America's energy sector is going through its biggest crisis--as well as its biggest seismic shift--in modern history. Fossil fuel companies have always dominated the U.S. energy space, and no company has been more dominant than Exxon Mobil (NYSE:XOM) thanks mainly to its powerful John Rockefeller pedigree. Exxon has always been the United States' most valuable energy company since it began as Standard Oil more than a century ago.
But something very strange happened over the last week: Suddenly, a company that has become the face of renewable energy took the mantle of America's most valuable energy company from mighty Exxon.
Florida-based NextEra Energy Inc. (NYSE:NEE) has leapfrogged Exxon and Chevron Corp. (NYSE:CVX) to become America's most valuable energy company thanks to its growing green energy credentials. NEE boasted a market cap of $147.61B compared to $144.69B and $141.32B by Exxon and Chevron, respectively, by close of business on Wednesday.
This has been a long time coming.
NEE has nearly doubled over the past three years compared to declines of 59% and 38% by XOM and CVX over the timeframe, respectively.
NEE is up 23.5% in the year-to-date vs. -50.8% and -39.0% returns by XOM and CVX.
ESG/ Renewables Boom
The Covid-19 crisis, as well as the ongoing ESG boom, has provided a major boost for NextEra while also condemning Exxon and Chevron.
According to a report from Morningstar, U.S. assets in sustainable index funds have quadrupled over the past three years and now account for 20% of the total. Increasing adoption of the UN's Sustainable Development Goals by asset managers as well as the ongoing generational wealth transfer from baby boomers to millennials and Gen Xers have been playing a significant role in this trend.
NextEra has been on the right end of this megatrend while Exxon and Chevron have not.
Currently, NEE is the world's largest producer of wind and solar energy, with 45,900 megawatts of generating capacity. The company owns eight subsidiaries, with the largest, NextEra Energy Services, supplying 5 million homes in Florida with electricity.
NextEra has doubled down on renewable energy's most promising sectors: Solar and hydrogen.
NextEra has unveiled its 30x30 goal to install more than 30 million solar panels, or roughly 10,000 megawatts of incremental solar capacity, in Florida, a world leader in the production of solar energy, by 2030 through one of its subsidiaries, Florida Power & Light (FPL).
That is likely to end up paying big dividends considering the extremely bullish projections for solar.
Solar stocks have emerged as the best-performing of any energy stocks after more than doubling amid Covid-19.
Solar ETF, Solar Invesco ETF (NYSEARCA:TAN), has been surging with blue wave prospects as Wall Street grows more bullish on the odds of a decisive Democratic victory that could provide a big push towards renewable energy.
TAN has gained 83.3% over the past 90 days, and a sizzling 146.2% YTD as new polls show Joe Biden has extended his lead over President Trump to 16 points--the widest so far for this election cycle. Biden's lead is the best of any challenger since 1936, the year when the first scientific polls were taken in a presidential race.
Biden has announced aggressive plans to ramp up renewable energy production.
Indeed, Biden has proposed a staggering $1.7 trillion in federal spending over the next decade to achieve this goal, with the private sector expected to chip in with the balance. Biden also says the taxpayer costs can be recovered by repealing the generous tax bonanza that Trump granted U.S. fossil fuels.
JPMorgan has said that a Democratic sweep, aka a blue wave, is a near-term catalyst for the solar energy sector.
But NextEra has not stopped there. The giant utility has lately expressed serious interest in investing in hydrogen fuel technology.
During its latest earnings call, NextEra's CFO Rebecca Kujawa declared that the company is "...particularly excited about the long-term potential of hydrogen" and discussed plans to start a pilot hydrogen project at one of its generating stations at Okeechobee Clean Energy Center owned by its subsidiary, Florida Power & Light (FPL).
