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2024 in Review: Energy
00:31:02
It’s not talked about too much, but energy stocks have sneakily been some of the best performers in the S&P this year.
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For me, I think there's really three buckets you can look at to invest in nuclear power. It's folks who own and operate existing nuclear sites. So think about these as the utility companies we talked about earlier. You can have folks who are playing the supply chain. So whether that's, you know, folks like BWX technology who make fuel components, that sort of thing, or the uranium producers, which is an interesting segment of the market where there's potential kind of crunch there, or you can look at folks who are developing reactors. And if it's me, I'm really looking in those, those first two buckets. Folks that have operating businesses today that have been doing this for quite a long time.
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I'm Mary Long and that's Nick Siple, an analyst for our Full Canada Service and an energy industry watcher. As we close out the year, we're sitting down with a number of analysts to look back on key industries to review what's happened and what might be coming in 2025. To kick us off, my colleague Ricky Mulvey caught up with Nick to look at the energy sector. They talk about AI's insatiable need for power, how the US has gotten better at getting oil out of the growing interest in small nuclear reactors, why investors have soured on renewable stocks and some other stories that Nick's keeping an eye on in the year to come.
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As we wrap up the year, we're looking back on some industries on the show. And for energy, one of the industries that has dominated the S and P, top performing stocks of the year, even though you may not have heard about it as much, we're bringing in Nick Siple to talk about it. Nick, what are your top energy headlines for 2024?
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Thanks, Ricky. Great to be here. I'd say really that the big energy headline this year is that the headlines that dominate everything this year is AI and how is that related to energy at all? It's really this is the year energy demand or expectations around electricity demand really went straight vertical. I think think a lot of folks don't realize energy consumption in the US hasn't really increased that much in the past 20 years, up about 5% since 2005. Now we've got energy consumption end user demand from AI expected to increase rapidly both from AI and other data center applications. Just training an AI model uses more energy than 100 households do in a year. And some of these next generation AI data centers might need as much power as some big cities. Estimates of AI energy consumption are that it's expected that More than double by 2026, could triple by 2030. And that would take data centers responsibility for energy demand from 2% that it was in 2022, up to 6% or more in the coming years. And that doesn't sound like much, but again, a 4 or 5 percentage point increase in energy demand is what we've seen in the past 20 years. And this is just the beginning of what we expect AI energy demand to drive. And that's what's been driving lots of activity in the energy space this year and some of the companies we're going.
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To talk about and there's a pretty close correlation between economic growth and energy usage when you look at developing and modern economies. But when we think about the grid right now, one of the great questions that a lot of these big tech companies are trying to figure out is can we power these the needs of artificial intelligence right now where the grid stands, is it ready for the demands.
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Of AI as of today? No. We need additional energy capacity. You've seen Elon Musk talk about this. You've seen Sam Altman from OpenAI talk about this. You mentioned all the big tech companies rushing to try to acquire energy to meet their long term power demands. Just over the past year and a half, you look at electric utilities estimates, they've doubled their forecasts for the additional power they're going to need over the coming decade. And that's really again creating incremental demand. Seeing folks rush to secure energy supply or that's nuclear, natural gas or others.
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Energy taking the top spot. Many of the top spots in the top five best performing stocks of the year. Three of them, Vistra, Constellation and GE Vernova. Vistra has the top spot. And this is a power generator with the capacity to serve 20 million homes. Right now it serves about 5 million. This company plays in natural gas, coal, solar, also has a few nuclear plants. And you may be surprised listening to the show that the top performer in The S&P 500 is in fact a utility company. So Nick, why have investors become so excited about Vistra over the past year?
