For solar stock SunEdison (SUNE), things haven’t been shining so brightly. In fact, it’s been nothing but black storm clouds for SUNE. From high debts to hedge funds, the reasons for those clouds are numerous. As the bearish thesis has played on, SunEdison stock has spent much of the back-half of 2015 plunging into the low single-digits.
All in all, SUNE stock has managed to lose more than 80% since hitting its peak back in June of this year, even while many of its solar peers have actually performed pretty well.
But, SUNE may finally be able to push those storm clouds away and begin to shine brighter. A recent piece of legislation — which was designed to help the oil industry, actually — may end up boosting solar and other renewable energy stocks/adoption. From this, beaten SUNE could be the biggest winner of them all.
For investors looking to gamble on solar energy’s future, SUNE stock could be the brightest star.
Opening Oil Exports & Boosting Solar Credits
The problems at SUNE are vast.
Like many of its pure-panel peers, SunEdison moved into the business of building out massive grid-sized solar farms and selling those farms to utility companies, which has worked out well for companies such as First Solar (FSLR) and SunPower (SPWR). However, that shift added a lot of debt to the SunEdison balance sheet.
As if that wasn’t enough, management also decided to make a move into the residential solar market, and SUNE’s purchase of Vivint added approximately $1.4 billion in debt to its balance sheet.
All in all, SUNE has about $19 billion in total liabilities on its balance sheet — with around $10 billion of that in long-term debt. Even worse is that this debt doesn’t include any debt held by its two YieldCo’s, TerraForm Power (TERP) and TerraForm Global (GLBL). As the largest shareholder, SUNE is on the hook for the reduced potential for dividends and cash flows from these two entities.
In the face of all of this debt, SUNE stock has been targeted hard by short-sellers and hedge funds. Even famed value investor David Tepper has stepped into the SunEdison circus, putting pressure on management, which is odd considering that Tepper is as far from an activist investor as they come.
Let’s not forget about falling oil prices, either, which have been adding additional downward pressure on SunEdison.
With all of this hitting SUNE stock at once, it’s easy to see why SunEdison stock has imploded over the last few months. Yet, shares may have finally hit a bottom, thanks to efforts to boost oil prices.
In an effort to remove a 40-year-old ban on oil exports, Democratic legislators tucked a series of extensions to vital tax credits for renewable energy sources into the proposed bill. Given that the bill is backed by both Republicans and Democrats, and is designed to prevent a government shutdown, it’s expected to pass and be signed into law by President Obama.
The bill will replace expiring solar credits valued at over $25 billion over the next five years. According to Bloomberg’s New Energy Finance portal, that will drive an estimated $38 billion worth of additional investments in solar projects, or about 20 gigawatts worth of capacity. Putting it another way, that’s more than every solar panel installed in the U.S. prior to 2015.
That’s absolutely huge for stock in the solar sector, including SUNE. No one expected that the credits would be extended for a year, let alone five.
SUNE Will Benefit In Spades
With the news, shares of SunEdison stock rallied 34%. But that, huge jump could be the tip of the iceberg. Since the tax credits were all but over with, utility companies had slowed their buying of solar assets — unless, of course, they were major coal-focused ones. That’s where the YieldCo’s stepped in. However, with the tax credits being extended for another five years, utilities can now come back to the plate and begin buying solar farms.
For SunEdison, this helps support and grow its business. For rivals FSLR and SPWR, that utility scale side has carried cash flows and profits over the last few years, and for SUNE it should do the same. Ultimately, this should help reduce its debt load, while commissioned projects and asset sales can be used to pay off liabilities.
Additionally, the Vivint buy may turn out to be a big win as well. Part of the hefty tax credit extension was directed at rooftop solar panels for homes and small businesses, and as such should help make the Vivint deal a more profitable venture over the next few years.
Finally, as for its YieldCo’s, SUNE and TERP recently agreed to add wind assets to its mix with a $2.4 billion buy of First Wind. Given that the tax credits also include significant wind subsidies, SUNE is now able to capitalize on both sides of the renewable energy coin.
Making a Play for SUNE Stock
For SunEdison, the tax credit extension couldn’t have happened at better time. It’s been beaten down and basically left for dead. Its debt and recent business decisions weren’t necessarily warranted in today’s environment, as it was more long term. The problem was getting to that longer term.
That tax credit extension provides a bridge to get to that sunny long-term outlook. Debt should be reduced, the YieldCo’s should begin to fire on all cylinders, and the residential rooftop market should have support. That’s three big wins for SunEdison and SUNE stock investors. Things can still go wrong, but the deck is finally stacked, once again, in SunEdison’ favor.
For investors, shares offer a risky, yet potentially rewarding play in the solar sector.
As of this writing, Aaron Levitt held no positions in any of the aforementioned securities.