From Fracking to Fuel Cells-Capitalizing on the Energy
Revolution: Laird Cagan
Source: George S. Mack of
For investors seeking high potential returns and the thrill of
participating in market innovation, the smallcap energy space is
where it's at. Managing Director and Co-Founder Laird Cagan of
merchant bank Cagan McAfee Capital Partners has built his career
by backing companies that are both filling current demand and
creating new markets. In this exclusive interview with
The Energy Report
, Cagan shares his experiences and discusses several companies at
the forefront of the energy revolution.
The Energy Report:
Laird, you and your partner are active investors. You are company
founders, you sit on the boards and you actually run the
businesses in some cases. What kind of advantage does that give
We are involved with fewer portfolio companies compared to a
private equity or larger firm. Because we take a very active role
and are starting companies at early stages, our preference is to
create a new platform company and a new business opportunity. So
the benefit is that we can be very close to the company and try
to launch it quickly to take advantage of whatever market
opportunity we see. We have a lot of skin in the game, a lot of
ownership, and we try to help guide companies in the right
direction. But like private equity investors, we generally have
professional managers from the industry who were either
co-founders or who were brought in to lead the company on a
day-to-day basis. One exception is the case of my partner Eric
McAfee, who has been running
Aemetis Inc. (AMTX:OTCPK)
since 2005, when we started that company.
What kinds of companies interest you most?
For the last 10 years or so we've been focused on building
companies in the microcap public space. We have found that this
has given us better, faster access to capital for the right
opportunities. Public investors don't want to take the three,
six, nine or 12 months that venture capitalists and private
equity firms take to investigate opportunities before making an
investment decision. Public investors want to see something
faster and want an opportunity that they can understand.
Typically, that means we stay away from pure-play technologies,
but we do look for technologies that are creating new markets.
For example, we founded
Evolution Petroleum Corporation (EPM:NYSE)
in 2002, when oil was $25 per barrel (/bbl). We created that
company to do enhanced oil recovery using technologies like
lateral drilling, which was not very prevalent back then. We
could take mature oil and gas fields and extract additional
reserves using new technologies. But we also benefited greatly
from having oil prices go from $25-100/bbl. We founded
Pacific Ethanol Inc. (PEIX:NAS)
to replace gasoline additive MTBE (methyl tertiary butyl ether),
which was outlawed in 2004 in California and many other states.
Ethanol was the only known oxygenate that would burn gasoline
cleanly enough to meet the clean air act. So, it was less of an
alternative energy play than a replacement-commodity play with a
West Coast focus. Those companies, Evolution Petroleum and
Pacific Ethanol, got us into the energy space. With rising energy
prices and a multitrillion-dollar marketplace, all sorts of new
opportunities began to arise because of technology. Aemetis,
originally called AE Biofuels, was focused on next-generation
biofuel moving from corn to other feedstocks that would be more
plentiful, more predictable and would not be in the food
Was horizontal drilling technology more capital-intensive at the
time, with oil at $25/bbl?
Not particularly. There were thousands and thousands of wells
around the United States that had been drilled and shut-in or
were at a trickle of their former production. Some were getting
ready to shut down. People would practically give them away
because it costs money from an environmental standpoint to close
them. For us, Evolution was an opportunity to create an
early-stage platform company to produce oil using enhanced oil
recovery. We were fortunate that by 2006 oil prices were at
What's the technique?
The technique used is called CO2 (carbon dioxide) flooding, where
you inject CO2 into the ground and it releases the trapped extra
oil, which then bubbles up. The CO2 adds pressure, just as it
does in a carbonated beverage. When you drill an oil well for the
first time and release the virgin pressure by traditional means,
you might get 40% of the oil. This means somewhere between 50%
and 60% of the original oil in place is still there. With the CO2
floods, you can typically get between 15% and 20% of the original
oil in place, and that's a meaningful well.
As a pioneer of this technology, where did you incur the most
You have to have a pipeline to get your source CO2, and that's a
challenge. If you're close to a source, the cost of injecting it
can be around $10/bbl. But a project's viability depends a lot on
the fixed cost of getting the CO2 to the site. At the Delhi Field
in Northern Louisiana, Evolution Petroleum formed a very
effective partnership with the leading CO2 player in the
Denbury Resources Inc. (DNR:NYSE)
. Together we've done very well. The Delhi Field was 14,000 acres
and is estimated to be capable of releasing an additional 60
million barrels (MMbbl) of oil. And with oil now over $100/bbl,
that's $6B worth of oil, and you can afford to spend a lot to go
I would say yes, it was foresight and some luck. We didn't
anticipate $100/bbl oil at the time. But, we really do focus on
trying to get a play at the beginning of a growth cycle. Of
course for any investor, being at the beginning of a rising tide
is one of the keys to success and having superior returns.
You're not as actively involved in
Camac Energy Inc. (CAK:NYSE)
as you are in some of your portfolio companies, but starting the
company has been an interesting saga. Can you tell us about
In 2006, after having had some success with both Evolution
Petroleum and Pacific Ethanol, I was introduced to Frank
Ingriselli, the former head of Texaco International. He developed
some important relationships in China and he had a lot of very
high-level experience with majors in that region. After Chevron
Corporation (CVX:NYSE) bought Texaco in 2001, he wanted to start
a new oil and gas company and needed capital to grow, for which I
was approached. We ended up funding a $21M offering and creating
a new public entity, Pacific Asia Petroleum. Frank went to China
to visit as a long-time contact and was granted a concession of
175,000 acres in the prime coal-bed-methane region of China.