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Yes, you mentioned Vistra Energy, Constellation Energy, both of these companies, independent power producers, meaning these are companies that compete in the competitive energy markets. That's as compared to your regulated utility that earns a regulated rate. Obviously this expectation of increased electricity demand for folks with existing generation, as demand goes up, you expect them to benefit. Also I think importantly, These folks are two of the largest nuclear power generators in the U.S. constellation, the number one and competitive nuclear power generation. Vistra number two, and those assets have become significantly more valuable in the past year. You've seen existing plants get license extensions where they can last for another 20 or 30 more years. You've also seen Inflation Reduction act subsidies that have helped these companies produce more nuclear power and keep some of these, these plants online. And there's been growing demand, again as I mentioned, for new nuclear capacity. Both these companies have existing sites that can expand their production. You know a lot of headlines this year. Microsoft working with Constellation Energy to bring back online the Three Mile island nuclear plant. So these existing nuclear facilities aren't valuable just for the power of the plants that exist can generate, but they can be upgraded and also can add a dising capacity over time. So really these companies are direct beneficiaries from this expectations for increased electricity demand over time and that that's part of why those stocks have moved up into the. Right.
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Yeah, you keyed in on the expectations. It's not the business performance that is dramatically changed quite yet for a lot of these energy companies. This is an expectations game where investors are getting really excited about these companies. Do you think this excitement is warranted, though?
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Well, it depends how much of this energy demand materializes over the long term. So certainly lots of expectations about what we could see from AI. However, there could be more efficiency or there could be fewer data centers than expected. However, these nuclear assets are super valuable and scarce. If you value these companies at replacement value for these plants, you could argue there's still more upside for the companies. But at the end of the day, they're operating in a commodity market that is difficult to predict. But I do think it highlights just how valuable these existing energy assets are. That's why these companies have performed so well. Now, can they maintain that performance over the long term? You're not going to see utilities return hundreds of percent a year in a normal market environment.
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Let's talk about some of the ways we get energy for a little bit. Number one is oil. And oil in the United States hit records this year. Our nation's crude output rose to about 13 million barrels per day, according to Bloomberg. That's about 50% more than what Saudi Arabia is putting out. And this is also at a time of increased efficiency. This record number is being done with less than one third of the rigs that were needed a decade ago. Looking at this big picture, Nick, how has the US become so much more efficient in getting oil out of the ground?
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Yeah, I think the short answer really is technology, learning, innovation. Right? We're 15 plus years into the shale revolution here in the US and these companies, both because of the conditions we saw in the market in the late 2010s and just because of just natural efficiency, these companies have had to get more productive. You see things like longer laterals drilled for wells. You see difference changes in fracking, fluid fracking, multiple wells at once, better drilling technology, utilizing automation. These companies are really, really good at pulling oil and gas out of the ground. And they've gotten better and better year after year. And at some point we will hit the limit of this efficiency. But it's really been impressive the ability to continue to grow production in the US We've heard calls for peak shale year after year after year. And production keeps going up and to the right.
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Yeah, there is a limited supply of oil in the ground, but there sure is a lot of it. Looking at these efficiencies, it costs less money to get oil out of the ground. The break even price going down. Is this a trend that you expect to continue for the long term?
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Well, I mean the growth can't continue forever. There's a certain point in which all of the oil and gas that is in these rocks is squeezed out. But I think the shale revolution, the importance of the US as an energy producer has been changed for what I think will be a long time. I think the balance of power in oil and gas has been changed such that OPEC isn't quite as important as they've been in the past. They still are very important and whenever they turn the spigots back on, we'll see some impact on price. But I think the US is in a much better position, energy security wise than it was 20 plus years ago. And I don't expect that to change anytime soon. Can we maintain this level of growth forever? Probably not. But I think the US is positioned as a significant oil producer unlikely to change anytime soon.
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Let's move on to nuclear. There's been a lot of investor interest. Stocks for these companies have done quite well this year and especially in the SMR space, the small modular reactor space. Two companies that play here are New Scale and oklo. Both of these have seen a lot of interest. We had the CEO of Oklo on the show earlier this year, Jacob DeWitt and Oklo is up almost 100% over the past year. Also a name in the chairman seat you might know with Sam Altman. Nuscale, which is appropriately tickered. SMR is up more than 700%. Here's the kicker though. These kind of look a little bit like biotech companies. To me, Nick, where they're not generating revenue. And a lot of this is expectations over an exciting new technology. So neither of these have a fully operational small modular reactor up and running right now. As we stand at the end of 2024, what are the challenges these companies are facing getting these off the ground or on the ground? You don't want them in the air.
