Stock Market: What’s Ailing the Clean Energy Sector?

Clean energy will power the future. That’s what we heard from the recently concluded COP27 Climate Change conference in Egypt.

It will probably happen — someday. But right now, clean energy companies are hurting badly, and shareholders are deeply concerned. 

Many people invest in these companies on principle. They believe they’re helping to combat climate change in their own small way. But they don’t like the idea of losing money in the process, and that’s what’s happening.

The S&P Global Clean Energy Index is down 6.1 per cent in the past year (to Dec. 2). The good news is it may have bottomed out. So far in the fourth quarter, it has gained 10. per cent. 

Why did these stocks plunge? Basically, rising interest rates, which are hitting these companies in several ways. Most clean energy companies are in the process of building out infrastructure. This means heavy capital expenditures, which are financed to a large degree by debt. As rates rise, the cost of paying for that debt increases, and the future cash flows from each project have less value. Existing fossil fuel companies have the advantage of well-established operating facilities to generate oil and gas output. 

Clean energy companies, like most industries, also face the possibility of a business slowdown if rising interest rates push the global economy into a recession. These companies are smaller than the oil and gas giants and are therefore more vulnerable in an economic downturn.

Here’s a look at three renewable energy stocks we have recommended in our Income Investor newsletter. Prices are as of Dec. 2. 

Algonquin Power & Utilities (TSX, NYSE: AQN)

Type: Common stock

Current price: C$10.17, US$7.55

Annual payout: US$0.7232

Yield: 9.6 per cent

Risk: High 

Website: www.algonquinpower.com

Comments: Algonquin sent investors reeling and analysts scrambling to downgrade the stock after the company released third-quarter results that were unexpectedly grim.

The shares dropped 35 per cent in the five days of trading after the Nov. 11 announcement as investors worried about whether a dividend cut would be the next shoe to drop.

CEO Arun Banskota described the quarter as “challenging.” It was that and more. Revenue was up 26 per cent, to $666.7 million compared with $528.6 million in 2021 (Algonquin reports in US dollars). But the company posted a loss of $195.2 million (-$0.29 per share), a huge drop from -$27.9 million (-$0.05 a share) last year.

Citing “challenging macroeconomic conditions,” Algonquin issued revised guidance. Earnings per share this year are now forecast to be in the range of $0.66-$0.69, down from $0.72-$0.77 previously. The company said that the current headwinds will extend into 2023, so it is revisiting longer term guidance. 

The company singled out rising interest rates and inflation as being a large part of the problem. In a research report by RBC Capital Markets analyst Nelson Ng and associate Trevor Bryan, the brokerage firm said Algonquin is carrying a large amount of floating rate debt and pointed out that will roughly double to $3.3 billion when the pending purchase of Kentucky Power closes, likely in January.

RBC slashed its price target on the stock by US$5 per share, to US$12, which seems optimistic in the circumstances. The brokerage cut its rating to Sector Perform from Outperform. 

Algonquin raised its dividend by 6 per cent in June, to the current US$0.1808 per quarter (about US$0.72 a year). That’s above the new profit forecast for 2022. The company has never cut its dividend since it went public in 2013. On the contrary, it has been a steady dividend grower. But with the yield now at 9.5 per cent, that will likely soon change.

Outlook: I don’t see any catalyst that will rapidly pull Algonquin’s share price out of the hole. Even if the company issues a statement declaring the dividend to be sacrosanct, as Pembina Pipeline did a few years ago, investors will be suspicious unless the bottom line dramatically improves. The probable outcome is that the stock will trade in a narrow range of C$10-$12 in the coming months. If the dividend is cut, that range could be lower. What was a dependable dividend grower has become a crapshoot. 

But if you’re willing to take the risk, the company’s assets could make it a takeover target. Don’t hold your breath though. 

