Oil stocks have grown in popularity among some investors as crude prices have crashed and taken the industry's market caps down with them. Much of the investor interest is based on the theory that what goes down must go back up. While it's tempting to speculate on an oil price rebound, the sector also has major structural issues to address, which could drag on returns over the long-term.
Among oil's many problems is that renewable energy will be a major disruptive force in the broader energy sector in the coming decades. Because of that, long-term investors would be better served to consider buying a renewable energy company instead of one focused on oil. Three of our favorite options are Clearway Energy (CWEN.A) (CWEN 1.79%), Brookfield Renewable Partners (BEP 0.32%), and First Solar (FSLR 5.04%).
The balance sheet renewable companies envy
Travis Hoium (First Solar): The renewable energy industry is in a strange position today: It's experiencing immense short-term disruption while seeing its long-term opportunity grow. Right now, we're seeing hundreds of thousands of job losses across renewable energy, and dozens of companies are likely to go bankrupt as construction on projects stops around the world. But long term, oil and natural gas companies are in even worse financial positions and exposing their fundamental risk. That could lead utilities and regulators to shift toward renewable energy even faster now, especially now that fossil fuels are the more expensive source of electricity. Wind and solar projects are already winning competitive bids against fossil fuel plants on a regular basis.
Add all of this up and the opportunity for renewable energy products and service providers is growing -- all they have to do is get through the current financial crisis. And the company built to survive almost anything is First Solar. It had a net cash balance of $1.8 billion at the end of 2019 and a bookings backlog of 12,400 megawatts as of February 20.
First Solar's financial strength will allow it to not only survive this crisis but thrive after it's over. The company could choose to acquire competitors, invest in R&D or manufacturing capacity, or just return excess cash to shareholders. No matter which way it goes, this should be a renewable energy winner over the long term.
Growth and income
John Bromels (Brookfield Renewable Partners): I'm so used to seeing oil and gas stocks with negative five-year returns that it's refreshing to look at an energy company that's notched a 45.5% return over the last five years, and is poised to continue that trend. Brookfield Renewable Partners, one of the family of master limited partnerships (MLPs) managed by the capable team at Brookfield Asset Management (BAM 5.52%), is just such a company.
Brookfield Renewable's strategy is simple: Invest in high-quality renewable energy assets, then sell the power they generate to utilities via stable, long-term contracts. The vast majority of Brookfield's revenue and cash flow comes from hydroelectric dams in North and South America. However, the company is acquiring more and more wind and solar assets -- for example, it recently agreed to buy the 38% of wind and solar specialist TerraForm Power (TERP) that it doesn't already own.
In 2019, Brookfield Renewable generated 52.6 gigawatt-hours of electricity from its assets, and churned out an impressive $761 million in funds from operations, 13% more than in 2018. Brookfield is anticipating more double-digit percentage growth, with a goal of growing earnings per unit (MLP-speak for EPS) by 12% to 15% over the long term. That's certainly something no oil company is predicting right now. And Brookfield's dividend, which currently yields 4.5%, is the icing on the cake.
High-powered renewable energy growth
Matt DiLallo (Clearway Energy): Instead of trying to figure out a way to profit from the short-term fluctuations in the oil market, I'm more focused on the long-term growth potential I see ahead for renewable energy. One way I'm doing that is by building a basket of clean energy companies that I believe have a bright future. The most recent addition to that section of my portfolio was Clearway Energy.
Two factors drove my decision to buy Clearway. First, it pays an attractive dividend that currently yields around 4.3% after a recent 5% boost. And that payout only consumes about 50% of the company's cash flow.
The other thing I like about Clearway is its growth profile. It currently expects to generate $310 million in cash available for dividends this year. That would be 20% higher than last year, powered by recent acquisitions and expansion projects. Meanwhile, Clearway recently signed a needle-moving deal to invest $241 million across several wind projects. These new additions should generate an estimated $23 million of annual cash flow.
Clearway will still have plenty of financial flexibility after completing that deal, which should allow it to continue investing in expansion opportunities as they arise. That should enable it to keep growing its payout. Those dual growth drivers are why I think it's a better investment than most oil stocks these days.