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That's right. If we start having them in the air, we've really had an incredible breakthrough. Yeah, I mean, it's really all of the above regulatory challenges. Perm, lack of skilled labor. Really, really the cost, I mean, NuScale had been, you know, they're the company that has the first small modular reactor that's approved on the market. They had plans to deploy in 2026, but last year their partners pulled out because the cost estimates came in significantly above what they, I think is 50% or more above the original plans. And I think it just really highlights a challenge with these companies you mentioned, you know, NuScale and Oklo, both of these are companies that have plans to build reactors, are in certain stages of the, of the regulatory process. But at the end of the day, these reactors are still on paper. And if you think about these, you know, on paper designs there, they can be simple, they can be small, they can be cheap, they can be light, they can be easy to be built quickly. But you start to run into some of these other challenges as you deploy these reactors. And often you see these things come in behind schedule, delayed. And this has been something from, you know, the onset of nuclear power in the 50s onto today. We just saw it in the past year or so in Georgia. We saw Volktool unit 3 and 4 come online. These are, these are the first big, large scale reactors built in the US In a number of decades. They had originally, those projects started in 2009, had been planned to be done seven years ago at a cost of $14 billion, came in in the past couple of years at over $30 billion. And so the gap between these plans for nuclear reactors and actually getting to construction are quite wide. And we'll see whether OCLO or nuscale or any number of companies that remain private are able to get there. But I think a lot of what you're seeing with the price moves today aren't about the operating company. It's that, oh my gosh, we've got two companies available to invest in that are operating in this small modular reactor space, and let's rush out to gobble them up. I for one am skeptical about whether we actually get to operation. And I gave you a couple of reasons. The cost of these things end up coming in significantly higher in the real world than they do on paper.
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Yeah, but if you have that Sam Altman tech money going behind you, he might want to operate some of those data centers with small modular reactors. I got, I got my string out in my cork board. I can see how this works out, even if it comes in a little bit over budget. Nick, with your skepticism, do you think we'll see any small modular reactors running in the next, let's say three to five years? In the United States?
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Yes, in the United States and not, not commercially, but we will see at least one running in the US in the next five years. The Department of Defense has the Project Pele microreactor project is going to be the first microreactor deployed in North America that's currently under construction here in the US right now and is expected to be completed by 2026. That's a department of Defense program. If we look in North America in general, the earliest deployment of small modular reactors is expected to come in Canada with Ontario Power Generation. They're building the BWRX 300 reactor which is, which is built by GE Hitachi, which is a subsidiary of GE Renovo, which you mentioned earlier. They're already doing some of the pre construction work, building some of the components that will go into that and construction is going to start next year. The plan is for that plant to be operational in late 2028 or early 2029. So that just sneaks us under that three to five year timeline. Oklo has talked about having a commercial reactor available by 2027. If everything goes exactly according to plan, they could, they can make that happen. I've laid out my skepticism for that, but I think there's a couple plants under construction today, both the military one I talked about, Project Pele and this, this one in Canada that should get to market by 2028 and that are under construction. So you know, not, not totally looking down on this market but, but just some of these companies that don't have operations or don't have, you know, the shovel in the ground today. It's a long way to go to get there in the next three to five years, that's for sure.
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You're not trying to dismiss the difficulty of nuclear science. I get where you're coming from. There's big tech companies mentioned. Sam Altman, but there's other big tech companies that are very interested in nuclear energy. How are you seeing them? Get in this game.
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Well, we've seen lots of deals this year and it's kind of you can put them into two buckets. It's securing capacity from existing nuclear plants. You had Amazon make a deal with Talon Energy for $650 million to acquire nuclear energy from their existing plants. Microsoft, in the kind of existing plant bucket I mentioned earlier, made a deal with Constellation Energy to drop power from their existing plants, both reactivating the Three Mile island nuclear reactor, but also having a power matching agreement to power their data centers with nuclear power there. But we're also seeing activity by big tech to build new nuclear reactors or at least explore that type of activity. And this is using utility partners primarily. So Amazon has a deal to explore deploying small modular reactors with Energy Northwest. And Washington State also has a relationship with Dominion Energy that's exploring a small modular reactor in Virginia. Amazon also invested in X Energy, which is another one of these small modular reactor design companies. Google also investing in a small modular reactor design company, Kairos Power. And then also in the world of kind of building new nuclear reactors. Just this week, Meta announced that they're going to put out a request for proposal to build 1 to 4 gigawatts of new nuclear generation capacity in the US by the2030s. So whether it's building new capacity or trying to lock up existing nuclear capacity, you've got all the big techs really swirling around for lots of reasons. It's not just powering AI, it's that these companies have taken the climate pledge. And in order to power these facilities in a way that's carbon neutral, nuclear is really the only available way to do that. Given that you need to run these things 247 and the intense power needs. So lots of demand from big tech and you're seeing lots of money getting thrown around. Almost panic spending, I would say panic spending.
