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Energy Stocks To Watch Amid Supply Chain Chaos

Published 10/13/2021, 05:58 AM
  • Solar and hydrogen stocks have been on the rise over the past few days as investors pile into renewables.
  • Wall Street is betting that global supply chain constraints and oil and gas shortages will be a boon for renewable energy.
  • As some analysts predict even higher oil prices, investors are betting that demand for fossil fuels will face growing pressure and force consumers into greener - and cheaper - alternatives.

Beaten down solar and hydrogen sectors have been on the mend over the past few days as investors bet that the ongoing global supply crunch, including oil and gas shortages, will lift the renewables sector. The solar sector has been out of favor in the current year, mainly on concerns about steep valuations leading to Invesco Solar ETF (NYSE:TAN) tanking 20.8% in the year-to-date.

However, Wall Street has started warming up to the sector once again, saying ongoing supply chain constraints to lift product prices.

"The solar industry will continue to be constrained by poly supply in 2022 with prices staying high. We are expecting 25% growth in PV installations if module prices correct to 2020 levels of ~RMB 1.6/W, unleashing demand suppressed by high prices in 2021 and stimulating sales for inverters and trackers," Jefferies analysts have said.

Jefferies has tapped Daqo New Energy (NYSE:DQ) as its top solar energy selection, with DQ shares rocketing 11% higher after the analysts assigned it a potential upside to $208–good for a nearly 4x jump over current levels.

Jefferies’ comments have lifted the entire sector, with the TAN ETF up 5.3%. Other leading solar names have been making strong moves, too: Sunworks (NASDAQ:SUNW) +13.4%, SunPower (NASDAQ:SPWR) +11.5%, JinkoSolar (NYSE:JKS) +8.3%, Maxeon Solar Technologies (NASDAQ:MAXN) +8.3%, SolarEdge Technologies (NASDAQ:SEDG) +7.9%, Sunrun (NASDAQ:RUN) +7.2%, Array Technologies (NASDAQ:ARRY) +6.2%, Enphase Energy (NASDAQ:ENPH) +6.1%, Canadian Solar (NASDAQ:CSIQ) +5.4%, Sunnova Energy International (NYSE:NOVA) +5.3%, and First Solar (NASDAQ:FSLR) +5.1%.

Despite the supply chain disruptions, solar companies have continued posting strong growth numbers.

Enphase reported Q2 non-GAAP EPS of $0.53, which beat Wall Street's consensus by $0.11; GAAP EPS of $0.28 beat by $0.02 while revenue of $316.05M (+151.8% Y/Y) beat by $4.82M.

Meanwhile, First Solar reported Q2 GAAP EPS of $0.77, topping Wall Street's consensus by $0.23 while revenue of $629M (-2.1% Y/Y) beat by $8.55M. For the full year 2021, the company says it expects EPS of $4.0-$4.6 vs. a consensus of $4.04, on revenues of $2.875B-$3.1B vs. $2.93B consensus. First Solar plans to build a new 3GW per year panel factory in Ohio at a cost of $680M. The company says it seeks to "reshore" manufacturing that has moved outside the United States, bolstered by President Biden's ambitious clean energy goals. CEO Mark Widmar says the company's three Ohio plants combined would produce panels that could generate 6 GW of power annually by 2025, more than half of all solar panels the company estimates will be produced annually in the U.S.

Hydrogen Power

With oil and gas prices constantly taking out multi-year highs and experts saying oil prices could hit an all-time high of $200 per barrel, hydrogen companies have come into the limelight again as companies look for cheaper alternatives.

The leader in the space, Plug Power (NASDAQ:PLUG), has been ramping up its use of hydrogen as a fuel.

PLUG shares have surged nearly 15% over the past five trading sessions and jumped to their highest in six weeks as Citigroup analyst P.J. Juvekar maintains his Buy rating and $35 price target after visiting the company's facilities and coming away impressed with the company's plans to expand its capabilities to make hydrogen gas while also lowering costs.

Juvekar says Plug Power will achieve its goal to manufacture green hydrogen for ~$6/kg. Though still considerably more expensive than the current cost of diesel fuel, it's on par with the cost of hydrogen derived from natural gas reformation, responsible for about 95% of the hydrogen produced in the United States. The analyst also says the proposed infrastructure bill is a big plus for the likes of Plug Power since it includes $8B for hydrogen-production hubs and $1B for green electrolyzer development in the 2022-26 period.

