After a tumultuous period that threatened to prematurely end one of the energy market's most impressive bull runs in recent history, confidence has returned to the oil markets. Crude oil prices have rebounded from seven-week lows after Saudi Arabia raised prices for buyers in the U.S. and Asia, signaling it sees demand staying strong despite the emergence of the COVID-19 omicron variant. Oil prices have climbed alongside equities as lockdown fears eased, with reports from South Africa indicating that omicron cases have so far only displayed mild symptoms, a position confirmed by Dr. Anthony Fauci, who says the variant has not appeared to produce a "great deal of severity" in cases so far.
But experts are now saying that persistently high oil and gas prices will only serve to make their biggest nemesis even more competitive.
In its latest Renewables Market Report, the IEA has painted a bullish outlook for the renewable energy sector and forecast that the planet's renewable electricity capacity will jump to more than 4,800 GW by the year 2026, good for a 60% increase compared to levels in 2020.
Indeed, renewables are expected to account for nearly 95% of the increase in global power capacity through 2026 despite the ongoing pandemic and surging inflation across the globe.
"We have revised up our forecast from a year earlier as stronger policy support and ambitious climate targets announced for COP26 outweigh the current record commodity prices that have increased the costs of building new wind and solar PV installations."
The energy watchdog says that whereas high commodity and energy prices are some of the headwinds that the clean energy sector is likely to face in the coming years, "elevated fossil fuel prices also make renewables even more competitive."
The IEA says renewable energy generating capacity will exceed that of fossil fuels and nuclear energy combined by 2026. Ironically, the world's biggest polluter--China--has been tipped to become the biggest clean energy purveyor: China is expected to reach 1,200GW of wind and solar capacity in 2026, four years ahead of its 2030 target, and ahead of the U.S., Europe, and India.
Despite the rosy outlook, the clean energy sector has been a major laggard this year thanks to valuation concerns as well as unprecedented supply chain disruptions. The iShares S&P Global Clean Energy Index ETF (NASDAQ:ICLN) has lost 20.9% of its value in the year-to-date; Invesco Solar Portfolio ETF (NYSEARCA:TAN) is down 18.4%, while its wind energy counterpart First Trust Global Wind Energy ETF (NYSEARCA:FAN) has declined 13.7% YTD.
Luckily for clean energy investors, the long-term bull thesis remains intact, with the supply chain disruptions expected to ease in the second half of 2022. Meanwhile, the ongoing climate crisis and renewed commitments to lower emissions make the renewable energy sector an obvious investment theme both in the near term as well as the long term.
Here are North America's top 3 clean energy plays for 2022.
#1. Plug Power Inc.
Industry: Alternative Energy
Market Cap: $21.1B
Shares of hydrogen sector leader Plug Power Inc. (NASDAQ:PLUG) have come under pressure in recent weeks after the company's Q3 earnings call in November failed to meet expectations. Plug Power reported Q3 GAAP EPS of -$0.19, missing the Wall Street consensus by $0.10, while revenue of $143.9M (+34.5% Y/Y) missed by $0.92M.
However, Plug Power has managed to remain in Wall Street's good books--and for good reason.
First off, the company raised its revenue guidance for 2022 given acquisitions and commercial traction to $900 Million–$925 Million. That marks a considerable improvement from earlier guidance the company had issued just weeks ago. Two months ago, Plug Power issued FY 2022 sales guidance of $825M-$850M, good for a ~65% increase over 2021 and above the $759M analyst consensus estimate, and also forecasts 2025 sales of $3B. The company said it expects to generate $1 billion in revenue from material handling and $700 million from hydrogen fuel and says it can generate 30% gross margins from hydrogen fuel sales at $6/kilogram.
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.
Morgan Stanley analyst Stephen Byrd has maintained an Overweight rating and $43 price target on Plug, saying margin pressure at the fuel service business is a transitory issue as the company ramps up production of its own hydrogen production facilities. Byrd notes the company expects fuel margin to be in-line with the overall corporate target of a 30%-plus gross margin by 2024.
Raymond James analyst Joseph Spak has reiterated his Outperform rating while raising the price target to $48 from $40, saying Plug is transforming into a one-stop, turnkey hydrogen solution whose rich valuation is justified, given the significant growth potential.