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That sometimes isn't a good thing I'm imagining though. You know, there could be some shareholder calls, you know, a few years from now. You know what, over here at Meadow we've learned that it's really difficult to store nuclear waste. That was not something we've been able to figure out over the past few years. So we've had to turn to a new energy source. This is something I'm imagining. And also to be clear, I'm optimistic about the future of nuclear. I think it's a really cool technology and it is, as you said, if you're trying to achieve carbon neutrality, it's a good place to get energy. So let's Say if big tech can't accomplish their nuclear dreams to power these cloud servers, these AI chatbots that are sucking up so much energy. You mentioned the power earlier. It takes 10 times more energy to do a chat GPT query than it does to do a Google search. So if big tech can't get nuclear up and running, where would you expect them to turn?
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Well, I really think it's an all of the above. Regardless of if you get nuclear up and running, they've been some of the largest deployers of renewables over the past several years. You're going to see companies turn to natural gas in the near term because of what I mentioned about needing a capacity 247 without any of this intermittency. So I mean 2024 is supposed to be the year. If things finish out the way we started the year, it's going to be the year where we have the most new natural gas generation announced in the US since 2017. We've got more than 200 gas units at various stages of development across the US so this increase in energy demand isn't just going to fall on building new nuclear plants. We're not going to be able to solve it just with new natural gas plants and we're not going to be able to do it just with renewables. I think there's really growth everywhere and natural gas is one of those areas where we've seen a return of interest in the past year or so. This is another one of those segments of energy where folks have continued to call a peak demand for the commodity and it continues to go up and up and up as demand surprises.
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As we talk about nuclear, you mentioned your skepticism towards some of the companies that aren't that don't have small modular reactors going. But last year you also pitched BW X Technologies for our stock March Madness game, which you won. As I'll remind the listeners or those who don't know, Nick won stock March Madness with this company which supplies fuel for nuclear submarines in the US Navy company also makes real revenue and is profitable. Another one where expectations have changed for the company is more interesting in nuclear comes in so with investors who are also excited about this space, you know, do you recommend should they look to the more established companies? Should they look at the startup? Should they take a basket approach?
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Yeah, for me I think there's really three buckets you can look at to invest in nuclear power. It's folks who own and operate existing nuclear sites. So think about these as the utility companies we talked about earlier. You can have Folks who are playing the supply chain. So whether that's, you know, folks like BWX technology make fuel components, that sort of thing, or the uranium producers, which is an interesting segment of the market where there's potential kind of crunch there, or you can look at folks who are developing reactors and if it's me, I'm really looking in those, those first two buckets. Folks that have operating businesses today that have been doing this for quite a long time. If I had to pick one company, BWX Technology still is the, I would say the highest quality nuclear business that I think is the lowest risk for folks to invest in today. You mentioned the military, nuclear sub and aircraft carrier business. They make fuel for those. They also manufacture the reactor components. They've been doing that for decades. It's basically a monopoly business, makes up the majority of the revenue. They also are one of these companies building that Project Pele microreactor in the US generating revenue. They're also working with DARPA and the Space Force on the first nuclear rocket engine in space with, with, with Project Draco. So they really have the flagship nuclear programs of the Navy, of the Air Force, slash Space Force and of the Army. If you think about Project Pele, if you think about the history of nuclear power, a lot of the innovation in nuclear has been driven by US military programs and has, have for quite a long time. When you're looking at microreactors, they do have the ability towards the end of the decade to potentially deploy the Project Pele reactor commercially or kind of derivative designs from the Pelec reactor commercially, which was, kind of puts them in the competitive market that OCLO is trying to get to in microreactors. If you look at small modular reactors, they're positioned as a