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Renewable premium: Wind, solar stocks outperform E&Ps hemmed in by oil prices

Q2: U.S. Solar and Wind Power by the Numbers

Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

Rate case activity slips, COVID-19 proceedings remain at the forefront in August


Renewable premium: Wind, solar stocks outperform E&Ps hemmed in by oil prices

Renewable energy stocks have punched well above their weight over the past five years, an analysis by S&P Global Market Intelligence found, with the biggest players adding nearly a third to their value while large oil and gas production company stocks were flat.

An equally weighted basket of the 10 largest publicly traded North American companies focused on making and selling renewable power — geothermal, wind and solar energy sellers — gained 31% over the past five years as of Aug. 31. Meanwhile, an equally weighted basket of the 73 firms in the S&P Oil & Gas Exploration and Production Index energy providers gained 2% over the same period. Weighted by market capitalization, the renewable energy producers gained 29% in value over five years while the E&P index lost 32% of their values, paralleling the 36% drop in crude oil prices over the past five years.

Eight of the 10 renewable stocks, all worth $1 billion or more and with a collective market capitalization of $31 billion, gained in value over the five years. Only 30% of the 73 S&P oil and gas index companies, a group totaling $1.36 trillion in market cap, were in positive territory after five years.

All the energy issues examined underperformed the benchmark S&P 500 Index, which gained 69% on an equally weighted basis and 77% on a market-cap-weighted basis.

The slide in the price of crude oil has not helped the E&P stocks, which are historically closely tied to the commodity, while renewable stocks have tracked more closely with the tech sector, said Deanna Zhang, an energy tech and renewables analyst for the energy investment bank Tudor Pickering Holt & Co.

"I think the performance differential is largely due to commodity swings in the oil and gas sector. That being said, renewables are still outperforming as fund flow in the oil and gas space has been particularly weak as of late," she said. "There was a big rotation in the midst of the [2014-2016] downturn and many funds that were oil-and-gas-focused blew up — those dollars are coming back but at a more gradual pace than expected. Renewables [are] likely tracking tech, which has run with the market."

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Raymond James & Associates Inc. oil and gas analyst Pavel Molchanov agreed that the market rewards high-growth stocks and renewables. Largely based on new and improving technologies, renewable energy companies are benefiting from the same trend that has exploded the value of such high-tech issues as Amazon.com Inc. and Facebook Inc.

"Oil prices are still meaningfully lower than they were five years ago — even after their rebound over the past two years — [so] it is intuitive that many oil-centric stocks are lower, as well," he said. "Concurrently, broader market trends for most of the past five years have been clearly favorable to high-growth story stocks, and plenty of clean tech names benefited from the momentum trade."

Tim Fox, a renewables policy analyst with ClearView Energy Partners LLC, said any direct comparison ignores the huge market cap differences between the two indexes.

Fox cautioned against being too quick to compare two numbers and declare a trend. "The rapid growth of renewable companies may overstate their performance relative to a large, stable base of mature E&P companies (large gains from a small base can still correspond to less overall value than modest gains from a large base)," he said in an email. Fox and ClearView analyze the impact of government energy policy decisions for investors but do not make specific investment recommendations.

High flyers in the renewable index, such as Nevada geothermal company Ormat Technologies Inc., with a 110% gain in five years, were offset by losers such wind and solar energy producer TerraForm Power Inc., which lost 66% of its value since its debut in 2014.

Weighing down the performance of oil and gas stocks has been the dramatic loss in value among shale gas pioneers such as Southwestern Energy Co. (-85%), Chesapeake Energy Corp. (-83%) and Gulfport Energy Corp. (-80%). Two of the top three largest U.S. oil and gas companies by market capitalization, supermajors Chevron Corp. and Exxon Mobil Corp., also lost value over the past five years.

As with oil and gas, the fortunes of renewable energy generators are linked to changes in law and policy. Analysts said the sector's growth is being fueled in part by state governments adopting rules requiring utilities to purchase renewable power and corporations looking to burnish their "green" brands by investing through long-term contracts.

"It is not surprising that renewable stocks have outperformed the E&P index over the past five years," said Vishal Shah, a partner with Hudson Sustainable Investments LLC, a $3 billion private equity fund. "[A] combination of positive industry fundamentals and favorable global policy support have resulted in this outperformance for renewables."

"Corporate renewables and storage plus renewables, along with the strong growth of distributed generation, are the main drivers for strong fundamentals in the renewables sector for power generation," Shah said.

Most of the gains in renewable stocks have not gone to the public, which overwhelmingly invests in its retirement money in large, passively managed index funds. Solar and wind company market caps are too low for most funds to consider them for inclusion.

Investors need a trail guide, several analysts said.

"The WilderHill Clean Energy Index — clean tech's main benchmark index — was the best-performing energy subsector of 2017, up 38%, and it marked the fourth year in five of clean tech's relative outperformance," Molchanov said. "More so than in oil and gas, clean tech remains a stock picker's market, so it simply does not lend itself to making broad calls."

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