3 Energy Stock Picks

VIDEO: As the nights draw in, Killik & Co's Rachel Winter looks at three energy companies that could heat up your portfolio

Holly Black 19 November, 2019 | 10:37AM
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Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me is Rachel Winter. She is Investment Director at Killik & Co. Hello.

Rachel Winter: Hello. Good afternoon.

Black: So, we've got a bit of an energy theme for our stock picks today. Where would you like to start?

Winter: We do. We've got three energy companies. So, we're really, really starting to look more and more at renewable power. So, it's something that individual consumers want. I think governments want it. So, for example, in the UK we are now committing to have a zero-carbon economy by the year 2050. I think corporates want it as well, because their shareholders want it. So, with all those things combined, I think there's going to be a huge move towards renewable power over the next couple of decades.

Black: I think you're just looking at the sector because the clocks have changed, and the nights are getting dark…

Winter: I just want some more light in my life.

Black: So, what's our first stock?

Winter: First one is SSE, so it's Scottish and Southern Energy. And this is really a company that's been through quite a transition over just the last few months. So, I'll be honest and say, over the last couple of years, we have been trying quite hard to get clients out of this company. That was because they had very little exposure to renewable power and there was the threat of labor trying to nationalize UK energy networks. And there was also a big look by the regulator at the charges that these retail power companies were charging their consumers. A lot of those threats have now gone away. So, we now think it's much less likely that labor will get in and be able to nationalize these power networks. SSE has sold off its UK retail business. So, it's got less exposure there. And they've also made a huge step and a huge investment in their renewable power business. So, they've now become the biggest generator of renewable electricity in the U.K. And they actually did surprisingly well in an offshore wind auction in September. So, that's going to allow them to more than quadruple their exposure to offshore wind. So, all those things combined we think SSE is now starting to look like a very different and a very attractive company.

Black: Okay. And we have another wind farm company to talk about as well, don't we?

Winter: We do. We've got another one called Orsted. So, this is actually the global leader in offshore wind. So, they actually built the first ever offshore wind farm all the way back in 1991. And they've also been responsible for the world's biggest offshore wind farm, which is just off the coast of Yorkshire. They're based in Denmark. But that if you take out China, they actually generate 30% of global offshore wind. So, they really are one of the leaders. And looking at the market for offshore winds, we think it's going to grow by about 15% per year for the next couple of decades. So, there really is a huge growth opportunity here for Orsted.

Black: Is that growth from quite a low base? Presumably, it's not that big at the moment.

Winter: Yeah, it's obviously fairly low in compared to the base for fossil fuels, but they are still a relatively large company, and just getting bigger all the time. And I think if we had our choice at the moment, we'd want all of our power to come from renewables. So, I really do think the future opportunity is massive.

Black: Okay. And our final stock?

Winter: Final one is actually a lesser known company. It's called Engie. Based in France. And this is actually the world's largest integrated utility company. They're worth about €37 billion at the moment. And they've recently announced a huge investment of over €11 billion into their renewables business. So, we like the fact they're moving more towards renewables. But we also like – they have kind of an energy consultancy. So, they work a lot with big corporates and they really try and help them to bring their energy consumption down. So, using things like smart meters to work out how and when they're using power, and then that allows Engie to develop new methods of power generation that will suit that particular corporation. So, they're really moving towards developing tailored energy solutions for corporations.

Black: It really does seem that companies are suddenly starting to take renewables seriously. Why is that?

Winter: I think, it's pressure from shareholders. I think they know that a lot of investors now are really wanting to invest firstly in renewable power, but also in companies that are operating in an environmentally sustainable way. So, I think, corporations know that if they can show they are operating in an environmentally friendly way, more people would want to invest in them, and that will push the share price up.

Black: Well, thank you so much for your time.

Winter: You're welcome.

Black: And thanks for joining us.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor, Morningstar.co.uk


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