Image source: Kool Cats Photography/Flickr.
Maybe everything is bigger in Texas after all.
The Lone Star State leads the nation in natural gas production (more than doubling the output of the runner-up), oil production (nearly tripling the output of the runner-up), and total electricity generation (nearly doubling the runner-up). While having more land area than any other state in the Lower 48 certainly helps, Texas lucked into bountiful fossil fuel reserves that were formed millions of years before borders were drawn. But the gifts provided by geography don't end there.
Texas also leads the nation in installed capacity and electricity generation from wind power (again, the runner-up is not even close). It might come as a surprise, especially given the state's abundant shale gas reserves, but wind power was the fastest-growing energy source in Texas from 2009 to 2014; its share of electricity generation swelled 70% in the period.
If you think you're late to the party, don't worry: companies have no plans to curtail wind energy investments in Texas anytime soon. That means investors could be on the receiving end of market-beating growth for years to come -- if they know where to look.
Which stocks powered Texas to No. 1 -- and which will keep it there?
Texas had over 12,000 megawatts of installed wind capacity in 2014 that was responsible for 10.6% of the state's total electricity generation, up from just 6.2% in 2009. What's better than that? Consider that total electricity generation for the state grew 11.3% in the same period, despite the fact that all other power sources saw their share of generation decline. In other words, wind has become the most attractive new source of electricity for Texas.
Texas wind is so plentiful that even a few unconventional players have joined in the action. For instance, Valero Energy owns a 50 MW wind farm that powers its McKee oil refinery, while BP has helped to build several hundred megawatts of capacity in the state.
Of course, oil refiners aren't driving the industry forward. What stocks have catalyzed the ongoing trend depicted above -- and how can investors jump on the bandwagon?
At the end of 2014 three companies accounted for over 42% of the state's installed wind capacity. That will change once privately held Tri Global Energy, led by Texas billionaire John Billingsley, brings online its 1,240 MW of capacity currently under construction. While investors will want to keep an eye on the company, you should focus on the three listed below:
Source: EIA, company websites and presentations.
German energy company E.ON owns several of the largest wind farms in the state (and world, for that matter), but American investors cannot acquire shares without journeying to foreign stock exchanges or the OTC.
Meanwhile, NRG Energy and NRG Yield own respectable wind capacity in Texas, although the latter acquired a 947 MW wind farm in California in June 2014 that dwarfs the combined output of the Texas assets. Actually, as the world's largest wind farm, it dwarfs all others.
While the total price tag came in near $2.5 billion, the project is expected to add $220 million in annual EBITDA by 2016. To put that in perspective, NRG Yield has guided for just $420 million in EBITDA for all of 2014. Since a yieldco's primary function is to grow cash flow and use it to acquire more cash-generating assets, investors can expect the acquisition to spur future expansion. Will that be in wind? And, if so, will it be in Texas?
Of course, no discussion about American wind energy is complete without mentioning NextEra Energy, which remains the best opportunity for investors to tap into Texas' wind leadership. The company owns 10,351 MW of installed wind capacity -- making it the nation's largest producer of wind power -- with over 27% residing in Texas (including assets belonging to its subsidiaries). The company's presence in the Lone Star State grew by another 250 MW in December 2014 when the Palo Duro farm came online.
But it gets even better, as the far right of this chart demonstrates.
From 2009 to 2014, the amount of electricity generated from wind farms in Texas grew nearly 100%, while new installations grew by less than 50%. How is that possible? No, it's not getting windier. Instead, over 3,500 miles of new transmission lines have been built to connect wind farms in the northwest part of the state to population centers in the southeast, which has resulted in less power generation being wasted and higher utilization rates of wind assets.
That's great news for investors. Why? Wind farm owners such as NRG Energy and NextEra Energy generate tax credits based on power generated. The addition of far-reaching transmission lines in Texas has allowed existing assets to be more productive and, therefore, more profitable -- without any change in behavior.
What does it mean for investors?
Texas has been an energy paradise for natural gas and petroleum companies, but we often fail to recognize that the same is true for wind farm owners. Billions of dollars in investments in recent years have allowed the state to generate over 10% of its total electricity from renewable wind power. Future investments -- and efficiency-boosting transmission lines -- promise to keep the momentum going for residents and investors.
