The big oil companies are still generating plenty of cash for their shareholders. But for how much longer? Many investors in the sector are moving to renewable energy stocks, but it’s not easy choosing the best ones to buy.
Billionaire investor Warren Buffett once pointed out that early motorcar pioneers were not the ones who made all the profits. He famously suggested that investors at the time would have done better if they’d shorted horses. I’m not sure I’d have the courage to go short on BP or Shell, mind.
Wind power
I have a couple of renewable energy stocks on my watchlist that I like the look of. One is Greencoat UK Wind. The company operates 43 wind farms, onshore and offshore, with a combined generation capacity of more than 1.4 gigawatts. So it’s not a risky start-up still looking for its first profits.
On the contrary, Greencoat is nicely profitable, and delivered a 5% dividend last year. First-half results are due on 28 July, and I suspect they might give the share price a boost.
Fuel cells
I also like the look of fuel-cell technology firm ITM Power. ITM, though, is not yet profitable. But it does have a steadily growing backlog of orders building up, having risen by 160% year-on-year. Full-year results are due on 8 August, so we’ll get some view of how the bottom line is progressing.
In addition to any individual risks these companies might face, there’s one large elephant in the room. It’s those two existing energy firms, BP and Shell. BP, for example, is aiming to generate up to 20 gigawatts of clean energy by 2025.
With their sheer financial muscle, I reckon there’s a good chance the big operators could easily eclipse some of today’s independent clean energy companies.
Picks and shovels
It brings me to the idea of so-called picks and shovels investments, named after the great gold rush of 1848. Whoever found the motherload, and whoever went bust trying, it was those who provided the tools and the infrastructure that made the money.
In the UK energy market, that has to be National Grid (LSE: NG). The energy network operator has just announced plans to invest £54bn in improving the country’s wind power network by 2030.
The biggest chunk of that would go to upgrading offshore network infrastructure. Wind power already contributes around a quarter of the UK’s electricity. So this seems like good news for investors in wind power specifically. But anything that improves the overall distribution network would surely cement National Grid’s big advantage in the energy distribution market.
Not without risk
There has been some pushback from people who don’t want their lives blighted by more pylons. And the big planned costs will affect National Grid’s bottom line over the next few years.
National Grid also has significant capital tied up in the gas network. And I can’t help wondering how soon all that might become obsolete. Investors don’t seem to like the uncertainty, and the share price has dipped a bit over the past couple of months.
But I do think National Grid could turn out to be a top long-term buy for investors wanting to get in on the renewable energy boom.