The conventional energy sector, including oil and natural gas, is as weak (from a sentiment standpoint) as it has been in a generation. In a twist of fate, this is having an adverse impact on renewable energy stocks, which have been gaining momentum (on the back of innovation and government subsidies) for years.
Everything that could go wrong, has gone wrong for the North American energy sector in the past 12 months. As recently as this morning, J.P. Morgan joined Goldman Sachs (which we wrote about here) in predicting oil prices could hit $20 per barrel. J.P. Morgan’s analyst cited a strengthening U.S. dollar and the fact that the U.S. was still producing 9 million barrels of oil per day.
US Dollar wreaks havoc on oil prices
In a Weekly Volume from January of 2015, The Orchestrator of Oil’s Collapse, we explain the Saudis motivation to crush oil prices and predicted much of what occurred in 2015.
We updated our stance on the oil sector over the weekend in a Volume titled Using Oil as a Weapon.
Renewable energy stock valuations plummet
Now, as oil behemoths such as Chevron chop their capital budget by 25% for 2016 and announced 6,000-7,000 job cuts, equal to 10% of its entire work force, you know things are getting bad. While some believe the collapse in renewable energy stock valuations is due to oil’s fallout, there is more to the story.
Truth behind renewable energy sector carnage
Almost one year ago, in a January 28th article from the Guardian, the discussion of low oil prices not hurting the renewable energy sector was explored.
The article attempted to reduce or eliminate fears that such a historic drop in the price of oil (Brent crude traded at $49.04 a barrel at the time of writing) would render the renewable energy sector unable to compete. How about $31.56 per barrel, which is where Brent was trading Monday afternoon. Below is an excerpt from the January 2015 article:
“But Adam Sieminski, who heads the Energy Information Administration, said oil was not in head-on competition with renewables when it came to electricity generation – and that government policies would help shield the clean energy industries.”
Renewable energy stocks decline amidst oil supply glut
The charts of some very well established renewable energy stocks say otherwise. Remember, the above article and comments suggest lower oil prices will not offset demand for more expensive, clean energy alternatives. This cannot be true in a free market economy. Only under the guise of subsidies and social and political forces can something more expensive be chosen over something that achieves the same result in a less expensive manner.
Any doubt governments would not support renewable energy projects was dismissed last month, when U.S. Congress passed legislation that renewed tax credits for renewable energy projects. Despite this rainfall of free money for the sector, (could you imagine if it wasn’t renewed) renewable energy valuations continued to slide.
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ETFdb.com’s Definitive List Of Alternative Energy Equities ETFs shows a sector in decline.
Solar ETF (TAN) is one of the largest and most popular solar ETFs in the world. Its currently down 10.90% YTD and was off 2.89% Monday to $26.51. This ETF has a 52-week high of $49.23. In fact, every ETF featured in ETFdb’s definitive list was down YTD, ranging from a few percent to almost 11%.
Below are its Top 5 Fund Holdings:
SOLARCITY CORP 7.12 %
FIRST SOLAR, INC. 6.54 %
SUNPOWER CORP 5.35 %
TRINA SOLAR LTD-SPON ADR 4.84 %
XINYI SOLAR HOLDINGS LTD 4.59 %
Another hugely popular ETF is the WilderHill Clean Energy Portfolio, which trades under the symbol PBW. It was down 2.25% Monday to $4.12 after hitting a high of $6.00 in early 2015. These are some big losses from a sector that many thought would be outperforming amidst falling energy prices.
NASDAQ-listed Enphase Energy is off huge in the past 12 months, falling from a high of $15.25 to a recently low of $1.63. Its shares were down 5% Monday as its market cap hovered around $128 million.
Enphase Energy – 1 Year Chart
NASDAQ-listed SolarEdge Technologies (one of the largest publicly traded solar stocks) was down 3.5% Monday to $25.77 per share. This company has given up hundreds of millions in market cap over the past 12 months after falling from a high of $43 per share in mid-summer. Its market cap sat at roughly $1 billion Monday.
SolarEdge Technologies – 1 Year Chart
As you can see, many ETFs and renewable energy stocks have performed horribly in 2015 and are off to a bad start in 2016 for three reasons:
- In a free market, lower prices and affordability promote use. With fuel prices at roughly $2 per gallon, few Americans are financially motivated to fork over cash for electric cars or other renewable energy utilities that require heft upfront costs.
- Higher interest rates. Always a threat to any market place, the ability to fund some of the massive projects overtaken in recent years, could become significantly more expensive, despite rampant government support and subsidies in this sector.
- Renewable energy stocks are still sensitive to economic growth. While beyond obvious, renewable energy appliances, cars, heating systems are purchased during periods of economic growth and prosperity. With both the US and Canada teetering on the brink of recession, these types of purchases are not at the forefront of consumers’ minds.
The crux is that oil is not falling because of the heightened adoption of renewable energy sources, but because of oversupply and a strong US dollar.
How do these losses compare to the oil and gas sector?
The most popular and widely traded oil ETF in the world is the United States Oil Fund – down 10.91% YTD. It was off 5.6% Monday to $9.25 from a 52-week high of $21.50.
While oil and gas is more sensitive to transportation, renewables are more utility focused. Large, subsidized infrastructure projects will continue to create opportunity, but this remains a buyer’s market for depressedrenewable energy stocks and clearly not a seller’s market.
In respect to the solar industry, an article from TheMotleyFool provides an additional reason investors have been hesitant towards solar stocks.
“…utilities are starting to learn how to fight third party solar and instead develop it themselves. Challenges to net metering in Arizona, Nevada, and California threaten the enormous growth in solar over the past few years, and companies banking their futures on those states — like SolarCity, which has 75% of its customers in just five states — could be in for a rude awakening.”
Buyers market for renewable energy stocks
The X-factor of DIY solar is something to consider when evaluating specific renewable energy and solar stocks and their respective target market.
Clean Energy Canada is a climate and energy think tank housed at the Centre for Dialogue at Simon Fraser University. Its latest report was titled Tracking the Energy Revolution: the Top 10 Trends Propelling the Global Clean Energy Transition. We cited some interesting facts in a late-2015 Weekly Volume from their latest study. None more powerful than this:
“In total, investors poured twice as much money into new renewable-electricity projects than into new fossil fuel projects.” (in the year 2014)
So, despite oil prices declining in 2014, 2015 and now into 2016, renewable energy adoption has and will continue. That said, oil pirces are likely heading lower in the short term, so for the three reasons given above, expect renewable energy projects to be less sought after for investment.
While many renewable energy companies, (Tesla is a great example) are closing the gap between what it costs to build and sustain electric energy vs conventional sources such as oil, the subsidy dependence truth will slow adoption amidst falling low prices in the years to come.
This article represents solely the opinions of Alexander Smith. Alexander Smith is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.