CFO Kujawa told analysts:
"Based on our ongoing analysis of the long-term potential of low-cost renewables, we remain confident as ever that wind, solar, and battery storage will be hugely disruptive to the country's existing generation fleet, while reducing cost for customers and helping to achieve future CO2 emissions reductions. However, to achieve an emissions-free future, we believe that other technologies will be necessary, and we are particularly excited about the long-term potential of hydrogen."
NextEra plans to test the electricity-to-hydrogen-to-electricity model at its natural gas-powered Okochobee Clean Energy Center that came online in 2019. Okochobee is already regarded as one of the cleanest thermal energy facilities anywhere on the globe. However, replacing natural gas with zero emissions hydrogen would be a major step in helping the company achieve its goal to become 100% emissions-free by 2050.
Kujawa said the company plans to continue evaluating other potential hydrogen opportunities to accelerate the decarbonization of transportation fuel and industrial feedstock and also support future demand for low-cost renewables.
Another key milestone: NextEra finished the quarter with a renewables backlog of approximately 14,400 megawatts, its largest in its 20-year development history. To put that backlog into context, NextEra revealed that it's larger than the operating wind and solar portfolios of all but two companies in the world.
Big bets in renewable energy?
NextEra has become the largest producer of wind and solar power in the world, with a good 30% of the company's revenue coming from renewables.
Sadly, the same can hardly be said about Exxon and Chevron.
Although the two companies have continued dipping their toes in renewables, their clean energy investments remain minuscule compared to their fossil fuel commitments.
Indeed, Big Oil continues to be chided for its outsized role in climate change and even pilloried for trying to burnish its green credentials with half-hearted attempts at clean energy investments. America's largest public oil companies remain guilty as charged, with Exxon earlier this year, eschewing a "beauty match" on carbon emissions at a time when European rivals have set out firm climate change targets.
Indeed, Exxon's investment roadmap remains as 'dirty' as ever even after the company recently indicated that it might write down its oil and gas assets by a staggering 20%.
According to Bloomberg, Exxon Mobil's current investment plans imply that it's likely to remain one of the globe's top emitters, with its plans putting it on course to increase its CO2 emissions by as much as the output of Greece.
In other words, it's probably going to be business as usual for Exxon, the ongoing climate change furor notwithstanding.
Bloomberg's analysis reveals that at a time when the likes of BP Plc (NYSE:BP) and Royal Dutch Shell Plc (NYSE:XOM), are moving to curb oil and zero-out emissions,. Exxon, by its own admission courtesy of internal documents, plans to invest $210 billion in fossil fuels that will see its yearly emissions increase 17% by 2025.
A decade ago, Exxon entered the algae biofuels race with a bang, teaming up with unicorn biotech startup Synthetic Genomics Inc., and outlining plans to invest more than $600M in the clean energy project. Exxon had lofty ambitions to produce algae biofuel within a decade but later pushed back the ETA in 2018 by saying it planned to produce 10,000 barrels of algae biofuels per day by 2025.
Exxon now stands out as the only oil and gas supermajor that is still pursuing algae biofuels in a big way, with the company claiming to have invested ~$250M in biofuels research over the past decade.
However, it's going to take some impressive feats of financial engineering for Exxon's algae biofuels to compete in this era of $30-$40/bbl oil or for the company to convince its critics that this is not just another attempt at greenwashing.
Chevron is not much better off. The company has launched a Future Energy Fund but set aside just $100m to invest in 'breakthrough technologies that will lower carbon emissions.'
Moment of truth
But Big Oil's big moment of truth has finally arrived.
Morgan Stanley recently put it bluntly, saying, "it's time for Exxon and Chevron to make some big bets on renewable energy," noting that M&A-led diversification into the power sector could help them navigate through the energy transition. Further, "renewable businesses offer attractive free cash flow yields, supporting strong accretion (in some cases, much better than acquiring E&Ps) and improved pro forma dividend coverage," the firm says.
Investors can only hope that the two have been taking notes.
By Alex Kimani for Oilprice.com
