may be a temporary halt in falling solar PV development costs, however, as the U.S. government in February has imposed “antidumping” penalties on Chinese and Taiwanese manufacturers. The antidumping duty on Taiwanese solar cells is now 20%, and the new duties on Chinese solar panels will range from 39 to 52%.

Wind-powered park at Cijin Beach, Kaohsiung, Taiwan

Also, with the price of oil falling more than 50% in the last year, there may be less public pressure to subsidize renewable energy projects. These combined forces may temporarily stop the tide of rising values for solar farm and wind farm land.

This may be a temporary hiccup, though, in a long-term trend of renewable energy sources to replace fossil fuel technologies as our predominant power production technology, as production costs are likely to continue to fall as technology advances. Compare these advances to shale oil hydraulic fracturing technology, which is only more expensive than conventional on-shore drilling. Ten years from now, the world of energy production is likely to be quite different than today.

Solar-powered golf course in Chiba prefecture of Japan, near Inba, as seen from my plane flight
Wind-powered business park in Kamisu, Ibaraki Prefecture, as seen from my plane flight

Tuesday, January 6, 2015

What is the Future for Bakken Real Estate?

 Dunn County "man camp" operated by Civeo, itself laying off 45% of staff

North Dakota and Canada's Bakken region can be considered a true boomtown economy, and with booms there are often busts based on changing economic circumstances.

The precipitous fall in oil prices is likely to whipsaw the Bakken economy, as shale oil production costs anywhere from $55 to $85 per barrel, and at this moment, West Texas Intermediate oil is trading on NYMEX for $47.88 per barrel. However, this figure represents the value of West Texas oil, not Bakken oil, which must be transported much farther than West Texas oil. The added transportation costs range from $11 to $19 per barrel of oil, meaning that the value of Bakken oil is much lower than for WTI.

This morning, the price offered at the pipeline for Williston Basin Sweet oil was just $31.69 per barrel and the price offered for Williston Basin Sour (meaning high sulfur content) was $22.58 per barrel.

Drilling activity in North Dakota has already been declining, with the number of drilling rigs declining 23% so far since this oil boom’s peak. The reason this number has not declined more is because much of the oil being produced at the moment is "hedged" or pre-sold at yesterday's prices. If current prices stay the same or decline more, the real bust might not occur for a few more months. That will be when layoffs accelerate and the man camps, motels and RV parks start experiencing significant vacancies.

The effect on real estate will be significant, and I have personally witnessed a similar collapse while working as an appraiser in Houston, Texas, from 1984 to 1987, when I lost my job in the Texas real estate collapse after oil prices fell to $9 per barrel.

Most affected will be the value of land previously considered to have development potential. There has been a proliferation of Bakken-area land parcels being advertised as ideal for business park, RV park or hotel development, at prices up to $200,000 per acre. Most of these are still raw, undeveloped land, and their highest and best use just may be a return to farming or ranching. It may be common to see commercial land values falling by more than 90% as highest and best use changes from commercial to agricultural.

RV parks will also be in jeopardy, as they typically house temporary oil workers who may be first to go as layoffs continue. Other “man camps” are already in trouble. Man camp operator Civeo, featured in the above photo, has announced layoffs for 45% of its total worldwide staff and saw its stock price plunge 50% yesterday. Its stock price is now $3.11 per share, an 89% decrease in the last year.

The lodging industry will also be severely impacted, as many hotel rooms were built to accommodate the boom in temporary workers, and there will be a consequent oversupply of rooms.

PS: Bakken update, January 14, 2015

The number of active drilling wells in North Dakota has fallen to 158 as of today, over 26% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet is $29.44 per barrel and $20.33 for Williston Basin Sour, representing further declines of 7% and 10% respectively in the last week.

PPS: Bakken update, March 5, 2015

The number of active drilling wells in North Dakota has fallen to 113 as of today, 47% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has risen to $35.19 per barrel for Williston Basin Sweet and $26.08 for Williston Basin Sour.

What this means is that Bakken oil producers are receiving 20 to 28% more for their oil in the last 2 months, as North Dakota drilling activity has dropped by 30% in the same time period and inventories shrink.

The consequences for the real estate sector will be negative.  Since the peak of Bakken drilling activity in mid-2012, the number of active drilling rigs has declined from 215 to 113, a drop of 47.5%.  Considering that each drilling rig employs 100 to 125 workers, this represents job losses of about 10,000 to 12,000 workers, workers who were living in motels and RV parks, and some who might have been renting apartments or even searching for a home to buy.  Despite the improvement in the price willing to be paid for Bakken oil, these benefits will go to the oil producers and not the real estate market.

PPS: Bakken update, March 16, 2015

The number of active drilling wells in North Dakota has fallen to 111 as of today, 48% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has plummeted to $28.44 per barrel for Williston Basin Sweet and $19.33 for Williston Basin Sour.

The most active driller in Bakken is Whiting Petroleum (WLL).  It put itself up for sale last week and the stock popped up to $40 per share after reporting interested buyers, at which time I sold this stock short. With current assets and a book value of property, plant and equipment (probably above market value) adding up to $13 billion, and liabilities of $8.3 billion, current market capitalization of $6.4 billion as of this moment seems at least 50% too high.

Related story:

PPS: Bakken update, March 27, 2015

The number of active drilling wells in North Dakota has fallen to 97 as of today, 55% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has increased to $32.44 per barrel for Williston Basin Sweet and $23.33 for Williston Basin Sour.

The most active driller in Bakken is Whiting Petroleum (WLL).  I sold this stock short 2 weeks ago at $40 per share and it closed today at $30.50 per share, for a personal gain of 23.75% in 2 weeks.

PPS: Bakken update, July 15, 2015

The number of active drilling wells in North Dakota has fallen to 73 as of today, 66% below the peak of the Bakken oil boom. The Plains All American Pipeline is no longer publishing offering prices for Bakken crude, but oil prices in general are higher compared to March, and the offering price for Nebraska Intermediate, closest in proximity to Bakken, is $39.50 per barrel today.  This is better news for oil companies, but bad news for Bakken-area real estate, as a two-thirds reduction in drilling rigs means that some oil workers might be moving out of state. The effect on employment could be muted, though, because up until this year, many workers were working double shifts so that they could earn six-figure incomes.  Still, this hinders their ability to pay the inflated rents of yesterday.