Big oil companies know that renewable energy is ultimately the future of the industry. The International Energy Agency projects that renewable energy generation will more than quadruple by 2040 and given the history of its projects, that's probably a very conservative estimate. Meanwhile, electric vehicles are disrupting the automotive space, and with dozens of new models coming online in the next year, we should see a sustained shift to electric vehicles over the next two decades.
Companies aren't able to fight these macro trends, but they can adapt their businesses to stay relevant. And that means some oil companies are slowly becoming renewable energy companies. The three oil stocks becoming renewable energy stocks that we're watching are Total (TTE 0.32%), Valero Energy (VLO -0.32%), and Clean Energy Fuels (CLNE 2.15%).
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Big oil to big renewables
Travis Hoium (Total): One of the first big oil companies to take renewable energy seriously was Total. The European energy giant bought a majority stake in SunPower (SPWR 7.34%) and acquired battery company Saft, which is now building some of the biggest energy storage projects in the world.
Total's move into renewable energy makes the company look more like a utility than a traditional oil and gas company. In 2020, the company expects to grow gross global renewable energy capacity to 6 gigawatts (GW) from about 3 GW in 2019. That's enough to power 1.14 million U.S. homes.
The role Total is taking in these projects varies, but it's usually a developer and owner of the renewable energy assets long term. For example, in Qatar it is a minority owner of the development and operations company building an 800 megawatt (MW) solar project and will own 49% of the asset when completed.
In batteries, Total's Saft business is taking a diversified approach to the battery business. The company is developing the largest energy storage facility in France, but it's also providing batteries for electric vehicles, military vehicles, medical applications, and even oil and gas operations. The company was acquired for $1.1 billion in 2016, and management said it generated about $100 million in cash flow from operations in 2019. This is already a big business and could be a big cash generator long term.
Long term, Total aims to have low carbon electricity operations account for 15% to 20% of its sales mix by 2040. That may not seem like a lot for an energy company, but remember that big oil companies are maneuvering a massive business slowly away from fossil fuels to other forms of energy. And Total is moving faster than most of its large rivals, which should serve it well as renewable energy becomes a larger portion of the world's energy mix.
Moving into biofuel
Howard Smith (Valero Energy): Valero Energy, one of the world's largest independent oil refiners, isn't normally thought of as a renewable energy company. As a manufacturer and seller of transportation fuels, the company operates 15 petroleum refineries and 14 ethanol plants.
But its stake in the largest renewable diesel plant in North America has the refiner moving into the fast-growing renewable energy sector. Valero operates Diamond Green Diesel, a renewable diesel joint venture with Darling Ingredients (DAR 0.42%), in Louisiana. Though still a small portion of its business relative to petroleum, the renewable diesel segment grew revenue 80% in 2019.
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Diamond Green Diesel is a sustainable biofuel facility, which uses carbon-friendly raw materials, such as rendered animal fats and used cooking oil from restaurants, supplied by Darling Ingredients. Unlike soybean-based biodiesel, renewable diesel can be transported through pipeline infrastructure. It is fully compatible with existing engines and has a lower carbon intensity than biodiesel. After a planned expansion in 2021, the Louisiana facility will more than double its current production capacity of 18,000 barrels-per-day.
Production at the existing facility has already been increasing as the average quarterly revenue for the time periods below shows.
| Metric | 1H20 | FY19 | FY18 |
|---|---|---|---|
| Revenue (in millions) | $327.5 | $304.25 | $169.5 |
Table by the author. Data source: Valero financial filings. FY = Full Year; 1H = First Half
As of its second-quarter earnings release on July 30, 2020, Valero said it is planning on spending $2.1 billion in capital investments in 2020. Approximately $252 million is planned for expanding its renewables business, the company said.
Valero is planning to continue growing its renewable diesel capacity beyond the 2021 expansion. It is in the midst of an engineering and cost review for a new renewable diesel plant at its current Port Arthur, Texas refining facility. If approved, the new facility will give Diamond Green an annual capacity of 1.1 billion gallons per year by around 2025, compared to the expected 675 million gallons annual capacity once the Louisiana facility expansion is completed.
The under-the-radar renewables leader
Jason Hall (Clean Energy Fuels): Clean Energy Fuels isn't an oil stock per se, but it certainly meets the definition of a fossil fuels company working to transition to renewables.
Clean Energy has moved a bigger share of its business to renewables than any other energy company I know of, and has done so quickly. Clean Energy's core business is selling natural gas to transportation customers, primarily fleet operators, like waste removal, public transit, shipping and logistics, and construction. Natural gas has a much cleaner emissions profile than diesel, and with more companies, investors, and municipalities prioritizing environmental measures, Clean Energy's fuel volume sales have grown quickly. In 2014, the company sold 265 million gasoline gallon equivalents of natural gas; in 2019 the number surged past 400 million gallons.
Here's something surprising: Almost all of its volume growth is from renewable fuel. In 2014, Clean Energy sold 20 million gallons of "Redeem," its renewable natural gas brand. Last year, it delivered 143.3 million gallons, growing the brand from single digits to more than one-third of sales in five years.
After years of struggling with debt and high operating expenses, Clean Energy is now lean, debt free, and cash-flow positive, generating almost $50 million in operating cash in the first half of 2020. Biofuels like renewable natural gas will remain a big part of commercial transport for decades. Clean Energy Fuels is an overlooked leader in the space.
Make a turn to renewable energy
Oil companies are aware that their businesses are being disrupted by renewable energy long term. Some are making a big pivot (like Total) to a new business model, while others (Valero Energy and Clean Energy Fuels) are leveraging what they do best to move into renewable fuels. With renewables growing as a percentage of our energy consumption, these are the three stocks we think are well set up to transition away from oil in the future.