Without any upfront money, we got a hold of a major resource that
launched the company. The Chinese government's goal was to bring
in people that had expertise and ability and who could bring
capital for projects, because the country needs energy. Over time
we ended up acquiring Camac, which owned a large property in
offshore Nigeria that was just beginning production. In a sense
it was a reverse merger for Camac because it became the majority
shareholder and ended up taking control by its Chairman and CEO
Kase Lawal. I dropped off the board around that period of
Camac shares have been flat over the past six months, but down
about 50% from a year ago. What accounts for the lag in the stock
Its first production well started out at 20 thousand barrels per
day (Mbbl/d) and it has gone down to about 4 Mbbl/d, but there's
still a huge reserve there, which is estimated to be between 600
MMbbl-2.2 billion (
) bbl of recoverable oil in the entire field. Camac is working on
getting a new partner to come in and develop that. I'm bullish on
the long-term. It's going to take time, but it should be very
exciting. I'm still a big shareholder and waiting, watching and
hoping for the best.
Were there any other companies you wanted to mention briefly?
I recently became chairman of
Blue Earth Inc. (BBLU:OTC)
, which is in the energy efficiency space. This is a very
important new category, and it is frankly the lowest-hanging
fruit of energy conservation by reducing energy consumption.
Commercial real estate uses about 20% of our nation's energy.
Making those buildings more efficient is very important, and
provides quick returns. For example, replacing old motors and
with energy-efficient motors produces a one- to two-year payback.
Blue Earth is geared toward doing that.
Is the company actually manufacturing new technology?
It's not a technology company, but it's using the latest
improvements in energy efficiency to retrofit commercial real
estate. It will also do energy audits for clients' buildings and
recommend an energy-generation project, be it solar, fuel cell,
etc. that fits the client's needs. This is called distributed
generation: Instead of going into the grid and selling power back
to the utility, the company sells directly to the customer. It
therefore has none of the energy losses of going through the
grid, nor any of the capex issues. Retrofitting to localize
energy at a site is a tremendous innovation that needs to happen
in order to reduce national and even global energy consumption.
I'm very bullish on the energy efficiency and distributed
generation space for the next 50 years. It has the power to
replace and transform our energy production. We are not going to
get rid of utilities because we need them, but we can chip away
at our use of fossil fuels from our insatiable appetite for
energy in a way that is cost effective. It also reduces carbon
Is Blue Earth a consulting company?
No. It's more of a contractor, or a construction company. In
other words, it does the work. In the solar world it's called
Engineering Procurement Construction or EPC. After the energy
audit, the company does the engineering, including procurement of
parts and construction. As we move on and migrate this business
model, the company will also provide the financing and
effectively become the developer. There are some good tax
incentives involved in alternative energy, both in solar and fuel
cells. Depreciation is also available, and that adds to the
Solar systems would be on the roof or on land, but how far away
would a generating fuel cell typically be from the building?
Adjacent to the building. There's no sound, and there are no
moving parts. You need a footprint about the size of a tractor
trailer. There are a few significant fuel cell manufacturers in
the U.S., and they are growing nicely. Fuel cells are
significantly more cost effective than solar if you can use
energy 24 hours a day such as in a data center and can have net
paybacks in 5-10 years at most, whereas it might take solar
10-20-years to payback.
What are the fuel cell companies?
One of the companies to look at is Bloom Energy (private). It has
the larger units, and Google Inc. (GOOG:NASDAQ) put Bloom units
into its building in Silicon Valley with a lot of publicity a
year or so ago. Bloom is different from the other three
manufacturers, as there is no waste heat, which is interesting.
So, if you have large, consistent needs, Bloom is good. The data
centers that Google runs are 24-hour operations. So, it would not
be quite as suitable for a company that shuts down at night
because you can't amortize 24 hours, and perhaps solar would be
better for a company that needs mostly peak daytime energy.
That's why an energy audit is so important, so clients can
understand what's most appropriate for their business.
Other companies include
FuelCell Energy Inc. (FCEL:NASDAQ)
and ClearEdge Power (private), the latter of which makes a
variety of units, including small residential-size fuel cells.
ClearEdge is blitzing homes. It's the SolarCity (private)
equivalent. SolarCity is trying to put solar on your roof, and
ClearEdge is trying to put a fuel cell next to your house, and it
makes systems all the way down to 5 kilowatts, which is
appropriate for a midsize house.
It has been a pleasure meeting you, Laird.
is managing director and co-founder of Cagan McAfee Capital
Partners LLC, a merchant bank in Cupertino, CA. Cagan McAfee
has founded, funded and taken public 10 companies in a variety
of industries including energy, computing, healthcare and
environmental. The company has helped raise over $500M for
these companies, which achieved a combined market
capitalization of over $2B. Mr. Cagan was the founder/chairman
of Evolution Petroleum Corporation (
), a company established to develop mature oil and gas fields
with advanced technologies, and he is a former director of
American Ethanol (
) and Pacific Asia Petroleum (PFAP).
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1) George Mack of
The Energy Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Energy Report:
None. Streetwise Reports does not accept stock in exchange for
3) Laird Cagan: I personally and/or my family own shares of the
following companies mentioned in this interview: Evolution
Petroleum Corporation, Camac Energy, Aemetis Inc. and Blue Earth
Inc. I personally and/or my family are paid by the following
companies mentioned in this interview: Evolution Petroleum
Corporation, Aemetis Inc. and Blue Earth Inc. I was not paid by
Streetwise for this interview.
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