McDermott (MDR): A nuclear option

by Steve Christ, editor The Wealth Advisory

After weeks of watching the waves roll in we have decided to go long in one sector that is in the midst of a rebirth -- the nuclear power industry where we have been bullish now for the last two years.

While some think the nuclear revival is something new, this is one bandwagon we have been on for years. In recent years, the industry has been slowly rebuilding itself providing investors with a future growth opportunity.

In fact, we recognized that the seeds of the industry's rebirth were first sown during the Bush Administration. Specifically, with the Energy Policy Act of 2005 which provided the nuclear industry the following:

• $3 billion in research subsidies
• Over $3 billion in construction subsidies for new nuclear power plants
• Nearly $6 billion in operating tax credits
• Over $1 billion in subsidies to decommission old plants
• A 20-year extension of liability caps for accidents at nuclear plants
• Federal loan guarantees for the construction of new power plants

And while the United States has not ordered one new nuclear reactor since the 70's, President Obama broke the ice last week when he announced that the Energy Department had approved an $8.3 billion loan for the construction of two nuclear reactors in Georgia.

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Needless to say, it was something of monumental break through.

Meanwhile, the nuclear industry has to be happy with the selection of Stephen Chu as Energy Secretary. Chu is pro-nuclear and has a deep understanding of all the technical issues around energy.

In fact, Chu was one of the signatories on a pro nuclear document released in August 2008 entitled: A sustainable Energy Future: The Essential Role of Nuclear Energy. To sum it up the paper argued that a coherent long term nuclear power strategy is needed and nuclear power is a major and essential part of solving our energy problems.

Further it proposed the United States should maximize current reactors (plant life extensions, uprate), deploy advanced light water reactors, license Yucca mountain and research advanced fuel management, and pursue aggressive R&D on advanced reactors.

So it's really not that surprising that President Obama plans to finance the construction of two nuclear reactors, the nation's first in three decades. Yet, in the same vein it's impossible to overestimate the importance of what happened. For investors in nuclear power, it is definitely a big win.

That's why we have decided to establish a new position related to the industry. It's a company called McDermott International (NYSE: MDR).

McDermott is an engineering and construction company, with specialty manufacturing and service capabilities, focused on energy infrastructure. McDermott's customers are predominantly utilities and other power generators, major and national oil companies, and the United States Government

With its global operations, McDermott operates in over 20 countries with more than 25,000 employees. And while McDermott may not be as obvious as a company like the Shaw Group, its Babcock & Wilcox subsidiary is actually a pretty big, player within in the nuclear industry.

In fact, the Wall Street Journal recently reported that the Tennessee Valley Authority, First Energy Corp. and Oglethorpe Power Corp. have signed an agreement with Babcock & Wilcox to build nuclear reactors that are no larger than the size of a railroad boxcar.

These units would be capable of generating 135 to 140 megawatts of power, and their cost would be much less than a traditional reactor. What's more they could be built quickly and installed at existing nuclear plants.

That to us, makes them an investment worth pursing since early support from these three big utilities, increases the odds that customers will come forward in the future.  Buy McDermott International under $22.00 a share. This is one great company we view as a long term hold.

Learn more about this financial newsletter at Steve Christ's The Wealth Advisory.