With the U.S. presidential elections just two weeks away, the U.S. energy sector is facing one of those nail-biting moments where nobody seems to agree on what the future holds for the sector with the prospect of two very different presidential candidates.
On the one hand, president of fracking company Reliance Well Services Dan Doyle has made a pretty convincing case that U.S. shale could be doomed under a Biden-Harris presidency despite the pair striking a centrist tone. On the opposite end of the spectrum, Goldman Sachs counters by arguing that a Joe Biden win could be positive for oil prices by tightening shale supply—a big reason why prices crashed this year.
A middle-ground can also be found by arguing that the outcome of the elections really will not matter in the bigger scheme of things because tighter U.S. shale supply will simply give OPEC the upper hand and leeway to grab more market share.
They say hindsight is 20/20, so we probably won’t gain much clarity into the matter until well after the elections. That said, here are three energy securities that may emerge as winners under different scenarios.
#1 TAN ETF: New King of the Power Market The shift from high-carbon fuels to clean energy is in full swing, and solar stocks are enjoying their moment in the sun.
A few weeks ago, Paris-based International Energy Agency, IEA, released its flagship publication, whereby it touted solar energy as the new king of the power market. The IEA has forecast that solar will be the main driver of growth as it sets new records for deployment each year after 2022, with onshore and offshore wind taking second and third place, respectively.
It, therefore, comes as little surprise that solar ETF, Solar Invesco ETF (NYSEARCA:TAN), has been surging with ‘blue wave’ prospects as Wall Street grows more bullish on the odds of a decisive Democratic victory that could provide a big push towards renewable energy.
TAN has gained 61% over the past 90 days, and a sizzling 140% as new polls show Joe Biden has extended his lead over President Trump to 16 points--the widest so far for this election cycle. Biden’s lead is the best of any challenger since 1936, the year when the first scientific polls were taken in a presidential race. Related: Biden's $2 Trillion Energy Plan Could Crush Natural Gas
Biden has announced aggressive plans to ramp up renewable energy production.
Indeed, Biden has proposed a staggering $1.7 trillion in federal spending over the next decade to achieve this goal, with the private sector expected to chip in with the balance. Biden also says the taxpayer costs can be recovered by repealing the generous tax bonanza that Trump granted U.S. fossil fuels.
Invesco Solar ETF (TAN) is an exchange-traded fund solely dedicated to companies in the solar sector. The ETF tracks the MAC Global Solar Energy Index, which itself tracks companies involved in a wide range of solar technologies, provision of raw materials, manufacturing, installers, solar plant operations, etc. Currently, TAN is the only ETF strictly devoted to solar energy, thus providing excellent exposure to the sector.
TAN boasts assets under management (AUM) of $1.76B and an expense ratio of 0.71%.
TAN’s top 5 holdings include:
- SolarEdge Technologies--7.83
- Xinyi Solar Holdings Ltd--6.68%
- First Solar--6.64%
- Enphase Energy Inc.--6.59%
- Sunrun Inc.--6.33%
Source: CNN Money
#2 First Solar: Most Bankable Solar Stock
Source: CNN Money
First Solar (NASDAQ:FSLR) is the largest solar manufacturer in America and the Western Hemisphere and also the third-largest in the world with revenue (TTM) of $3.1 billion. First Solar manufactures solar panels, photovoltaic power plants, and related services, including construction, maintenance, and recycling of solar products. The Tempe, Arizona-based company employs thin film semiconductor technology to achieve enhanced efficiency and sustainability in its solar modules. Although FSLR is trailing TAN with YTD gains of 52.7% vs. 139.6%, it’s one of the energy stocks that could get a big boost under a Biden presidency thanks to its dominant position in the American market. During its latest earnings call, First Solar estimated that ~75% of its potential booking opportunities were in North America. Meanwhile, FSLR maintained its 2020 module-production guidance and also provided impressive module-sales guidance. Related: Oil Majors Stuck Between A Rock And A Hard Place
More importantly, FSLR has a stronger balance sheet than most of its peers, with an impressive current ratio of 3.66 compared to 1.04 by JinkoSolar (NYSE:JKS), 1.14 by Canadian Solar (NASDAQ:CSIQ), and 0.47 for Daqo New Energy (NYSE:DQ).
Interestingly, the three companies have outperformed FSLR with YTD gains of 217.8%, 76.7%, and 296.3%, respectively, thanks to their much bigger exposure to fast-growth markets in China, Asia, and Europe.
FSLR might not be the best buy for growth investors, but remains a solid pick for investors who like Biden’s chances in the upcoming elections.
#3 Marathon Oil: Cheap with Good Turnaround Potential
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Source: CNN Money
Oil field services companies and oil refiners have been hardest hit by the energy crisis, and Marathon Oil (NYS:MRO) and Valero Energy (NYSE:VAL) have not been spared despite oil prices appearing to have a floor around $40. Indeed, Marathon Oil’s management is confident enough about the company’s outlook that it recently reinstated the dividend after suspending it in June, albeit at a lower rate of 3 cents a share compared to 5 cents before the cancellation. That modest dividend is good for a forward yield of 3.03%.
Still, investors seem to be giving MRO a wide berth, with the stock having crashed 26% over the past three months and 70% YTD.
That’s disconcerting for MRO bulls considering that the company becomes cash-flow positive at oil price around $35/barrel.
That could largely be the case because of the still weak oil demand outlook, with crack spreads remaining painfully squeezed and well below their trailing 12-month averages. Investors have probably also not forgiven the company after its poor hedging strategy. MRO had hedged its oil prices for the June quarter at $30.33, or nearly $10/barrel below current prices. Further, sentiment on the company has been worsening with Moody’s lowering its bonds to “junk” status in May.
There’s a silver lining to this company, though: The selloff has left the stock dirt-cheap, trading for just 0.85x sales, or about a third of the ratio of the S&P 500 average.
Marathon oil looks like a good bet due to its relatively strong balance sheet, including an untapped credit facility of $3 billion, and could make a nice rebound if Trump carries the day. The stock could also soar in the event of a Covid-19 vaccine breakthrough with recent reports that Pfizer Inc. (NYSE:PFE) has already manufactured several hundred thousand Covid-19 vaccines in anticipation of a November regulatory approval.
By Alex Kimani for Oilprice.com
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