Evercore ISI has maintained its Outperform rating while lifting its price target to $50 from $42, citing "a more positive view on Plug's ability to become meaningfully profitable by 2025 and to grow revenues more than anticipated by 2030."
Meanwhile, H.C. Wainwright's Amit Dayal has a Buy rating and $78 target on PLUG, saying the Q3 loss was expected and the company could continue to adjust 2022 guidance upwards, given that business momentum remains robust.
Plug Power has been striking some impressive deals, too.
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.
Plug Power has also struck a green hydrogen deal with Airbus (OTCPK:EADSF, OTCPK:EADSY) in a landmark study to decarbonize air travel. Plug Power says it will build deployment scenarios for green hydrogen infrastructure at airports, while Airbus will provide insight on hydrogen aircraft characteristics. The companies say they will choose a U.S. airport to serve as the first "hydrogen hub" pilot airport in North America, serving as a case study for hydrogen infrastructure scale-up at other airports, and will also consider setting up a range of joint projects as part of the partnership.
#2. Ford Motor Company
Market Cap: $79.2B As a member of the 'Big 3' Detroit automakers, Ford Motor Co (NYSE:F) is a controversial pick on a list dedicated to clean energy plays. But Ford's EV exploits are worth looking into because the company has set out one of the most comprehensive EV roadmaps by a legacy automaker. Indeed, Ford's impressive 123% YTD gain is largely due to the company's EV upside.
Although the company sold a modest 21,703 units of its all-electric Mustang Mach-E through the first ten months of the year, according to Motor Intelligence, Morgan Stanley forecast Ford's EV unit sales will reach 150K in FY22 to rep 3.5% of Ford's volume, 473K units in FY25 to rep 11.5% of volume and 1.24M units by FY30 to represent 34% of volume. Ford has already overtaken General Motors (NYSE:GM) in EV sales in the United States.
Further, Ford has already taken 200K reservations for its hotly anticipated F-150 Lightning pickup truck, and plans to start converting reservations to full orders in January 2022, thus beating General Motors' (NYSE:GM) Chevy Silverado to the market by a full year. The F-150 Lightning pickup truck is an all-electric version of Ford's best-selling passenger vehicle in the market, the F-150.
MS values Ford's EV/AV and Mobility businesses at nearly $12 per share, which at the moment is roughly 100% of its lowly price target of $12. Meanwhile, Credit Suisse is more positive on the Detroit automaker with a price target of $20 on expectations that strong pricing and supply chain improvements in 2022 will work in its favor.
Speaking to CNBC.com, Ford CEO James Farley said the company will have to scale its EV capacity to compete with Elon Musk's Tesla Inc. (NASDAQ:TSLA). Farley has talked up the auto maker's 12% stake in EV truck and van maker Rivian (NASDAQ:RIVN), noting that the firm's well-received IPO "gives us lots of optionality" about what to do with its investment.
"You should expect us, as we go electric, ... to reinvent the brand," Farley said.
Farley reported that it was "too early to tell" what Ford will do with its RIVN stake, but suggested that the company would consider liquidating some of its shares to fund acquisitions if the opportunity arose.
#3. Enphase Energy Inc.
Industry: Renewable Energy
Market Cap: $30.4B
Enphase Energy Inc. (NASDAQ:ENPH) is a Fremont, California-based company that designs and manufactures software-driven home energy solutions used in solar generation, home energy storage and web-based monitoring and control.
ENPH is among the leading solar and alternative energy names that have been surging following the passage of the Build Back Better bill in the U.S. House a couple of weeks ago, even as the measure likely faces substantial changes in the Senate.
The biggest chunk of money in the bill has been allocated to climate-related provisions, including $320B in the form of tax credits for companies and consumers that install solar panels, improve the energy efficiency of buildings and purchase electric vehicles. The bill also provides financial incentives for U.S. manufacturing of clean energy technologies, seeking more domestic production of wind turbines and solar panels via a combination of grants, loans, and tax credits.
Last month, Wells Fargo initiated coverage on Enphase with an Outperform rating. Wells pointed to two key competitive advantages that should support growth visibility: regulation NEC 2017, which creates barriers to entry in the U.S. market; and product innovation and software technology, which provide customers with an intelligent home energy management system.
Back in August, Evercore ISI's James West said he rates the stock at Outperform and raised his price target to $199 from $184 though he said the company's chip shortage likely will linger a while longer.
By Alex Kimani for Oilprice.com
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