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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Clean Energy Earnings: A Few Stinkers Sour Sentiment

We are at the tail-end of the Q2 2023 earnings season with nearly 90% of S&P 500 companies having reported. Unlike recent seasons, the current one has been disappointing both for the energy sector and the market in general. The energy sector is reporting the largest earnings decline of all eleven sectors at -51.4%, much worse than the S&P 500 average at -5.2%. 

Lower oil and gas prices are largely to blame (average price of oil in Q2 2023 was $73.56, well below $108.52 for Q2 2022). 

Of all the five energy industries, only Oil & Gas Equipment & Services, where oilfield services companies such as Haliburton Co. (NYSE:HAL), Schlumberger Ltd (NYSE:SLB) and Baker Hughes Co. (NASDAQ:BKR) belong, is reporting positive earnings growth at 68% Y/Y. 

The clean energy sector has posted more positive results, but not without some notable stinkers.

First Solar (NASDAQ:FSLR) has reported Q2 GAAP EPS of $1.59, beating the Wall Street consensus by $0.65 while revenue of $811M (+30.6% Y/Y) beat by $91.59M. The company also provided a healthy full-year outlook, with Net Sales expected to fall in the $3.4B to $3.6B range, considerably better at the midpoint than the analysts average at $3.46B while EPS is expected to clock in at$7.00 to $8.00 vs $7.24 consensus. FLSR shares have continued outperforming the clean energy sector with a year-to-date return of 34.0% vs. -13.4% by iShares Global Clean Energy ETF (ICLN).

Shares of residential solar company Sunrun (NYSE:RUN) have been surging after the company reported a surprise profit a week ago. Although the company’s second quarter revenue of $590.19M (+1.0% Y/Y) missed the Wall Street estimate by $40.89M, the market has decided to overlook it after Q2 EPS of $0.25 came in much better than the consensus of -$0.39. Analysts at Janney have upgraded Sunrun to Buy from Neutral with a $32 price target, good for 90% upside. The analysts have cited Sunrun’s "operationally solid quarter, beating customer additions expectations and reiterating its stance for continued margin expansion over the next few quarters." They have also noted that the company is gaining market share from small and large competitors thanks to its differentiated product offering. Related: Saudi Arabia’s Cabinet Throws Support Behind OPEC+ Cut Extension

Meanwhile, operator of fast charging network for electric vehicles, EVgo (NASDAQ:EVGO), has returned an impressive quarterly scorecard, with Q2 revenue of $50.6M (+456.0% Y/Y) beating by $20.89M while Q2 GAAP EPS of -$0.08 beat by $0.10. EVgo has reported that network throughput hit a record 24.9 gigawatt-hours, good for a 147% Y/Y increase while total network utilization was in the double digits.

The same can, however, not be said about First Solar's peer, SolarEdge Technologies (NASDAQ:SEDG). The solar inverter manufacturer has reported revenue of $991.29M (+36.2% Y/Y) missing estimates by $4.6M while Q2 Non-GAAP EPS of $2.79 beat by $0.23. While those are pretty decent numbers, the revenue miss notwithstanding, what has undone SEDG stock is the weak guidance provided by the company’s management as follows:

  • Q3 revenues in the range of $880 million to $920 million
  • Non-GAAP gross margin in the range of 28% to 31%
  • Non-GAAP operating income in the range of $115 million to $135 million
  • Revenues from the solar segment in the range of $850 million to $890 million
  • Gross margin from the solar segment within the range of 30% to 33%.

Analysts at Susquehanna have cited inventory buildup and the likelihood of reduced battery shipments in the coming quarter as some of the reasons for the selloff. SEDG stock has cratered 32% over the past 30 days. 

Interest Rate Headwinds

Although renewable energy earnings have generally been better than those by oil and gas companies, the sector has lately been struggling, with higher interest rates and a weak economic outlook outweighing considerable backing by the Biden administration. 

The iShares Global Clean Energy ETF (NASDAQ:ICLN), the world’s largest green energy ETF and a catch-all bet on clean energy, has lost 13.4% in the year-to-date compared to a 17.5% gain by the S&P 500. The solar and wind energy benchmarks are not faring much better, either, with Invesco Solar ETF (NYSEARCA:TAN) down 13.8% YTD while First Trust Global Wind Energy ETF (NYSEARCA:FAN) has lost 6.3%.

Clean energy projects tend to be highly sensitive to interest rates because they require developers to borrow lots of capital up front to build projects. To make matters even more dire, the cost of electricity generated from renewable energy tends to be impacted much more by rising interest rates compared to electricity generated from fossil fuels. 

Indeed, a 2020 analysis from the International Energy Agency found that a 5% rise in interest rates increases the levelized cost of electricity from wind and solar by a full 33% but only marginally for natural gas plants. These are the main reasons why there was a deluge of capital flowing into companies focused on renewable energy, electric vehicles, batteries and hydrogen producers when interest rates were low but the funding gusher has lately slowed to a trickle as interest rates continue increasing. 

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Startup electric-vehicle makers, in particular, have become a target for short-sellers, with Mullen Automotive (NASDAQ:MULN), Lordstown Motors (OTC:RIDEQ), Faraday Future Intelligent Electric (NASDAQ:FFIE), Workhorse Group (NASDAQ:WKHS), and Canoo Inc. (NASDAQ:GOEV) badly hammered. On the flip side, speculators have burned their fingers shorting Tesla (NASDAQ:TSLA), Rivian Automotive (NASDAQ:RIVN), Li Auto (NASDAQ:LI), XPeng (NYSE:XPEV), and Electra Meccanica Vehicles (NASDAQ:SOLO).

By Alex Kimani for Oilprice.com

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