With almost all sectors of the stock markets set to end the year in red, it might be safe to assume the Santa Claus rally has been canceled. Amid an ocean of red, the Energy sector is the only green island remaining that has defied the bleak macroeconomic picture to return a hefty 51%, as of Dec 19, 2022.
An unrelenting array of headwinds -- geopolitical flareups, rising energy costs, and energy supply disruptions – have buffeted equities markets. However, these events also triggered worries about the issue of energy security globally, creating tailwinds for energy companies evidenced by their blockbuster profits.
The following energy stocks are well positioned to benefit from the secular trend and the rise in renewable energy consumption as the cost of renewable power generation falls and elevated oil prices accelerate the transition to clean power.
Shell (SHELL) is an integrated oil and gas company that explores and refines oil around the world. The firm serves clients globally while its production and reserves are in Europe, Asia, Oceania, Africa, and North and South America. The company operates refineries in the Americas, Asia, Africa, and Europe.
As part of the energy transition, Shell is pushing to achieve its target of a net-zero portfolio by 2050. “Like peers with similar targets and goals, Shell plans to expand its marketing retail operations and reduce oil production over time,” says a Morningstar equity report.
However, unlike peers, Shell has not offered an explicit renewable generation capacity target. “Given the competitiveness of the space and the potential for lower returns as more firms enter the space, this is likely prudent,” says Morningstar sector strategist,Allen Good.
As opposed to the asset, Shell is focused more on the customer, which is where it believes the value will be in the energy transition. “Instead of producing large amounts of renewable power, it will work with customers that want to secure low-carbon solutions for their businesses,” says Good.
“Management believes participating along the entire low-carbon energy spectrum will prove difficult to replicate and produce a competitive advantage,” says Good, who recently raised the stock’s fair value to EUR 33 from EUR 28.5.
British oil and gas giant BP PLC (BP) explores, produces, and refines oil and natural gas globally. The company also produces renewable energy and has customers worldwide.
The oil major is transitioning from an integrated oil company to an integrated energy company as it pursues its emission reduction targets while growing earnings and improving returns.
“Its strategy ranks as the most aggressive move away from hydrocarbons among its peers with plans to reduce production by 25% by 2025 and 40% by 2030 and refining capacity by 30% by 2040 through divestment,” says a Morningstar equity report.
A large part of its energy transition efforts is tied to renewable power generation and low carbon energy. The company is targeting generation capacity of 20 GW in 2025 and 50 GW in 2030 from 2.5 GW at present. It also plans to double its LNG equity portfolio.
BP is leveraging existing assets to grow its fuels and lubricants business in emerging markets and charge EVs. “Imbedded in this strategy are plans to grow retail sites in emerging markets six-fold by 2030, double retail locations that offer food and grow EV charging points nearly 10 times,” says Good, adding that its doing all of this with modest increases in capital investment, while doubling EBITDA.
Good recently lowered the stock’s fair value to US$39.50 from US$41.50 after incorporating the updated strategic plan including the latest capital spending guidance.
French energy heavyweight TotalEnergies (TTE) is an integrated oil and gas company with exploration, production, and refining operations around the world. It also holds a 19% interest in Russian oil company Novatek. It also generates renewable power.
Total has been growing energy production on all fronts while pursuing its ambition of net-zero emissions by 2050. It is aiming for delivering near-term cash flow growth even at relatively low oil prices.
“The emissions reduction goal matches many of its European peers’, but in contrast, Total does not plan a quick retreat from hydrocarbons,” says a Morningstar equity report, adding that “instead, it plans to grow oil and gas production near term while delivering a reduction in portfolio emissions over time by expanding its ownership of renewable power and low carbon assets.”
Total’s oil production is set to grow by 1.5% per year through 2027, boosted from short-cycle projects, continued growth in Brazil, new projects in Africa and recent exploration successes.
“After losing Russia LNG project growth, Total has successfully backfilled its project queue with new opportunities in Qatar that, combined with projects in the U.S., Papua New Guinea and Mozambique, should increase production to nearly 25 mtpa by 2030,” says Good, who recently raised the stock’s fair value to US$64, incorporating the latest capital spending guidance, financial results and oil prices.
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