Many companies claim to be “energy” companies. But they aren’t really.
Oil and natural gas producers aren’t selling energy. Oil and gas are fuels that must be burned to create energy. Solar panels and wind turbine makers aren’t energy companies, either. They’re manufacturing machines that harvest energy from the environment.
People were using the power of flowing water to drive looms, grind grain and smelt iron before the Industrial Revolution. American “mill towns” were all powered by water, from Pawtucket in Rhode Island to Paterson in New Jersey to Minneapolis in Minnesota. Water isn’t energy, either.
This is important to remember because America’s energy mix is changing. It costs less to make and install machines that harvest the Sun or wind than it does to drill for and refine oil. The idea of harvesting energy from the environment is no longer a science fiction pipedream. As we enter 2021, it’s commonplace and conventional business practice.
Here are 9 stocks to buy for opportunities in our ongoing energy revolution:
- SolarEdge Technologies (NASDAQ:SEDG)
- Switchback Energy (NYSE:SBE)
- Casey’s General Stores (NASDAQ:CASY)
- BP (NYSE:BP)
- Chevron (NYSE:CVX)
- Exxon Mobile (NYSE:XOM)
- Occidental Petroleum (NYSE:OXY)
- PBF Energy (NYSE:PBF)
- Whiting Petroleum (NYSE:WLL)
Oil and gas companies see their long-term futures constrained and some are looking to transform themselves. Those connected to the machines are looking to scale and take control over the electric grid. One side hopes to offer income, the other capital gains. We’ll start with the capital gains.
SolarEdge Technologies: The Front End of a Bubble
When any stock starts selling for 10 times its revenue, it’s in bubble territory. Such valuations can be justified, if the company is growing fast and doing so profitably. But even cloud application stocks eventually fall to Earth, either because they justify the faith by growing into their valuation, or by failing and falling.
With 2020’s gain of 225% SolarEdge Technologies has entered bubble territory. It traded on December 17 with a market cap of $15.8 billion, but revenue for the year is only expected to be $1.5 billion.
SolarEdge makes inverters, along with related parts and software. These turn the DC power created by solar panels into the AC power used on the electric grid. No matter who makes the panels, converters are essential in making power useful. With solar panels now delivering power for less than $1/watt, analysts are expecting a boom. New technologies will only drive the price down further.
When SolarEdge announced September quarter net income of $43.7 million, or $1.21 per share, on November 2 , it beat analyst profit expectations. But these same analysts then looked at the revenue number, $338 million. They multiplied it by four, shouted “where’s the growth,” and the stock fell hard, from $262 per share to about $213.
It went down but it’s up again, because of articles like this, which define SolarEdge products as Module Level Power Electronics (MLPE) . SolarEdge shares 80% of the residential MLPE market with Enphase.
The “Unique Selling Proposition” for SolarEdge is intelligence. Its inverters are “power management systems” that maximize the power produced by each panel. It tells homeowners you can “run your car on sunshine.” It offers cloud-based software to electric utilities so they will take residential power instead of shunning it, as they did a few years ago.
On December 17 shares were trading at $313. This justified the faith of my colleague Luke Lango, who called SolarEdge “a long-term winner” in November. The Biden Administration’s promises to boost solar energy have given stocks like SolarEdge new life.
Switchback Energy: The Line at the Electric Gas Pump
Switchback Energy is a Special Purpose Acquisition Company (SPAC) designed to take ChargePoint public. And InvestorPlace writers have been pounding the table for SBE. Those who followed that advice were richly rewarded. This was an $11 stock in mid-September. It opened December 14 at almost $39.
There are lots of reasons to like ChargePoint, as I wrote in November.
ChargePoint claims 44% market share in a sector that could grow by 10 times over the next six years. The number of Chargepoints has grown by a factor of 10 over the last 8 years, and should grow another 250% over the next five. In its SEC filings, ChargePoint sees its revenue growing by 15 times during that period.
Our Louis Navillier sees no reason for this stock to slow down. Unlike most SPACs, which are losing money and hungry for capital, ChargePoint could easily draw upon private capital, given its expected annual growth rate of 60%.
Most of ChargePoint’s “stations” are direct conversions of AC power. A Level One outlet will top your tank overnight. Even a Level 2 outlet, the most common type, takes all night to fully charge.
