Investing in North American energy
The US stands at an energy crossroads. While it has long thrived on oil & gas, the world’s largest economy looks to be switching to clean sources for its power needs. With that in mind, we’re examining what both conventional and renewable energy in the US can potentially offer investors.
Traditional & renewable energy in the US – a worthy investment?
The wider North American energy picture
The US needs an energy overhaul. Those are the signals coming from the Biden administration. The 46th President of the United States has made it clear his White House will be doing all it can to overhaul his predecessor’s less-than-enthusiastic attitude to climate change. For a start, Biden has realigned the United States with the historic Paris Climate Change agreements signed in 2016.
Significant investment in clean power and renewable energy in the US is likely on its way throughout the next four years. At least. $380bn has been apportioned to the sector as part of a wider $2 trillion infrastructure plan. As such, investors are looking to some of the top US renewable energy companies for long term portfolio bolsters.
But that is not to forget traditional energy sources. Shale oil and gas has turned the US from a net importer to a net exporter. 2021 however, has battered oil & gas markets – mainly oil – but demand recovery is predicted to surge throughout the rest of the year with economies worldwide opening up post-lockdown.
Liquid natural gas (LNG) could also be a significant money-spinner for US energy firms. Rising import numbers from Asian markets are propping up the market currently. Feed gas volumes at Texan LNG terminals are nearing record levels at roughly 11 billion cubic feet per month.
Midstream: a key component in North America’s energy system
Midstream energy firms, i.e. those involved in the transportation, storage and processing of hydrocarbon products, make ideal investment vehicles. They are essential to the current fossil fuel-led global economy. This sector includes pumping stations, pipelines, storage facilities, tanker ships, tank trucks, and rail tank cars.
Even in 2020, a torrid year for oil, yields from such investments could have been as high as 10%, as midstream firms typically operate on long, multi-year contracts with set fees. That gives them more dependable free cash flow compared with upstream (getting oil & gas out of the ground) firms, who struggled immensely due to the multi-billion-dollar cost of their activities. While midstream is expensive to set up, tax breaks ensure companies remain profitable by swallowing some of the cost.
Looking at the Alerian Midstream Energy Index, an index tracking performance of midstream energy firms, we can see it gave a 10.4% yield in November 2020, and a 6.7% yield by March 2021. For context, the S&P 500 index’s yield for March 2021 was 1.5%.
The case for US renewable energy for investors
Moving back to renewable energy, there is a long term case for renewables. We spoke earlier about the Biden White House’s major spending plans. The current administration is targeting carbon-free nationwide electricity generation by 2035. That will require sustained capital injections across the solar, wind and other forms of clean power generation over the coming decade. A ten-year extension to the US’ current renewables tax credit scheme worth $400bn has been proposed too.
Companies in the midstream oil & gas sector are looking to slash emissions. Natural gas pipeline company Williams Companies (WMB) is investing $400 million in solar installations to power its facilities and is targeting net-zero emissions by 2050.
For investors looking to beef up their portfolios for companies with solid green credentials, or are just supplying clean energy and infrastructure, renewables companies could generate solid returns.
This will take looking at the top renewable energy firms in the US, such as NextEra Energy. The Florida-based utility company is one of the nation’s clean power pioneers. It is currently in the midst of significantly boosting its green energy capacity, aiming to construct 30 GW of new power generation infrastructure by 2030.
NextEra projects sales growth of 12% throughout 2021 too, although conservative estimates say a steady 6-8% rise per year until 2023 is more likely. Utility firms like NextEra work on fixed-rate power supply deals. That means firms like NextEra can count on steady cash flow generation. Factor in 5.5m Floridian homes already powered by NextEra, and its ambitious growth targets, long term ideals are there.
Marketbeat recently upped NextEra’s target price to $75.00, with the stock currently trading at around $74, as of May 20th 2021.
US renewable energy investment & risk
When investing in North American renewable or conventional energy, risks must be taken into consideration. In 2020, for example, the pandemic caused the oil market to crash. It’s only now starting to claw its way back up but is nowhere near pre-pandemic levels of capital expenditure by oil companies, or product demand. Personal positions on oil as a commodity or on oil company stocks are likely to have shed considerable value across 2020.
Renewable energy stocks are subject to volatility too. Turning back to 2020, we’ve seen utility firm share prices drop as they fail to get new projects off the ground owing to tougher working conditions or supply chains snags caused by Covid-19. Likewise, some equipment manufacturers have struggled to fulfil orders for the same reason, leading to their own share prices dropping.
With any investment, be sure you can afford to ride out market volatility. Only do so if are comfortable taking any losses.