The often static energy sector has investors crackling with anticipation over spikes in energy consumption over artificial intelligence frenzy and the prospect of new investment opportunities as renewable energies gain leverage.
At the beginning of 2024, Duke Energy, The Southern Company and NextEra Energy, trailed behind the S&P 500 but a surge in the last two months has restored investors’ faith.
NextEra Energy boasts the biggest gain in both the energy sector and its competitors, with the company’s stock price up by 36% since the beginning of the year, closing at $82.76 on Friday. The Southern Company’s stock price rose by 28% and closed the day at $89.70. While Duke Energy climbed by 20%, wrapping up at $116.37 on Friday.
Analysts credit the recent growth of energy shares to several factors.
Utilities are characterized by being sensitive to interest rates and often see the benefits from cuts in interest rates and steady but solid dividends will attract more investors as rates decline. While the focus has been on tech stocks, energy has proven to be the backbone of all artificial intelligence operations by providing the power that sustains all of their data centers. In addition, the embrace of renewable energies have investors giddy over the often forsaken sector.
“Energy is pretty much disliked at the moment and has been for the past year and a half despite the fact that the companies are flush with cash (they mint money at $70 oil and breakeven at $35) and are returning to shareholders via buybacks and dividend increases,” said Stephanie Link, Chief Investment Strategist at Hightower Advisors.
A Trump presidency could encourage reliability on fossil fuel energies.
But investors should be wary of relying solely on fossil fuels.
“Utilities have responded to both the economics and the policy requirements by increasing their investment in renewable energy,” said Travis Miller, energy and utilities strategist at Morningstar.
The upcoming presidential election will also have an impact on the direction of energy.
“Not deregulating but sort of just removing government regulation and red tape and allowing oil and gas producers to drill more would probably have a positive impact for sure,” said Nicholas Cacchione, founder and analyst at Oil & Gas Financial Analytics.
On the other hand, a Harris presidency would follow closely Joe Biden’s efforts to switch to low emission energies.
Electric vehicle companies have been successful in generating free cash flow for their shareholders, which will continue to attract investors.
“The only thing that stands in the way is that the industry has changed a lot in the last eight years,” Cacchione said.
The Infrastructure Investment and Jobs Act and the Inflation Reduction Act, both passed by Congress during Biden’s presidency encourages a switch to greener energies, as an effort to grapple with the looming climate crisis.
Osmany Aparicio, 31, an operations manager at a commercial refrigeration distribution company in South Carolina bought shares in Nextracker and Noble Corporation in the past year and plans to keep both.
“Nextracker is in the renewable space, green energy, they supply technology to the solar panel business. So that’s my main interest in that one, as to why I believe it’s going to have a very strong growth going forward,” he said.
And although he is skittish about Noble Corp, he is going to retain as he believes the drilling of crude oil is not going out of style anytime soon.
Most analysts have hold recommendations for Duke Energy and The Southern Company. As for NextEra Energy, the consensus is to buy.
The International Energy Agency estimates that demand for energy across the globe will grow by 3.4% each year through 2026.
“Electricity consumption from data centers, artificial intelligence (AI) and the cryptocurrency sector could double by 2026,” according to the IEA. “The demand is roughly equivalent to the electricity consumption of Japan.”
With worries about the potential impact on climate change, the IEA expects ecologically-friendly energy sources to supply almost half of the world’s energy consumption.
Whether energy stays on the drilling path or takes the more sustainable route, it is not going anywhere.
“Market is broadening out – I expect it to continue as rates come down. Energy is ripe for a mean reversion in the medium term. Lower rates also help the consumer – along with lower inflation and commodity costs as well as solid labor market and wages,” said Link.