So the big money for ChargePoint in the near term is in fleet charging. As UPS (NYSE:UPS), Amazon (NASDAQ:AMZN) and the U.S. Post Office go electric, there will be big contracts and ChargePoint’s scale will matter. It’s just that these contracts have yet to be let, and ChargePoint will just be selling hardware, not electricity. In other words, it’s building gas stations, not selling gas.
The big future is in Level 3, which takes DC power and can charge a vehicle in a half-hour. ChargePoint has a plug design called DC Fast. But Tesla (NASDAQ:TSLA) has its own plug design, and most electrics are Teslas. You can adapt a Tesla plug to DC Fast. But if given a choice, most Tesla owners will choose Tesla stations. There are already thousands of such stations at hotels, Tesla dealers and along major highways.
Think of Tesla as the Apple (NASDAQ:AAPL) of the electric vehicle market and its infrastructure as the iCloud. Think of ChargePoint as the Android of electric vehicle infrastructure.
Casey’s: The Best Place in Oil is At the Pump
In today’s oil and gas business the best place to be is at the end of the line: the gas pump.
The best operators are in the convenience store business, running big stores with lots of pumps: those store brands raise margins. The best publicly-traded operator is Casey’s General Store (NASDAQ:CASY), a familiar name for those in the upper Midwest.
Casey’s has become hungrier for acquisitions under new CEO Darren Rabelez. He had been president of the Dine Brands Global (NYSE:DIN) IHOP chain before taking the Casey’s hot seat last year. He was also once COO of Seven and I Holding’s (OTCMKTS:SVNDF) 7-Eleven chain.
Rabelez finally delivered growth in November. Casey’s bought Buchanan Energy, which operates a chain called Bucky’s, for $580 million. About $80 million of that is “tax benefits,” the rest cash. The deal will increase Casey’s footprint to 2,300 stores.
While Rabelez started his career with Exxon Mobil (NYSE:XOM), he has learned that the big opportunity in gas stations is in food, specifically prepared food. On the November 9 earnings call, he noted that 31% of Casey’s merchandise mix is pre-made food, like pizza.
Casey’s stock was up more than 20% on the year and beating the averages before the latest lockdowns. It’s now up just 9% on the year.
But the numbers reported for the October quarter beat estimates for the third straight time. The company earned $112 million, $3 per share, on revenue of $2.2 billion. It hiked the dividend another two cents to 34 cents per share.
Compared to the general market, Casey’s stock is cheap, at under 20 times earnings. The renewed pandemic has made it even cheaper.
Unlike many players in the energy game, Casey’s is profitable. And its rural footprint means it will be slower to be disrupted by electric vehicles. Analysts have Casey’s stock as a moderate buy, with a price target of $215, 23% higher than its current level. It’s worth considering, whether as a retailer or a bet that we’ll be traveling again soon.
BP: Still an Oil Company, Despite its Reinvention
BP wants to reinvent itself as a renewable energy company. But it’s still an oil and gas outfit.
BP stock fell with the pandemic and never got back up. The fall in 2020 has made BP stock a moderate buy recently, with analysts at Tipranks predicting a return to $30/share.
BP has signed a wind power agreement that will supply Amazon cloud data centers. It owns half of Lightsource, a solar power developer. And it’s pumping carbon dioxide back under the North Sea to reduce greenhouse gases.
That’s not all.
BP has sold its Alaska oil pipelines. It bought half of Equinor’s (NYSE:EQNR) interest in two large wind projects off New York and New England. And it plans to invest in both “blue hydrogen,” derived from natural gas, and in “green hydrogen,” derived from electricity created by solar farms and wind turbines.
Yet despite these big ambitions, BP is still an oil and gas company. It eked out a small profit in the September quarter. The stock price rose as the price of West Texas Intermediate (WTI) oil, the primary U.S. grade, jumped from $42/barrel to $48. BP stock is up 42% since late October, when the earnings came out.
BP operates the world’s third-largest oil field in Iraq, plus fields in Oman and the United Arab Emirates. It has promised not to explore in any new countries, but it’s still doing so in places where it already has operations. It just finished a pipeline from Azerbaijan that will add to Europe’s glutted natural gas supply.
That means investors must depend on capital gains for growth. And at least in the near term, those gains will be dependent on the price of oil and gas.
Chevron: An Integrated Oil Seeking Income
ExxonMobil and Chevron. In oil, these are the two big guns, always competing with one another. In 2020 Chevron has done “better,” but it’s been a booby prize. Shares are down almost 26%, which is terrible, except ExxonMobil’s are down nearly 40%.
