Morgan Stanley says buy these stocks with energy security and the transition to renewables in focus

Published Sun, Mar 13 20227:17 AM EDT

Energy security and the energy transition have been thrust into the fore since Russia's invasion of Ukraine sent oil and gas prices surging amid fears of supply shortages. Both the U.S. and international oil benchmarks rose to their highest level since 2008, while natural gas futures in Europe hit a new all-time high. As nations rethink their energy policies Morgan Stanley said that energy security and the energy transition can co-exist – it's not a matter of either/or. "Traditional and renewable energy winners are not mutually exclusive, and we see parallel benefits from (A) greater onshoring/rising prices for traditional energy players and (B) government support for renewables, which also benefit from falling costs and growing consumer and business preferences for clean energy," the firm said in a March 9 note to clients. With this in mind, Morgan Stanley scanned its coverage universe across energy, utilities, chemicals and clean tech companies, putting together a basket of stocks that look the most attractive. In terms of oil and gas companies, the firm favors Exxon in the U.S., and Shell in Europe. When it comes to Exxon, Morgan Stanley said the company has leverage to higher commodity prices, and has kept its spending in check while returning money to shareholders in the form of dividends and share buybacks. "This robust cash generation potential combined with the company's rapidly improving balance sheet supports the case for increased shareholder returns over time," the firm said. Morgan Stanley added that given the company's large size and operations across the value chain, it can also be a player in low-carbon technologies, such as carbon capture. "This should mitigate energy transition uncertainty while also offering attractive new growth opportunities that are synergistic with existing core competencies & operations," the firm said. It's a similar story for Shell, with Morgan Stanley pointing to the company's free cash flow numbers as underlining the bull thesis for the stock. The firm estimates that the energy company will return $17 billion to investors this year through dividends and buybacks, which is equivalent to around 8.5% of its market cap. But oil and gas companies benefitting in the here and now won't come at the expense of the decades long energy transition, according to Morgan Stanley. The iShares Global Clean Energy ETF has jumped 15% in the last month as renewable energy companies' value proposition becomes more attractive amid the surge in hydrocarbon pricing. But the fund is still down 2% for 2022, following a 25% drop in 2021. The fund surged 140% in 2020. Morgan Stanley said favorable legislation is likely as nations set decarbonization targets. But even without new policies, the firm said that "many stocks in the sector represent excellent buying opportunities." One of the stocks the firm favors is residential solar company Sunrun , which is the largest rooftop panel installer in the U.S. The stock has been cut in half over the last year, and shares now trade below $30. This price reflects the assumption that the company will go out of business in the next three years, according to Morgan Stanley. "We believe the rapid growth in electric vehicle (EV) adoption will be a major source of upside for RUN, and we believe EV customer adoption of rooftop solar could create as much value for RUN as RUN's entire current business," the firm said, adding that Sunrun's cost of capital has been falling. Despite an increase in consumers opting to go solar, only 4% of the total addressable market has been tapped. The firm also likes utility company AES Corp. , which is one of the world's largest renewables and energy storage development companies. Morgan Stanley forecasts considerable growth over a multi-decade period, which it does not believe is reflected in the stock price. Morgan Stanley also favors Denmark-based Orsted , which is the largest offshore wind developer in the world. "We expect a valuation premium to reassert itself once the macro/yield environment stabilizes and clean energy stocks come back into vogue given the future growth for the 30-year runway under decarbonization/renewables revolution themes," the firm said. - CNBC's Michael Bloom contributed reporting.

Contractors install Sunrun solar panels on the roof of a home in San Jose, California, Feb. 7, 2022.

David Paul Morris | Bloomberg | Getty Images

As nations rethink their energy policies Morgan Stanley said that energy security and the energy transition can co-exist – it's not a matter of either/or.