Brookfield Renewable Partners: Stock of the Week

This renewable energy stock surged last quarter – but is it a buy?

Andrew Willis 15 July, 2024 | 4:45AM
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Key Takeaways for Brookfield Renewable Partners Stock:

  • Brookfield Renewable Partners stock surged in Q2 around the time of a multi-billion-dollar buyout of a French renewable energy developer.
  • Brookfield has buying power, but it has not yet built a moat. The company’s portfolio is changing in an increasingly competitive landscape.
  • Brookfield Renewable’s portfolio has historically been heavily weighted toward hydro generation, but that has changed in recent years given outsize growth in wind and solar. The company has built out further development capabilities in recent years.

 

Andrew Willis: Renewable power stock Brookfield Renewable Partners (BEPC) got quite a positive jolt in May and June. The move in price put Brookfield among the 10 Best-Performing Canadian Dividend Stocks last quarter.  

The price action for Brookfield occurred around the announcement of plans to acquire a French renewable energy developer, Neoen. The transaction comes in around a cool six and a half billion Euros, and it’s something that a company with the capital backing that Brookfield can do. But does that ability to acquire – the source of much of Brookfield’s growth – make for a competitive moat?

Morningstar equity analyst Brett Castelli says Brookfield’s renewable legacy is centred on its hard-to-replicate hydro assets. The extreme cost of hydro projects makes it hard for competitors to enter the field, but for the same reason, more of the growth in the future may be coming from renewables with limited barriers to entry, such as wind and solar.

Brookfield Renewable Partners Has Buying Power but No Moat

The evolving renewables segment hasn’t stopped Brookfield from ramping up its wind segment to 25% of cash flow, and it’s entered the solar space. In addition to renewables, Brookfield Renewable expanded its investment scope in 2022 to include broader energy transition asset classes, such as carbon capture, as well as traditional fossil fuel and nuclear power generation.

Castelli says Brookfield primarily takes a contrarian approach to its acquisitions and that the company has traditionally weighted towards buying or merging vs. building, but that the company has constructed further development capabilities in recent years.

Perhaps this specialized knowledge in energy development can help Brookfield earn a moat in the future – but as we’ve seen lately, they’re more than keeping the lights on with their acquisitions.

For Morningstar, I’m Andrew Willis.

 

bulls Brookfield Bulls Say

  • Brookfield Renewable is well positioned for the global renewables buildout given its diversification.
  • Brookfield Renewable's strong capital allocation record has generated returns generally above peers'.
  • An investment-grade balance sheet ensures Brookfield Renewable of a competitive cost of capital with peers.

bears Brookfield Bears Say

  • The company is exposed to emerging-market foreign-exchange risk, which generally constitutes 25%-30% of its cash flow.
  • The large amounts of capital looking to invest in renewable projects increases competition for projects, compressing returns.
  • Brookfield Renewable’s complex corporate structure creates the potential for corporate governance risks.

 

The author or authors do not own shares in any securities mentioned in this article.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Brookfield Renewable Corp Ordinary Shares - Class A (Sub Voting)44.07 CAD1.66Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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