Napoleon Bonaparte once said that his army marched on its stomach – by which he meant, of course, that no amount of military genius would help him if he let his troops outrun their supply wagons. Food and water are as important as guns and ammunition to an army.
By analogy, our economy marches on oil. Factories and power plants, cars and trucks, computers and smartphones – none of them run by themselves, they all need a source of energy. Which puts energy companies – and the investors who buy their stocks – in a potentially enviable position. They occupy a “necessary niche,” one that customers will always in good times or bad, booms or busts.
International banking firm Credit Suisse has released a year-end report on their favorite energy stocks, those that the firm’s analysts believe have potential to lead their sector in growth for 2020. Hindsight being perfect, we know the actual results until next December – but we can analyze the companies and their market positions, and make intelligent estimates of near-term performance.
This is where TipRanks, a company that tracks and measures the performance of Wall Street’s financial analysts, offers an invaluable service. In addition to tracking the analysts, TipRanks also collects and collates data on more than 6,400 publicly traded stocks. A variety of search and filter tools, from the classic Stock Screener tool are available to make it easy to use the raw data.
We’ve gotten the process started for you, by pulling up the information on three of Credit Suisse’s top 2020 energy plays.
Sunrun, Inc. (RUN)
Sustainability is all the rage in energy, as environmentalists, activists, investors, and just plain old concerned citizens want to ensure a cleaner future. New tech has made it possible to extract fossil fuels from previously marginal reserves, and scrubbers exist to keep pollutants from the air – but drilling and burning still do environmental damage. Solar energy is one option as providers and customers consider switching, and here, too, new technology has improved the available choices. Sunrun, a company providing residential solar options, is clear example.
Sunrun offers customers three choices for adding solar power generation to their homes: a lease model, in which the company installs and owns photoelectric panels, and the customer uses the power generated to reduce electricity bills; a model, in which solar panels charge batteries which are then used to reduce grid power use during peak rate hours – or replace it during an outage; and a purchase system, in which the customer buys solar power generation technology, has it installed, and enjoys the benefits.
The company has leveraged demand for its products to produce quarterly profits since Q2 2019, and build up a $1.63 billion market cap. Sunrun’s Q3 earnings, reported in November, missed the forecasts but showed strong year-over-year gains. EPS was up to 23 cents, from a 2-cent loss the year before, while revenues gained 5% year-over-year to hit $215.5 million.
Credit Suisse’s Michael Weinstein makes RUN stock a ‘top pick,’ writing, “We expect them to grow deployments >15%/yr… RUN continues to retain the highest market share (16.2%) with robust project profitability ($1/W NPV), cash generation ~$100M annually, and a $50M stock buyback program over the next three years.”
Weinstein puts a $24 price target on RUN, suggesting an impressive upside potential of 73% for the stock. (To watch Weinstein’s track record, click here)
Sunrun has a Strong Buy rating from the analyst consensus, with 4 Wall Street reviewers giving the stock a Buy rating during Q4 2019. The stock sells for just $13.81, so even the low-ball price target of $18 would represent significant gains for investors. The average price target, $22, implies a strong upside of 58%. (See Sunrun stock analysis at TipRanks)
Diamondback Energy (FANG)
Texas is the epicenter of the American oil boom, and Diamondback is a mid-sized player in the rich Permian Basin in the western part of the states. The company engages in oil exploration and drilling operations, and produces more than 130,000 barrels of oil equivalent per day. Diamondback, while not an industry giant, is playing an important part in the Texan fracking industry that has in recent years made the US the world’s largest oil producer.
Low prices, however, can hurt even the strongest companies. The low-price regime that dominated 2019’s oil market held FANG to a mere 1% gain for the year. The Q3 numbers, reported in November, showed the result – earnings were down, both year-over-year and against the estimates, even though revenues were up. Increased production did not quite make up for the lower product prices. Put into numbers, the EPS was still strong at $1.47, and revenues reached $975 million.
FANG paid out a dividend of 18.75 cents per share, for an annualized payout of 75 cents and a decidedly modest yield of 0.81%. That yield is roughly half the sector average – but it is reliable, as FANG has been maintaining or raising the dividend for the last two years, and with a payout ratio of just 12%, it is easily sustainable.
Company management recently revised down their 2020 production guidance, putting it into line with 2019’s actual numbers – and the company underperformed the sector last year. Credit Suisse analyst Betty Jiang looked at management’s action and sees in it reason to believe that FANG will improve performance in the coming year. She writes, “While management has made a concerted effort (with much improved disclosure) to explain the factors that drove the downward revision, we continue to field questions on the impact of co-development on 2020 well productivity and perhaps more importantly, whether this is truly a one-time reset (our answer is “yes”)… Based on our work, we believe FANG’s revised 2020 production is achievable while they will likely continue to be successful in driving down costs.”
Jiang puts a $116 price target on FANG shares, showing her confidence in a 25% growth potential. (To watch Jiang’s track record, click here)
The analyst consensus on FANG is not unanimous, but almost. The Strong Buy consensus rating is supported by 15 Buys against a single Hold – Wall Street is sanguine about this stock. Shares sell for $91.67, and the average price target of $122.27 indicates an upside of 31%. (See Diamondback stock analysis at TipRanks)
Baker Hughes Company (BKR)
With Baker Hughes, we move power sources (solar or crude oil) to support services. BKR is an oilfield services company, offering the specialized tech and engineering knowledge and tools that the oil and gas industry needs. Baker Hughes’ services allow exploration companies to evaluate area geology, complete wells, and support drilling operations. The company offers support in the upstream, midstream, and downstream segments of the industry.
Two key numbers from 2018 show both the scale and headwinds of the oil industry. Baker Hughes brought in over $22.8 billion in revenues that year – but showed a net income of just $195 million. The oil industry may have a captive audience for its products, and generate large amounts of cash, but high overhead and variable market prices cut deeply into margins.
Last fall, BKR entered into a partnership with C3.ai and Microsoft, a three-way joint venture to develop ai cloud-based AI software solutions for the oil industry. The three companies are leaders in their sectors, and bring together high-end expertise in oilfield support, cloud computing, and AI software. Baker Hughes CEO Lorenzo Simonelli described the venture as “a singular offering that can accelerate digital transformation across the sector, energy businesses can now draw on the power of Microsoft’s cloud, C3.ai’s leading AI capabilities, and Baker Hughes’s expertise in the energy industry.”
Just two weeks before announcing the partnership, BKR had reported strong Q3 earnings. Revenues and EPS both gained year-over-year, with the top line hitting $5.88 billion and EPS coming in at 21 cents. During the quarter BKR also improved its free cash flow, generating an FCF of $161 million.
Jacob Lundberg, reviewing the stock for Credit Suisse, took a bullish stance, writing, “We met with C3.ai’s Tom Siebel at the company’s headquarters in Redwood City, CA, to learn more about C3’s technology and its partnership with BKR. We walked away from the meetings more bullish on the prospects for BKR to drive a meaningful and sustainable competitive advantage… stemming from its early adoption of and exclusive access to C3’s technology… the directional impact is clearly positive.”
Lundberg put a $28 price target on BKR, backing up a Buy rating. His target suggests a 9% upside to BKR stock. (To watch Lundberg’s track record, click here)
BKR is another stock with a unanimous Strong Buy consensus rating, this one backed by 9 recent Buy reviews. The $29 average price target suggests an upside premium of 14% from the $25.43 current share price. (See Baker Hughes stock analysis at TipRanks)