Are these energy stocks worth a look? RBC thinks so

Equities
Investments

It seems every week an investment bank plucks out several energy stocks it thinks could be big winners. This time, it’s the turn of RBC to highlight some energy equities it believes are on the cusp of great things.

Energy stocks

RBC updates global energy list

RBC’s “Global energy best ideas list” does what it says on the tin. It’s a grouping of energy stocks RBC thinks are about to overperform. It may also act as an entry point for investors looking to add power and energy to their portfolios.

“The RBC Capital Markets Global Energy Best Ideas List highlights our Research Analysts’ highest conviction names across the global energy sector at the time of their addition into the list,” RBC said in a note dated August 31st.

So far, the stocks on previous iterations of RBC’s list have performed well – at least according to the bank’s figures. Since the list’s launch in 2013, RBC states its listed picks have made 39.4% when weighted against the S&P Global Energy Sector ETF which is down 15%.

The equities spotlighted by RBC are not purely renewable energy stocks, despite the ongoing worldwide shift away from fossil fuels. Oil & gas stocks still make a case as they recover following the pandemic-induced battering they took across 2020 and into early 2021.

It’s a global round-up of stocks too, covering super majors, US power and utility firms, Indian solar companies and more.

Energy stocks to watch

According to RBC, the below stocks are worth watching:

  • Neste
  • Shell
  • NextEra energy
  • Algonquin Power & Utilities
  • AZRE
  • California Resources Corp.
  • Drax
  • ConocoPhillips
  • Equinor

Let’s start with Shell. The Anglo-Dutch supermajor is “undervalued”, according to RBC, and is expected by the bank to return 50% of its current market cap to investors up to 2026. Strong cash flows are the key to Shell’s success, RBC says, with a 14% free cash flow yield between now and 2025.

Shell is the big hydrocarbons name on the list, but the bulk of its constituents come from firms powering and pioneering green energy. The industry’s ongoing growth suggests key players will turn into opportunity-rich stocks.

Norway’s Equinor, the world leader in offshore wind farms and turbine manufacturing, is forecast to improve its free cash flow yield this year. That’s why it makes the list.

India’s AZRE is becoming a solar-power leader in South Asia. RBC believes AZRE will benefit greatly from a national Indian renewables push, as it snags up government contracts. The bank’s analysis also highlighted AZRE’s strong land buying track record, providing a “significant” advantage over competitors, as it snaps up fresh acreage on which to build new solar projects.

NextEra Energy has seen its stock underperform, but there is a solid base to build from, according to RBC.

“We expect the overall industry will see accelerated growth, and that NEE will maintain or further its standing as a renewable mega player,” RBC said.

Power and utility suppliers also fall into the energy ecosystem. In this instance, RBC flagged California-based Algonquin Power & Utilities as a stock with high growth potential. Its utility business already serves one million US customers, and it could use President Joe Biden’s clean energy reforms as a springboard onto greater revenue generation.

British power company Drax’s recent acquisition of renewable energy firm Pinnacle, drew RBC’s attention, alongside its bioenergy with carbon capture and storage development efforts. The BECCS process, as it’s known, extracts energy from biomass and stores the resultant carbon.

RBC said it sees Drax’s balance sheet strengthening in the long term.

US Election2020 fast update: Biden ramps clean energy plans

US Presidential Election
  • Biden plans $2tn clean energy investment
  • Clean energy stocks may prosper under Democrat clean sweep
  • Potential risks?

Clean energy stocks were among yesterday’s best gainers as Joe Biden, presumptive US Democrat president, outlined a $2tn green energy and infrastructure spending plan. Traditional oil companies also rebounded, with Chevron and Exxon up over 3% and Schlumberger, EOG Resources and Halliburton both adding over 5% as Biden appeared to steer clear of any fracking bans.

Biden plans “irreversible path” to net-zero emissions

First the numbers – it’s more money, faster with a more ambitious target than in the primaries after – it has all the hallmarks of Bernie Sanders on it. The $2tn over 4 years exceeds the $1.7tn over ten imagined in Biden’s primary campaign.

Biden outlined plans to set the US on an “irreversible path” to net-zero carbon emissions by 2050, with an ambitious goal to build a carbon pollution-free power sector by 2035. There is a clear break being made with the oil & gas sector implicit in this, but crucially we did not hear an aggressive take on fracking or proposals to restrict US shale.

The focus was on job creation in new industries, not on going after the oil & gas sector per se, albeit the proposals clearly imply a far more aggressive shift away from fossil fuels than a Trump administration would pursue. As much as it cemented the Democrats as the green party, this is an election pitch to voters in some key swing states who may have lost their jobs.

Meanwhile, the Democrat proposals would also involve upgrading millions of commercial and residential properties over 4 years to increase energy efficiency, with among other things the installation of solar panels, which is a potentially huge growth area (Sunrun, Solaredge, FirstSolar).

We also note a positive policy position on EV (Tesla, Nikola) with plans to invest in 500,000 electric vehicle charging stations. Biden’s goal is to combine going green with economic recovery: to Build Back Better. He is promising to create 1 million new jobs in the auto industry, domestic auto supply chains, and auto infrastructure, from parts to materials to electric vehicle charging stations, which will depend on the repurposing of the auto industry from ICE to EV.

How will oil and gas sector workers react in key states?

Whilst Biden is playing a strong hand here in tying jobs and economic recovery to the green economy, killing two albatrosses with one very large boulder, there are of course risks to this strategy, notably among the millions of workers in the oil & gas sector in states like Pennsylvania and Texas.

Biden boasts of creating more than 250k jobs “immediately to clean up local economies from the impacts of resource extraction”, but they may see Trump as a better guarantor of their jobs when it comes to the crunch.

Broadly the announcement appeared to be positive for the S&P 500 Energy sector, which rose 3.43%. Our Biden20 Blend clean energy constituents, selected as potential gainers from a Democrat clean sweep, notched broad gains, with some solar energy names taking off after Biden’s announcement.

 

Company Ticker % daily move
Nikola Corporation NKLA -1.5%
Nextera Energy NEE +2.46%
Brookfield Asset Management Inc BAM +2.93%
Tesla TSLA +1.32%
First Solar FSLR +9.91%
Terraform Power TERP +4.59%
Brookfield Renewable Partners BEP +3.92%
Sunrun RUN +12.26%
SolarEdge SEDG +8.74%
Enphase Energy ENPH +6.8%
Ormat Technologies ORA +0.48%
Atlantica Sustainable Infrastructure AY -1.95%
Plugpower PLUG +4.09%
Nextera Energy Partners NEP +2.95%

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