merchant supplier in the market. So that means that they can provide services to lots of these potential small modular reactor design companies. The most notable of which I talked about that the BWRX 300 reactor that's being built in Ontario at the Darlington site. They are building the reactor pressure vessel for that, for that reactor and are currently generating revenue on that today. So if you think about the kind of small reactor designs in North America that are getting built right now, BWX Technologies has shots on goal on both of those and also have the potential to offer business to lots of these other small reactor, small modular reactor design companies, they're the only company that's able to manufacture large nuclear reactor components. So I think they're well positioned regardless of who wins in small modular reactors to really gobble up a portion of that business and then, you know, without spending too, too much time here they have a medical business that's in a position to grow rapidly providing nuclear radioisotopes. OCLO is invested in there as well. So I think this is a business that a lot of companies are talking about doing things in these space micro reactor space. But BW Technologies is generating revenue today and has the potential to continue to do that as the space grows over the next 10 plus years. So I think this is a business that is high quality, is going to grow with the market and also doesn't carry the same risk that some of these paper reactor companies have today.
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Oh, they've got plans, they've got people who want their reactors. Nick, quick question before we move on for the project Pele reactor, that's something that the Department of Defense ordered. Where's the energy for that going? Do you know?
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Yeah. So it's going to be built at the Idaho National Laboratory, which is one of the, there's a handful of kind of US Nuclear laboratory. The Oak Ridge National Laboratory here in Tennessee is another one. And it's going to be deployed at the kind of test center and over the long term, if it proves viable, would be something that would be deployed at remote military bases across the country and across the world. Really solves the problem of how do you provide logistics to these bases. I think that the stat was something like 50% of the casualties in Iraq and Afghanistan were related to just transporting diesel and other types of fuel to remote military bases. And obviously if you could put a small nuclear reactor on these bases, you could save a lot of lives. Certainly there's a military application here that makes a lot of sense.
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Let's move on to some renewables because renewable stocks outside of nuclear have had a rough few years. For example, the iShares Global Clean Energy ETF, it's about flat over the past five years and has had a selling off basically since the pandemic hype. And many of these companies. It's impossible right now, Nick, to talk about these companies without talking about the political situation. Travis hoyam@full Doc was writing on fool.com about First Solar, which is a company that makes solar panels and operates, we'll call them, solar power plants. You can imagine the large fields of solar panels that are generating energy. Hoyam pointed out that basically if it did not receive clean energy subsidies, then its operating income would fall by more than 2/3. Trump administration coming into office has talked about rolling back these clean energy subsidies. What are the impacts you're going to be watching if that happens?
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Well, I mean, very hard to predict, especially given how the President Elect likes to negotiate. But I mean, if you look across the board, the Inflation Reduction act went out the board, you could certainly see lots of impact in some of these renewable companies. I mean, nuclear benefits from some of these subsidies under the Inflation Reduction Act. Renewable diesel is another area of the market that you look at that's had lots of investment over the past few years that if you look at the economics of that business, without subsidies, it doesn't really work. Electric vehicles have talked about rolling back electric vehicle tax credits certainly would hurt the folks that are benefiting from that today. So you could see really effects across the board. Some folks might argue that maybe you see some marginal projects that only existed because of subsidy get abandoned and create breathing space for other projects. But I think it's really difficult to predict. And I think if you have an investment thesis that is wholly dependent on the government doing X or not doing X, it often is going to put you in a bad spot as an investor. Don't let the political narrative drive your investing decisions.
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Do you think the investing thesis for a lot of these renewable energy companies remain strong or for any of these renewable energy companies?