Innergex Renewable Energy (TSX: INE, OTC: INGXF)

Type: Common stock

Current price: C$16.90, US$12.54

Annual payout: $0.72

Yield: 4.3 per cent

Risk: Moderate

Website: www.innergex.com

Comments: The stock dropped sharply in September, to a 52-week low of $14.23. We have seen a small rally since but, like most clean energy companies, Longueuil-based Innergex faces strong headwinds right now.

That said, it’s performing better than many of its peers. Production, revenue, adjusted EBITDA, and earnings were all better on a year-over-year basis in the third quarter, although adjusted earnings were down. 

Revenue was up 40 per cent, to $258.4 million, from $184.6 million last year. For the first nine months of the year, revenue was $666.9 million. That was a 36 per cent improvement over 2021.

Net earnings for the third quarter were $21 million ($0.11 per share), compared with a loss of $23.5 million (-$0.10 a share) a year ago. However, adjusted earnings were negative $1 million, compared with a profit of $11.9 million in 2021. The company said adjusted earnings are intended to provide a measure that eliminates the impact of derivative financial instruments and other items that are outside of the normal course of its cash-generating operations

Adjusted EBITDA was ahead 48 per cent over last year. Free cash flow (FCF) was $159 million. The company reported a payout ratio of 91 per cent, but that is based on FCF, not earnings.

The company announced it issued almost $1 billion in green bonds to refinance the non-recourse portion of its debt on its Chilean portfolio. It also said it intends to complete the acquisition of the minority 30.45 per cent of its French wind portfolio in the current quarter. The entire portfolio is expected to generate $100 million worth of revenue next year. The assets carry about $350 million of net debt. 

Brookfield Renewable Partners (TSX: BEP.UN, NYSE: BEP)

Type: Limited partnership

Current price: C$38.99, US$29.01

Annual payout: US$1.28

Yield: 4.4 per cent

Risk: Moderate

Website: www.brookfieldrenewable.com

Comments: BEP reported what its CEO, Connor Teskey, described as “another successful quarter,” but the units have been drifting down since. 

Funds from operations (FFO) showed a good gain of almost 16 per cent, from $210 million ($0.33 per unit) in the third quarter of 2021, to $243 million ($0.38 per unit) this year. The partnership reports in US dollars. For the first nine months, FFO was $780 million ($1.21 per unit) compared with $720 million ($1.12 per unit) last year.

From a straight P&L basis, it was a different story. BEP lost $136 million (-$0.25 per unit) compared with $115 million (-$0.21 per unit) a year ago. The loss was due to non-cash depreciation of $385 million in the quarter. 

Brookfield continues to employ an active investment policy, focusing on opportunities in the US. It recently signed a deal to acquire Scout Clean Energy for $1 billion. Scout’s portfolio includes over 800 megawatts of operating wind assets and a pipeline of over 22,000 megawatts of wind, solar, and storage projects across 24 states, including almost 2,500 megawatts of under construction and advanced-stage projects. BEP also closed the acquisition of Standard Solar for $540 million with the potential to add another $160 million to support growth. 

In another move, Brookfield Renewables announced in October that it is getting into nuclear power. It’s forming a strategic partnership with Cameco to acquire Westinghouse, one of the world’s largest nuclear services businesses. The deal brings together Cameco’s expertise as one of the largest global suppliers of uranium fuel for nuclear energy with Brookfield’s clean energy capabilities “to create a powerful platform for strategic growth across the nuclear sector.” The total equity invested will be approximately $4.5 billion ($750 million net to Brookfield Renewable), which, alongside its institutional partners, will own a 51 per cent interest, with Cameco owning 49 per cent.

This deal has raised eyebrows. There’s a lot of debate over whether nuclear is in fact “clean.” And there is no certainty about the ultimate profitability of this venture. Brookfield says Westinghouse is in a position to benefit from the over 50 gigawatts of plant extensions that have been announced and more than 60 gigawatts of new-build reactors that are expected globally between 2020 and 2040. 

Those are just a few examples of the growth initiatives BEP is engaged in. The downward trend in the unit price suggests investors are concerned that partnership may be overextending itself in a period of rising rates.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe 

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