Bank of America says Russia-Ukraine conflict will hasten Europe’s energy transition — and names its top stock picks to cash in

Published Wed, Mar 23 20227:57 PM EDT

Bank of America has named its top European energy stock picks as the region seeks to accelerate its pivot away from fossil fuels. The bank believes the Russia-Ukraine conflict will have far-reaching consequences, with Europe transitioning to become more independent as many sectors and economic paradigms are redefined, Bank of America's analysts, led by Eric Lopez, said on Mar. 22. One such sector is energy, according to the bank. Lopez noted that energy independence has become Europe's "number one strategic priority," with significant investments in gas infrastructure, low-carbon energy sources and carbon capture seen to be required for the region to achieve self-reliance. He added that this transition will be the "enabler" for Europe's quest to achieve energy independence, with more investments expected in current growth industries such as renewables, hydrogen, electricity gas infrastructure, nuclear, biofuels and electric vehicles. Europe currently imports nearly 40% of its energy needs from Russia and phasing out Russian gas will require Europe to more than double its current imports of liquified natural gas (LNG), while boosting demand for carbon capture infrastructure and technology, Lopez said. The bank also expects Europe to accelerate investments into low-carbon energy sources including biofuels, renewable power as well as so-called "blue" and "green" hydrogen, which it views as "more competitive" against the backdrop of higher-for-longer oil and gas prices. Green hydrogen is when the energy used to power electrolysis comes from renewable sources like wind, water or solar. Blue hydrogen, meanwhile, refers to hydrogen produced using natural gas — a fossil fuel — with the CO2 emissions generated during the process captured and stored. Energy stock picks Within this space, Bank of America like Shell as a "main beneficiary" of tighter-for-longer LNG markets given its estimated 25% share of the global LNG market. The bank's earnings estimates for Shell are 20% above consensus and it expects the company to return around 10% of its market cap annually via incremental dividends and buybacks. Bank of America also likes Norwegian energy firm Equinor as the company is "most exposed" to European spot gas prices. It also expects the company to improve its "already strong" balance sheet, which should bolster its ability to maintain its "generous" shareholder payouts, the bank added. Bank of America believes the renewed urgency around energy independence will support earnings for Danish wind turbines manufacturer Vestas through further price support for turbines. The bank also likes Siemens Energy on the back of an improved outlook for wind demand in Europe, which it says should provide a more solid operational and pricing backdrop for the company and allow the company to return to a more positive margin trajectory. German energy firm RWE also makes the bank's list. Bank of America views the company as a "key beneficiary" of Germany's quest to achieve energy independence and sees potential upside to the growth of its renewable targets through 2030, as well as further earnings per share upgrades from high power prices. Indirect beneficiaries Italian grid operator Terna is another stock favored by Bank of America, with the company expected to benefit from higher capital expenditures amid an increase in demand for electrification. The bank also favors Irish building materials firm Kingspan as a beneficiary of energy efficiency-related investments as its industry-leading insulation products have a direct positive impact on the energy efficiency of buildings. Bank of America likes Dutch lighting company Signify for its "pure-play exposure" to energy efficiency and emission reduction. It also likes Air Liquide , which the bank described as a "big global hydrogen player" and a "critical enabler" of the energy transition. Amid spiraling fuel prices, the bank expects electric vehicle adoption to accelerate, which should benefit charging infrastructure stocks such as London-based Pod Point. German automotive parts supplier Vitesco Technologies is another stock favored by Bank of America. The bank said the company is the first automotive supplier to fully embrace the shift to EVs and is a "key, underappreciated, EV transition enabler" with a target of growing its electrification revenues at a compounded annual rate of 40%. The company also enjoys a strong balance sheet and cash generative core business outside of EVs, according to Bank of America.

Shell petrol station logo on Sept. 29, 2021 in Birmingham, United Kingdom.

Mike Kemp | In Pictures | Getty Images

Bank of America has named its top European energy stock picks as the region seeks to accelerate its pivot away from fossil fuels.