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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Short Sellers Circling The Clean Energy Sector

  • Renewable energy stocks have badly underperformed their fossil fuel peers and the broader market in the current year.
  • Sunrun and Sunnova Energy are among Hazeltree's list of most shorted small-cap stocks.
  • Interest rates are a key area of sensitivity for the renewable energy sector because clean energy projects require developers to borrow lots of capital up front to build projects.

Three weeks ago, shares of Israel-based solar inverter manufacturer, SolarEdge Technologies Inc. (NASDAQ:SEDG) crashed spectacularly after the company issued weak guidance for its upcoming third quarter earnings report. SolarEdge said Q3 revenues, gross margin and operating income will all come in below the low end of the company’s prior guidance, citing "substantial unexpected cancellations and pushouts of existing backlog from our European distributors," due to higher than expected inventory in the channels as well as slower than expected installation rates.

A similar playbook played out a week ago after shares of iconic EV manufacturer Tesla Inc. (NASDAQ: TSLA) were badly hammered following the company’s less-than-stellar Q3 Report. The report revealed that Tesla not only missed Wall Street’s earnings estimates but its margins have continued to shrink at an alarming clip, suggesting the EV maker is facing stiff competition.

And now the shorts can smell blood in the water, with dozens of solar and electric vehicle stocks becoming their targets. In the solar sector, Sunrun Inc. (NASDAQ:RUN) and Sunnova Energy International (NYSE:NOVA) are among the top 10 most-crowded securities in treasury and liquidity management platform Hazeltree’s list of the most shorted small-cap stocks while Tesla, alongside luxury EV startups Rivian Automotive (NASDAQ:RIVN) and Lucid Group (NASDAQ:LCID), are among the top 10 most shorted mid- and large-cap stocks in October. Among these names, Sunnova and Lucid Motors have the highest short interest at 30.1% and 25.1%, respectively. For some perspective, the median short-interest among S&P 500 stocks usually falls in the 2.1% to 2.4% range, with small-and mid-cap stocks among the most shorted corners of the market at 2.9% and 3.6% short interest, respectively. Related: Russia Won’t Abandon Grand LNG Plans

So, what’s ailing these clean energy industries? Renewable energy stocks have badly underperformed their fossil fuel peers and the broader market in the current year, with the selloff accelerating in recent months thanks to higher interest rates and a hawkish Fed outweighing considerable backing by the Biden administration. 

There’s a dark cloud hanging over green stocks,” Martin Frandsen, portfolio manager at Principal Asset Management, has told the Financial Times. 

Interest rates are a key area of sensitivity for the renewable energy sector because clean energy projects require developers to borrow lots of capital up front to build projects. Further, the cost of electricity generated from renewable energy tends to be impacted much more by rising interest rates compared to electricity generated from fossil fuels. 

In fact, analysis from the International Energy Agency in 2020 found that a 5% rise in interest rates increases the levelized cost of electricity from wind and solar by a third but only marginally for natural gas plants. Although the U.S. central bank left interest rates unchanged at its latest meeting a week ago, it signaled a willingness to raise rates again if progress on inflation stalls.

As for Tesla and its EV brethren, the market is growing increasingly concerned that the halcyon days of explosive growth for the sector might be coming to an end. Experts say that the people who have so far held off buying an electric vehicle are likely price-sensitive shoppers, leery of making major adjustments to accommodate an entirely new technology including charging anxieties and home equipment installations.

EV adoption is looking to move into its next phase — requiring much more mass-market interest — and this larger cohort has to be sold on EVs since they aren’t as enthusiastic and willing as early adopters,” Jessica Caldwell, director of insights at Edmund, has said.

Exxon Mobil Among Most Shorted Large-Cap Stocks

Interestingly, Exxon Mobil is the only oil and gas stock that has emerged in the Top 10 most shorted large-caps in October. Shares of the United States' largest company as well as those of its close peer, Chevron, have come under pressure after the two reported weak Q3 results.

Exxon Mobil reported Q3 Non-GAAP EPS of $2.27, $0.09 lower than the Wall Street consensus while Q3 revenue clocked in at $90.76B (-19.0% Y/Y), missing by $1.81B. Exxon reported that cash flow from operations was $16.0 billion, up $6.6 billion versus the second quarter. Capital and exploration expenditures were $6.0 billion in the third quarter, in-line with the company’s expectations and bringing year-to-date 2023 expenditures to $18.6 billion. For the full-year, Exxon said it expects capital and exploration expenditures to be at the top end of the guidance of $23 billion to $25 billion as the company continues to pursue value accretive opportunities.

Further, Wall Street remains skeptical about Exxon's claims about its $60B acquisition of fellow shale operator Pioneer Natural Resources (NYSE:PXD), including its ability to double the amount of oil and gas it can recover from shale wells. Pioneer is currently the second-largest producer in the Permian Basin by oil production, and an entity formed by the two merged companies would make Exxon the largest producer in the Permian with production potential of ~1.2 million boe/day, overtaking current leader Occidental Petroleum (NYSE:OXY).

Meanwhile, Exxon’s peer, Chevron, has not fared any better in the current earnings season. The company reported  Q3 Non-GAAP EPS of $3.05, missing by $0.64 while revenue of $54.08B (-18.8% Y/Y) beat by $1.08B. Worldwide net oil-equivalent production was up 4% from the year-ago quarter primarily due to the acquisition of PDC Energy, Inc. Meanwhile, capex in the third quarter of 2023 was up over 50% from the year-ago period. The company is facing a litany of woes across the globe, including fracking problems that delayed production in the Permian Basin, and overseas refining operations that garnered only around half the profit analysts had expected.

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Chevron’s $45B joint venture project that aims to boost production at its massive Kazakhstan oil field is suffering from additional delays, cost increases and a reduction in projected free cash flow. The company now sees costs at the Tengiz project increasing by 3%-5%, which CEO Mike Wirth has attributed to the complexities of the company's efforts to refurbish Soviet-era power infrastructure for the giant field.  This means the company will have to pay an extra ~$1B for its share of the JV's capex, which in turn will take a 20% cut  to operational cash flow in the coming year.

By Alex Kimani for Oilprice.com

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Leave a comment
  • M G on November 10 2023 said:
    DE-licious!
  • fredric longabard on November 10 2023 said:
    And to think a few years we had reliable and cheap energy. What happened?
  • fredric longabard on November 10 2023 said:
    And to think a few years AGO we had reliable and cheap energy. What happened?

Leave a comment




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