Earlier this year, SK Group made a $1.5B capital investment in Plug Power to accelerate the expansion of the hydrogen economy in Asia.

And now the companies are going at it full throttle: Plug Power and South Korea conglomerate corporation SK Group have announced they have formed a joint venture to build a gigafactory with mass capacity for hydrogen fuel cells and electrolyzer systems in South Korea by 2024, The JV will supply domestic and certain overseas markets in Asia and also distribute liquefied hydrogen produced by SK to ~100 charging stations nationwide. Plug Power will own 49% of the JV with SK owning the rest.

Meanwhile, last year, American electric utility and renewable energy giant NextEra Energy (NYSE:NEE) unveiled an equally ambitious plan to start replacing its natural gas-powered plants with hydrogen. During an earnings call, NextEra's CFO Rebecca Kujawa said the company is "...particularly excited about the long-term potential of hydrogen" and discussed plans to start a pilot hydrogen project at one of its generating stations at Okeechobee Clean Energy Center owned by its subsidiary, Florida Power & Light (FPL).

CFO Kujawa told analysts:

"Based on our ongoing analysis of the long-term potential of low-cost renewables, we remain confident as ever that wind, solar, and battery storage will be hugely disruptive to the country's existing generation fleet, while reducing cost for customers and helping to achieve future CO2 emissions reductions. However, to achieve an emissions-free future, we believe that other technologies will be necessary, and we are particularly excited about the long-term potential of hydrogen."

NextEra plans to test the electricity-to-hydrogen-to-electricity model at its natural gas-powered Okeechobee Clean Energy Center that came online in 2019. Okeechobee is already regarded as one of the cleanest thermal energy facilities anywhere on the globe. However, replacing natural gas with zero emissions hydrogen would be a major step in helping the company achieve its goal to become 100% emissions-free by 2050.

Another top hydrogen fuel cell name, Bloom Energy Corp. (NYSE:BE), is borrowing a leaf from NextEra's hydrogen playbook and replacing natural gas with hydrogen in its fuel cells. Bloom Energy says it will start taking orders for its hydrogen-powered fuel cells and shipping in 2022.

These hydrogen companies are in good company, too.

Saudi Arabia's national oil company Saudi Aramco (SE:2222) sent shockwaves through the natural gas markets after it announced that it was kicking off the biggest shale gas development outside of the United States. Saudi Aramco said it plans to spend $110 billion over the next couple of years to develop the Jafurah gas field, which is estimated to hold 200 trillion cubic feet of gas. The state-owned company hopes to start natural gas production from Jafurah in 2024 and reach 2.2 Bcf/d of sales gas by 2036 with an associated 425 million cubic feet per day of ethane.

And Aramco has announced that instead of chilling that gas and exporting it as LNG, it will instead use it to make much cleaner fuel: Blue hydrogen.

Saudi Aramco CEO told investors that Aramco had abandoned immediate plans to develop its LNG sector in favor of hydrogen. Nasser said that the kingdom's immediate plan is to produce enough natural gas for domestic use to stop burning oil in its power plants and convert the remainder into hydrogen. Blue hydrogen is made from natural gas either by Steam Methane Reforming (SMR) or Auto Thermal Reforming (ATR) with the CO2 generated captured and then stored. As the greenhouse gasses are captured, this mitigates the environmental impacts on the planet.

The Saudi government is already building a $5 billion green hydrogen plant that will power the planned megacity of Neom when it opens in 2025. Dubbed Helios Green Fuels, the hydrogen plant will use solar and wind energy to generate 4GW of clean energy that will be used to produce hydrogen.

The world's green hydrogen leaders have joined hands with an ambitious goal to drive a 50-fold scale-up in green hydrogen production over the next six years.

The Green Hydrogen Catapult Initiative is a brainchild of founding partners Saudi clean energy group ACWA Power, Australian project developer CWP Renewables, European energy giants Iberdrola (OTC:IBDRY) and Orsted (OTC:DNNGY), Chinese wind turbine manufacturer Envision, Italian gas group Snam, and Yara, a Norwegian fertilizer producer.

The companies hope to drive 25GW of green hydrogen production by 2026, a scale that could significantly drive down hydrogen costs to below $2/kg thus making the fuel source competitive with fossil fuels in power generation.

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