By DAVID BERMAN
Tuesday, July 17, 2018
It's too early to know if the new Ontario government will succeed in bringing down electricity rates as it promised during the recent election campaign.
But the government sure has brought down stock prices of independent power producers in a hurry, setting up what could be an ideal buying opportunity for investors.
Ontario Premier Doug Ford telegraphed that changes to the province's energy policies were coming during the election campaign this spring, yet his announcements since taking office have surprised many investors - and walloped stock prices.
On Friday, the Premier announced that the government is cancelling hundreds of contracts that had been under development with renewable-power developers, raising uncertainty in the sector as some observers wonder if projects already in operation could be targeted next.
Among two of the bigger moves that attracted attention because of their exposure to renewable energy in Ontario, Pattern Energy Group Inc. fell 8.2 per cent on Friday and Boralex Inc. fell 2.7 per cent.
Both stocks regained some lost ground on Monday, as brave investors bet that the bad news and uncertainty were overdone.
They had significant support from analysts: Several of them published bullish reports on Ontario's energy market, arguing that the provincial government likely wouldn't break existing renewable-energy contracts (known as feed-in tariffs or FIT) because of the risk of legal challenges and reputational damage to Ontario's business climate.
"The long-term consequences of any attempt by the province to back out of existing FIT contracts, should give the government great pause as such an action could materially increase Ontario's cost-of-capital - investors would ascribe far more risk to any investments in the province," Wells Fargo analysts warned in a note.
David Quezada, an analyst at Raymond James, even upgraded his recommendation on Boralex - to "strong buy" from "outperform" previously, and maintained his 12-month price target of $28.50, implying gains of about 40 per cent.
He pointed out that Ontario currently represents 18 per cent of the company's operating capacity, but most of it looks safe. The project that doesn't look safe, the 50 MW Otter Creek project, would cut a mere 2 per cent from Mr. Quezada's share price target if it were cancelled. Big deal.
Meanwhile, the company's recent acquisitions in France, Scotland, Quebec and, yes, Ontario have boosted its operating capacity by 54 per cent.
That should add $200-million to EBITDA (earnings before interest, taxes, depreciation and amortization), compared with $319-million in 2017. There is also a strong development pipeline in Europe. Yet, the share price is down about 18 per cent from its highs in early January.
"We believe [Boralex's] track record of value creation (which the stock does not reflect), combined with future growth and attractive valuation represents a compelling risk-adjusted return supporting our upgrade," Mr. Quezada said in a note.
Jeremy Rosenfield, an analyst at Industrial Alliance Securities, agreed that the Otter Creek project is not a good reason to avoid Boralex, and he maintained a "buy" recommendation on the stock with a $26 price target.
"Considering that the project had not yet reached financial close or entered into construction, Boralex had not invested material amounts to date. Thus, we do not expect the direct financial impact to be material," Mr. Rosenfield said in a note.
Pattern Energy is in a similar situation: About 30 per cent of its EBITDA is exposed to Ontario-based renewable energy, according to Ben Pham, an analyst at BMO Nesbitt Burns.
Yet none of the company's projects is affected by the provincial government's cancellations. A project that is in development, the Henvey Inlet wind farm on Georgian Bay, faces potential cancellation.
However, Mr. Pham hasn't included this project into his financial estimates for Pattern Energy, which implies that cancellation would have little or no impact on the shares.
Mr. Pham reiterated his "outperform" recommendation on the stock along with a target price of US$21 (the shares trade on Nasdaq as well as Toronto), implying a gain of 33 per cent.
Of course, you could wait until the Ontario government provides greater clarity on its policies toward renewable energy.
But right now, the uncertainty looks like a gift.