Chevron has set a capital budget of $14 billion for 2021 and says it is focused on higher returns.
Chevron finished buying Noble Energy for $5 billion in stock in October, adding to its interests in the Permian Basin and eastern Mediterranean. But even with Noble, future capital budgets have been slashed by one-third to $14-16 billion through 2025. While ExxonMobil is exploring for new reserves, Chevron is buying them. Big winners in the Noble deal were its bondholders, who now have a stronger hand on notes paying up to 8%.
Chevron says it has a lower breakeven price on oil than Exxon and creates less pollution per barrel. CEO Mike Wirth says he wants to be measured by actions, like shutting part of a natural gas terminal in Australia to fix a leak. Chevron is investing in hydrogen and nuclear fusion. But the focus remains oil and you will still be using carbon in 2050, he insists.
Still, Chevron’s decision to focus on sure things means it is taking on new debt more slowly than ExxonMobil; its debt-to-equity ratio is still just .26. Its conservative attitude means it didn’t have to take the huge asset write-down of its rival.
While Wirth talks about a lower-carbon future, what matters to investors is a lower-debt future and a lower-risk future. Chevron still has positive free cash flow. If global oil prices firm next year the dividend still looks safe.
Exxon Mobil: An Integrated Oil Seeking Oil
For decades Exxon Mobil defined energy, becoming the world’s most powerful company. Now demand for what Exxon produces seems headed for a permanent fall.
What was once a solid dividend stock with capital growth is now a cigarette company with declining demand. Exxon Mobil shares are down 37% in 2020. The market cap has fallen to $185 billion despite a dividend yield of 7.95%.
Analysts at Oilprice.com insist the oil market is about to recover. And prices have firmed since November. The supply overhang has fallen by 75 million barrels, the equivalent of 26 days’ supply. Production from U.S. shale plays has fallen nearly 2 million barrels/day and rig counts have fallen in half.
Meanwhile, vaccines are emerging. OPEC has agreed to set only modest production increases for next year. Traders haven’t been this bullish since August, and many insist the excitement over electric vehicles is overdone.
The Energy Information Agency now projects oil prices will average $49/barrel in 2021 with demand just below 2019 levels. The only problem is that supply will also increase, by 5.8 million barrels/day.
Exxon’s capital plan for 2021, released early in December, reflects this. The company will take a $17-20 billion impairment charge for the current quarter, abandoning gas assets in Canada, the U.S. and Argentina. It plans to invest $16-19 billion next year in the Permian Basin and off Guyana, where it has found the equivalent of 8 billion barrels of new oil. Its speculative drilling will be nearby, off Brazil.
Exxon’s stock appears to be broken because the psychology of the oil market appears broken. The assumption that oil in the ground will always be worth as much or more than current production has collapsed. ExxonMobil has gone from being a stock everyone needs to a speculation.
But as a speculation, it’s a good one for 2021. Exxon is now worth just a little more than Oracle (NASDAQ:ORCL), the database company that just announced a move to Texas. Given the dividend, putting a little money into ExxonMobil now seems like a no-brainer.
Market psychology does change. If it does, you’ll see a huge capital gain. And even if it doesn’t you should get a very fat dividend yield.
Just be careful. Be prepared to abandon ship when the end of oil gets closer.
Occidental Petroleum: Speculating on Higher Oil Prices
Speculators betting on higher oil prices in 2021 recently drove a spectacular run in the stock of Occidental Petroleum.
And in the long run, that’s not a bad call. The short run is something different. Occidental may have a long way to run from its near-death experience. That began with what now looks like the dumbest deal of the Trump era, the $55 billion purchase of Anadarko Petroleum in 2019. About 80% of that was in cash, most of which Occidental CEO Vicki Hollub borrowed.
Occidental stock fell to $10 in March and was still trading at $9 at the end of October. The “doubling” has come off those October lows, spurred by good news about vaccines and hope for sharply higher demand. Occidental has also signed a new deal to explore for oil in Abu Dhabi.
Hollub spun-out Occidental’s midstream pipelines as Western Midstream in January and hoped to sell up to $15 billion of assets in 2020. She only managed to sell roughly $2 billion.