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Renewable is continuing to grow rapidly. Solar Deployment in the US grew 25%. Utility scale grew 30%. About 90% of total new electrical generating capacity in the US in 2024 came from renewable. You're seeing really rapid growth in renewable. However, it is more challenged than it was a few years ago. Interest rates are higher, which is making some of these projects that would have penciled out at lower interest rates not work in the same way they would have previously. Potentially, you have fewer subsidies. You saw some of that in California. For me, I think it's hard to find super attractive places to invest in renewables today. That doesn't mean that that they're not out there. But I do feel like some of these segments of the market are becoming a little bit commoditized and there's a little bit more attraction to invest in some of these other areas. So if I had to invest in the renewable area, I would be looking at some of these companies like Brookfield, renewable energy folks who own kind of a broad basket of renewable assets, and less in some of these companies that make panels and that sort of thing, which for solar would fall in that bucket. One other thing to mention too. You talk about what happens with changes in subsidies, but for solar in particular, if you see a return of Tariffs, they have a lot of manufacturing capacity in the US And a lot of the low priced solar panels are imported from China. There's more puts and takes that could happen here than just, well, you pull subsidies over here, you add tariffs over there. I don't know, your mind could spin. If you spend too much time thinking about some of this stuff, you start.
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Doing a lot of bank shots. While renewable energy capacity is still expanding, it seems to me that the fundamental problem for a lot of these companies is baseline power needs. That's something that nuclear energy addresses. But the sun isn't always shining, the wind is not always blowing, and you can't have rolling blackouts because of that. Are these renewable companies in the wind and solar space, are you seeing them meaningfully address these baseline power needs?
- [27:09]
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Well, everybody's trying to get involved in battery storage in some way and some of that is driven by subsidies or incentives, you know, with California change their rebate mechanism, which, which, you know, puts you in a better position if you have battery storage. But, but, but again, on the, on the flip side of things, if you have a solar panel farm plus battery storage, that's another additional spend that you have to make. So listen, I think there's a growing realization that it's going to have to be an all of the above strategy to solve our energy needs. We're not just going to have renewables with battery storage that, you know, replaces all of our natural gas and nuclear. I think we're going to need more of everything, you know, to achieve, to achieve our needs. So, you know, just because renewables won't provide 100% of baseload power all the time, you know, doesn't mean that there's not a bright future ahead for the market. And we're not going to be producing a heck of a lot more, you know, solar energy in particular, five and ten years from now than we are today. I just think the market is not as optimistic about renewable energy as it was a few years ago, and I think they were probably too optimistic a few years ago.
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And finally, what energy storylines are you watching as we enter into 2025?
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Yeah. So I'll give you three. The first one, what is OPEC going to do with their idled capacity? For the past couple of years, there's been a question of when is this potential oil production on the sidelines going to be brought online. Sooner or later, the cartel is going to give and decide, hey, we want to sell more of our product into the market and we're tired of waiting around for higher prices. If that does happen, then the trickle down effects to producers in the US and around the world obviously could be significant. Number two, looking in North America. In 2025, the LNG Canada project will begin exporting. I believe it's this summer. It's scheduled to do its first exports. That's going to be the first liquefied natural gas project in Canada. Canadian natural gas has been significantly below world benchmarks for quite a while because of a lack of offtake capacity. I would expect that to drive price of Canadian natural gas up in 2025 and there's some producers there that could stand a benefit. And then the last one is what's going to happen. I mentioned earlier this BWR X300 reactor that's going to start construction in Canada in 2025. When a watch the progress of that reactor under construction, if it starts to see some of the same kind of cost overruns and delays that we've seen at prior nuclear, you know, new nuclear projects we've seen in recent years, then then that could start to, you know, lessen some of the optimism in the nuclear sector. However, you know, Canada has been working for the past several years to extend the lives of existing nuclear reactors is a very and has been able to do that actually below budget and ahead of schedule. If some of that same kind of expertise can drive some of the same results for construction of small modular reactors, then maybe you see the order book pick up. So be interested to see what happens there. Lots going on. I'm sure there's going to be some stories that surprise us in 2025 as well.
- [30:16]
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Nick Stipel, appreciate your insight. Appreciate you being here. Thanks for joining us on Motley Fool Money Anytime.
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Ricky, thanks so much.
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As always. People on the program may have interest in the stocks they talk about and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and are not approved by advertisers. The Motley fool only picks products that it would personally recommend to friends like you. I'm Mary Long. Thanks for listening. We'll see you tomorrow.