NextEra Energy recently exceeded Exxon Mobil’s market cap. The milestone for the company “Clean Energy” was mentioned in the headlines. It’s also one of the largest utility companies in the world, but by combining its 20th century fossil fuel power generation model with decades of investments in renewable energy, investors are betting that its model is the future.
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Some high profile companies that are at the forefront of technological innovation, including Apple and Tesla, split their shares earlier this year to make the sticker price more attractive to investors. Retail investors are increasingly looking for smaller pieces of what many see as large chunks of the future of the market. One of the most recent companies to split its stock and trade for even better value for money than Apple is not a household name in the same order: NextEra Energy, the largest company in the US utilities sector.
NextEra Energy hit some headlines this fall when it topped Exxon Mobil for the first time in market value. Leaving oil behind wasn’t that uncommon for companies in various industries this year – Zoom Video Communications was more than once bigger than Exxon by 2020. NextEra is a more revealing case, however.
Many headlines about the jump over Exxon stated that it was a “clean energy” company. That’s right – it has the largest renewable energy project business in the country. It is also one of the largest utilities in the United States and continues to manage many fossil fuel plants for subsidiaries such as Florida Power & Light and Gulf Power. Utility experts say no Climate contradictions in his current fleet – where coal and natural gas still play a big role, and there is even a small oil-based power generation – may ultimately be less important to investors than positioning for the future. It has increased to more than double the market weight of a competitor in the S&P 500 Utility Index.
Whether it’s wind, solar, or energy storage, NextEra is “number 1 in them all,” said Steve Fleishman, utility analyst at Wolfe Research. “You are a winner in the ongoing energy transition,” he said.
While short-term market capitalization gains or losses can be temporary, the Exxon Mobil passing on is an important signal for the future.
“Same as when Tesla exceeded the market cap of traditional automakers. One thing we like to say is, if Tesla is worth what it is, that’s a lot of EV sales that are powered by our companies need to be operated, “said Fleishman.
As the economy becomes more electrified and electricity fleets increasingly switch from coal to renewable energies, NextEra will benefit from both: a growing customer base for energy providers with higher future demand for electricity from industries such as cars, which will help them grow their business and invest in it the grid, while it is also a major player in the development of renewable energy projects.
With electric vehicles becoming more prevalent, “it doesn’t help if we charge coal-fired plants,” said Sophie Karp, utility analyst at KeyBanc Capital Markets. “It has to be done together. And this is an opportunity for everyone in the energy sector.”
In the face of climate change, utilities look more like NextEra, complementing steady, cash-flow-rich traditional businesses by developing renewable energy projects or at least buying renewable power generation. There is Xcel Energy, Berkshire Hathaway Energy and others are using renewable energies even more slowly, but are now accelerating their climate path Dominion Energy and Duke Energy.
According to analysts, this is an approach to the energy transition that the oil and gas sector, which is also showing high levels of cash generation, may have considered earlier. However, it is becoming more difficult to let the economy work in your favor.
While the returns that oil and gas companies can get today from fossil fuel exploration may remain higher, there is less uncertainty about the profitability of renewable energy in the longer term. “At some point, energy companies will have to decide where to invest the next dollar,” said Travis Miller, Morningstar Utility Analyst.
A compromise has to be struck between today’s absolute return and investors’ belief in the future.
“I don’t expect that big a transition from other E&Ps, but energy companies will have to make decisions at some point as to whether they can get the best returns by investing in the fossil fuel business or in renewable growth, and I think we can too.” Renewable returns will remain positive and uncertainty about the long-term viability of fossil fuels will increase. “
BP Recently, Bernard Looney cut its dividend and made a commitment to renewable energy under the new CEO – but it’s not the first time BP has made a commitment to alternative energy, as it has done in the past in and outside of the solar business , and speaking under former CEO John Browne two decades ago under the corporate motto “Beyond Petroleum” on the fight against climate change.
Renewable energy economics haven’t changed as dramatically as investor sentiment about the future has recently changed, says Karp.
“ONE Dollar cash flow is one dollar cash flow, and it can come from an oil well or a wind farm, “she said.” Right now, investors are clearly saying we will value the wind farm dollar higher than oil projects. “
For the past five years, NextEra Energy has been rewarded by investors for balancing its traditional utility business with the largest renewable energy company in the country while Exxon has been weighed down by the oil and gas slump and lack of vision for the future not bound to these goods.
In that regard, NextEra has a big head start in spite of increasing competition, and this is likely to continue for years in the U.S. renewable energy project market, analysts said.
Renewable energy development involves many personal and political relationships, such as landowners, project site boards, politicians, environmental review boards and tax authorities, and suppliers of project materials for solar, wind and storage, according to Morningstar’s Miller. “There are a huge number of characters that need to be involved in renewable energy development. So by the time you have these relationships, you’re already well on your way in terms of putting a project together. And that makes it for someone who what is new is the hardest way to get into the renewable energy market, “Miller said.
Utilities like NextEra have another benefit: the right geography. Operating on site in Florida, for example, gives him a head start when experimenting with solar energy on a large scale. It has been in the wind business in Texas for over a decade. “Geography is a big deal in the utility business. Because they cover larger coverage areas, they have access to significant amounts of land, and most energy companies don’t have the local knowledge and access to geography,” Miller said.