That still left a huge debt mountain to climb, so Hollub pushed out maturities. Occidental is buying back some short-term paper with a coupon rate of 2.36%. To do that, it’s using proceeds of long-term debt that cost up to 8% and more.
Occidental still had long-term debt of $36.7 billion at the end of September, but just $10 billion comes due before the end of 2025. What the bulls hope is that oil prices rise enough so that Occidental can sustain production and service the debt, then get acquired.
Speculators are betting on Hollub. She’s a creative executive, who has done all she can in 2020 to keep Oxy alive. But she’s the same woman who bought Anadarko in the first place.
That’s why Occidental isn’t a game for investors. There’s still a lot of risk. Speculators believe Hollub has created potential for great reward, but there’s a difference between speculating and investing.
PBF Energy: Another Black Day, in the Best Possible Way
PBF is fighting for its life, burning through $100 million in cash each month in refining oil with just $2 billion in liquidity. PBF hopes to cut that burn in half, but Blackrock obviously sees light at the end of the tunnel. And if Blackrock is right, PBF is a bargain.
At its December 16 price of about $7.50 per share, PBF has a market cap of just $875 million. During the third quarter alone, it had revenues of nearly $3.7 billion, but lost $417 million, $3.49 per share, on those sales.
Just as Occidental made a huge mistake in 2019 by buying Anadarko, PBF made one buying Shell’s (NYSE:RDS.A) Martinez, California, refinery near San Francisco for $1.2 billion. The deal closed in February, right before the pandemic stalled the economy. At the time PBF called Martinez “a top-tier asset.”
The company earned a small profit in the second quarter by selling five hydrogen plants to Air Products & Chemicals (NYSE:APD) for $530 million and cutting capital spending by $240 million. It suspended the dividend, cut headquarters staff and shutdown most production at a New Jersey refinery, laying off 250.
PBF remains the fourth-largest U.S. refiner, running at less than 80% of its capacity. But the end of the pandemic and rising demand for transportation could mean a quick return to profits next year.
Blackrock is getting in at what it sees as a bottom. PBF did $24 billion of business in 2019 and, if estimates are correct, should do $16.7 billion in 2020. If Blackrock is seen as a strong hand, PBF profits could rise sharply in 2021, along with the stock price.
If you do follow Blackrock into PBF stock, make sure you have an exit strategy. My guess is they do.
Whiting Petroleum Lives, But Does It Thrive?
Whiting Petroleum, known as the “King of the Bakken” during the 2010s’ oil boom, went bankrupt in April.
But it came back: same name, different guys, new attitude. Whiting emerged from bankruptcy in September with just hundreds of millions in debt, rather than billions, and new management devoted to “capital discipline and free cash flow.”
As oil prices firmed this fall, so too did Whiting stock. Shares are up 21% since the restructuring, 65% from a late October low.
The old Whiting crashed because the Bakken, a shale oil field extending from western North Dakota into surrounding states and Canada, is hard for making money. During the height of the boom, the area around Williston looked like something out of the 1860s. Wildcatters were sending out unconditioned oil to eastern refineries in trains. These became known as “bomb trains” because the oil held volatile gas and liquids, not just crude. Some blew up. Wells depleted quickly in the tight, thin shale formations.
To stay solvent, the new Whiting needs mid-stream facilities that “condition” oil by heating it and extracting volatile gas and liquids. It also needs pipelines to take that oil to market cheaply. Even in September, Bakken oil was trading at a little over $35/barrel, an $8/barrel discount to the standard West Texas Intermediate (WTI) price.
That makes the Dakota Access Pipeline, with a capacity of handling 570,000 barrels/day, essential. A judge ordered it shut in July, but the case remains under review. Energy Secretary nominee Jennifer Granholm is said to oppose the pipeline.
If you owned Whiting before the bankruptcy, you’ve already gone through a 1:75 reverse split. But it may make you a profit if you buy it today. The hope is that Whiting will operate at near breakeven for the current quarter, which will be reported February 4. A recent analyst report carried a price target of $27. That’s 10% higher than its December 17 price of $24.50.
While I think the short-term prospects for the oil patch are good, without pipelines the numbers don’t work. If the Biden Administration gives Dakota Access a reprieve, Whiting could be profitable for a few years. The market cap is $931 million for a company that did $1.6 billion in business during 2019.
You can speculate on that.
At the time of publication, Dana Blankenhorn had a long position in AMZN and AAPL.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.