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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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The Best Buys In Nanotech For Energy Investors

Investors have to be forward looking. It’s part and parcel of the process of deploying capital to try and forecast what opportunities make the most sense to pursue.

Of course that forecasting also makes investing very difficult. Nowhere is that more true than in the energy space. The modern energy sector, whether in clean tech or traditional fossil fuels, is all about new technology. From technology cutting the price of solar panels to tech allowing better oil and gas extraction, energy has become an even more technical field.

With that in mind, investors need to be cautious when reading about new advances like the recent announcement about a breakthrough to help create solar powered cars. University researchers announced that they have created a new design for fuel cells using nanotechnology based around tiny wires of gallium phosphide. The design breaks down water into hydrogen and oxygen using solar power and then powers the car. The idea is novel and interesting – but also high risk. Researchers frequently develop new designs that never make it to production. Related: Global Oil Supply More Fragile Than You Think

In this case though, investors who have been around a while might remember that this is not the first time nanotechnology has been hyped. Back in 2006, nanotech was hyped as a potential $2.6 trillion dollar industry by 2014. That estimate has proved wildly inaccurate.

Nanotechnology does offer some real benefits though, especially in certain applications. From OLED lighting and improved solar panels to better material coatings and reinforced rubbers, nanotechnology clearly has potential to result in improved materials for use across a lot of the energy space.

A number of applications in the energy sector are already in development. In particular in the fracking space, nanotech can be very helpful. One of the fundamental challenges in fracking is getting as much oil out of a well as possible. Oil is “thick” and so, when it is being withdrawn from a well, it tends to coagulate around the sides of the well resulting in a type of dendritic stick jump behavior. Related: Low Oil Prices Make This Stock A Good Long-Term Bet

In other words, a lot of excess oil is lost on the sides of the well and becomes difficult to recover – sort of like the thin film of milk on the side of a glass. Nanotech films in wells can help to offset this. Similarly, in fracking, nanotech can help with can help with creating more effective forms of fracking proppants.

So on the whole, nanotech does have value, but investors should not be deluded into investing in what is really just a very wide branch of science. The key is to find specific applications and companies to invest in. For investors interested in a broad safe opportunity, conglomerate 3M (MMM) is a great choice. The firm makes numerous products, has a broad and deep R&D pipeline, and the stock generates an extremely reliable stream of revenues. The stock is not particularly cheap currently at a little under 20 time trailing twelve months EPS, but this is a case of investors paying for quality and a healthy 4 percent dividend. Related: How Russia’s Energy Giant Imploded

For those looking for a more focused investment option that also necessarily comes with higher risk, FEI Company (FEIC) is an interesting choice. The firm makes a variety of nanotech related products including a whole slew of products dedicated specifically to the energy industry. At the same time though, the product line is diversified enough that the current weakness in energy and commodities in general is not crippling the business as its robust earnings recently showed. The firm has a particular strength in scientific instruments related to nanotech, which makes its products less commoditized than many of the failed pure-play nanotech names of the last decade. The stock is even more expensive than 3M, but for investors who see nanotech developments slowly changing the way industry operates around the world, FEIC is definitely worth a look.

By Michael McDonald for Oilprice.com

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