The extent to which the oil and gas companies are not as fast or as broad in the US transition as some European counterparts like the Danish company Orstedwhich used to be an exploration and production company and is now an offshore wind company. However, Miller believes that with NextEra, the big energy companies will be among the biggest emerging investors and competitors.
“The way the energy sector has acted and the outlook for fossil fuels suggests that capital should be channeled into renewable energy. We saw it in Europe. I think we will see additional investment in renewable energy,” he said. “There’s still the shale business, it’s still a major source of energy in the US and needs investment, but we’ll see energy companies increase their direct investment in renewable energy.”
But it won’t be easy.
“It’s going to be difficult for Big Oil because they missed the boat,” said Karp. “They don’t have the cost of capital that these people have, and capital is the biggest input … majors are now being penalized in the market for being essentially oil companies,” she said.
This makes investing in renewable energy projects even more difficult as the cost of capital must be low given the return profile of investments in renewable energy. Oil is also in secular decline as a sector. “It’s not that easy to overcome. NextEra has quite a few growth opportunities ahead of it,” said Karp.
The focus on investing in renewable energy for shareholders differs from investing in interest payers that many utility companies have undertaken as government policies drive their regulated business models. Minnesota-based Xcel buys as much renewable energy for customers as any other utility company in the country. However, this differs from focusing directly on the project business with renewable energies. “That way, you don’t get that high a return, but you also take a lot less risk,” Miller said.
The ESG corporate policy and net zero carbon targets will also benefit NextEra’s focus on renewable projects. “You hear about carbon-free, carbon-free, carbon dioxide emissions, and utilities are raising those corporate goals for ESG,” said the Morningstar analyst. The world’s largest tech companies are among the most aggressive, including Apple, alphabet, Amazon and Microsoftcommitted to a net negative CO2 target.
With its warehouses alone, “Amazon has a lot of geography for solar panels,” Miller said.
With the costs of solar, wind and storage falling, there will be more competition for NextEra, more players in various industries who can afford to invest capital in renewable energy projects. “The people trying to get in there are a huge crowd,” Miller said. But he added, “The entire industry is chasing NextEra.”
BP is cutting its dividend in early fall, and Exxon announced last week that it would not raise its dividend for the first time since 1982. However, NextEra has the regulated utility business to keep appealing to the dividend-minded investor and capitalizing on the markets to finance renewable energy companies. It can protect this existing investor base while targeting a more growth-oriented, climate-focused shareholder.
“The lumbering regulated utilities are a good mechanism for paying dividends. The renewable energy business is not going to be well set up for paying dividends,” Miller said.
BP’s recent move to focus more on renewable energy projects is not coming from a position of strength, according to a shareholder watchdog.
“They are being forced as the future of their business model collapses before their eyes,” said Daniel Stewart, energy researcher at As You Sow, a shareholder group that pressures companies to commit to climate change goals.
The NextEra dividend is funded from the regulated utility business and not from the utility money used to finance renewable energy. However, the business model allows the company to access debt at attractive rates and raise equity to invest in its clean energy model.
“NextEra has been building these capabilities for decades … traditional oil companies will find it difficult to corner any other part of the energy market,” Stewart said, though he added that Potential in hydrogen and geothermal might make more sense for these actors as it indicates where their existing strengths lie: engineering, drilling and management.
Karp said other utilities would try to scale up renewables and access capital, but NextEra will have an advantage for the foreseeable future as these are capital-intensive projects that require scalability as well as a low cost of capital. “It is now so large,” she said.
“Others will try. The market is rewarding other utility companies that are on the same path. Excel is one example of this,” Karp said. “If you’re a utility and want to branch out, you need to have a solid utility that pays dividends and holds the investors who want a dividend.”
“You have put yourself in a fantastic place,” said As You Sow’s Stewart of NextEra’s regulated utilities business, which generates most of its revenue, and the renewable energy business, which has great potential going forward.
“And that’s where a lot of the value comes from, that part of the business where the energy transition is advancing,” he said. “Investors are looking at the energy transition at the macro level and how disruptive it is going to be and how much faster it unfolds. NextEra is really benefiting from it. … The volatility on the oil and gas side just scares a lot of people and it’s very scary when you think of how fast the energy transition is advancing. “
But there is one big caveat: a significant portion of its business still relies on coal and natural gas, and while NextEra has climate-based emissions reduction targets, it has not set carbon targets for its entire utilities business that are as ambitious as some of its peers in net zero the coming decades.
NextEra’s renewable energy business can be a distraction from the regulated utility business. “It gives them room not to act as aggressively as others … it gives them room to breathe,” said Stewart. “They show no support for an ambitious climate policy in Florida.” You can improve. “
However, unlike oil and gas companies starting to write off assets, NextEra’s renewable energy business is on the right track when it comes to how energy is generated and consumed.
“In the case of an Exxon or Chevron … when we see the market valuation of NextEra or Orsted, they missed the opportunity to buy out a large, disruptive renewable energy company. It’s incredibly difficult to make up for that, “he said.