The energy industry continues to transition to more clean and renewable sources of energy and that creates a huge opportunity for investors. Companies who can get out in front of the trend could be great renewable energy growth stocks, just as legacy fuels are fading away.
Three of our contributors think Bloom Energy (BE -7.47%), Array Technologies (ARRY -1.46%), and Equinor (EQNR -0.07%) are playing the energy trends well and could be ready for a breakout in 2021.
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Leading the hydrogen wave
Travis Hoium (Bloom Energy): The hydrogen economy has been a topic of a lot of investor excitement over the last year and for good reason. Hydrogen is a completely clean fuel that can be created from renewable energy and water and used to fuel trucks, industrial fuel cells, and even ships.
There are a number of players in the hydrogen space, but Bloom Energy is one that I think has a lot of potential. It doesn't use the proton-exchange membrane technology that most competitors use, it has a solid oxide fuel cell design that should be higher efficiency and lower cost long-term. That is showing in financial results with Bloom Energy generating more revenue and higher margins than Plug Power and Balard Power Systems, two of its biggest competitors.
BE Revenue (TTM) data by YCharts
Right now, Bloom is primarily making fuel cells for auxiliary or backup power for industrial buildings, but that's just the start. Management is building and testing its fuel cells for marine applications, electrolysis, clean hydrogen electricity production, biogas, and more. These markets are new and Bloom is early in each, but they could be worth billions to the company and as the year goes on we should get more info about how pilot or development projects are progressing.
I think hydrogen will be a transformative fuel in the future as renewable energy becomes a larger portion of our energy mix. That's a huge tailwind for Bloom Energy and why it's my breakout stock for the rest of the year.
Things should get sunnier
Howard Smith (Array Technologies): Solar power generating capacity increased through the pandemic, and that growth is expected to continue. But shareholders of one company in the sector aren't participating in growth so far in 2021.
Array Technologies makes solar panel ground-mounted tracker systems for large-scale solar projects. Though the company is profitable, investors ran from it after it reported its first-quarter 2021 results in May. Year-to-date, Array shares are down almost 70%. Most of that came on a single day after it reported earnings for the period ended March 31, 2021. Two things scared investors from that financial report.
First, Array CEO Jim Fusaro said earnings were below the company's expectations "as a result of higher than expected logistics costs." But maybe more important were comments made by CFO Nipul Patel. Mr. Patel said in a statement to investors that the company was withdrawing forward guidance, "given the continuing increases we are seeing in steel and freight costs as well as our ongoing review of open contracts to assess what costs we will pass on to customers."
Uncertainty from lack of visibility on costs and project profitability drove investors away. But the company also made an announcement the same day as the earnings release that shows it has a plan. Steel is the material that makes up much of the solar panel tracking systems' structure. The published index futures price of hot-rolled coil steel has tripled from pre-pandemic levels at the start of 2020, and remains near recent highs.
But Array now has an agreement with leading North American steelmaker Nucor (NUE 0.25%). The agreement has Nucor supplying the solar company with steel needed for Array's production of several parts and components used in its solar systems. Though details weren't released, in return for the additional business for Nucor, Array likely received a preferred and contracted price. That should give it more visibility. The company reports second-quarter results on Aug. 11, and investors may start to feel more comfortable after that release.
The drop in share price has the stock trading at a future price-to-sales ratio of below 2.0, according to data by YCharts.
Investors may want to wait to hear what the company has to say after earnings. But there could be much more upside in the second half of the year if the company expresses more confidence that it has a better handle on costs going forward.
Back to its old self
Daniel Foelber (Equinor): Norwegian energy giant, Equinor, is in the midst of an impressive rebound after a tough 2020. Although the company has aggressive plans to gradually shift away from oil and gas toward renewables, the reality is that its business is still very much dependent on oil and gas prices. Just as this dependence worked against Equinor last year, it's working very much in its favor this year. Equinor is back to its old self of generating high profit margins from its established oil and gas business (mainly out of Norway). The company just recorded its highest quarterly free cash flow (FCF) in 10 years, as well as a big uptick in revenue and net income from the pandemic lows in the second quarter 2020. Despite these impressive results, Equinor remains committed to growing its renewable portfolio.
In 2020, it allocated 4% of its gross capital expenditures (capex) toward renewables and low carbon solutions. In 2021, that number has grown to 12%. And by 2030, Equinor expects that over 50% of its gross capex will go toward renewables and low carbon solutions like hydrogen and carbon capture and storage. More specifically, Equinor is guiding for gross investments in renewables of around $23 billion between 2021 and 2026 -- which would be roughly a third of its planned capex over that six-year time frame. Investors would do well to monitor Equinor's ramp-up in renewable spending to make sure the company is holding true to its long-term goals.
If there was a red flag from Equinor's 2Q 2021 conference call, it was that CFO Ulrica Fearn seemed hesitant to provide specific details or updates on the financials of the company's wind energy megaprojects. Equinor is far away from achieving meaningful returns on these projects, so it's understandable why the company doesn't feel the need to spend too much time updating investors every quarter. However, the company could do well to be a little bit more open with investors as its projects progress.
The bottom line is that Equinor is using the strong FCF from its oil and gas business to fund its long-term wind energy investments. The company plans to keep oil and gas production flat through 2030 despite a few upticks here and there. Given the company's first-half performance, recent dividend raise back up to $0.18 per share per quarter, and long-term upside, there's a lot to like about Equinor stock going forward.
The boom in renewable energy is just starting
Each of these stocks has huge tailwinds behind them in renewable energy. As the industry grows and new opportunities arise in hydrogen, solar, and energy storage, they're all set up to succeed and reward long-term investors.
