I believe there is a huge difference between business model and valuation. One – obviously – is how you make the money and the other is how investors perceive your long term prospects. Over the past 6 months, we have talked at length about Tesla, which, last I checked, is still a car company that trades at north of 13x revenue and whose profitability comes from selling carbon offset credits. Hey – maybe they will solve the battery problem – Elon is one smart mother, but 500,000 cars a year doesn’t a 350 billion market cap make, so I don’t own it.

Last week, NextEra Energy, Inc. (NYSE: NEE), a “leading clean energy company” which owns two electric companies in Florida: Florida Power & Light Company and serves more than 5 million customer accounts in Florida and is the largest rate-regulated electric utility in the United States as measured by retail electricity produced and sold; and Gulf Power Company, which serves approximately 470,000 customers in eight counties throughout northwest Florida surpassed, if briefly, Exxon’s market cap. Of note, NextEra Energy owns a “competitive clean energy business, NextEra Energy Resources, LLC, which, together with its affiliated entities, is the world’s largest generator of renewable energy from the wind and sun and a world leader in battery storage.”

I have long shared my position that oil and gas is a net asset value business and why, more than the ‘ES’ part of ESG, is why we don’t have any investors (see ‘We have a G problem’). At the core, oil and gas is an easy but capital intensive business. You have inventory, capital requirements and an assumed long term price. Do some math, add a discount rate to account for volatility and risk and Tada! There is the valuation you should trade at. That is the reason I am short the entire sector. In my opinion, 100% of US E&Ps trade way above their intrinsic valuation. The market seems to agree with many stocks trading at 52 week lows and in my view, no where to go but further down.

So it brings me to NextEra. Is their energy business better? Who doesn’t love financial statements?

Let’s start with their Debt: are they generally adding leverage or reducing leverage to generate returns?

2016: 30b
2017: 35b
2018: 37.7b
2019: 42.6b.

Debt is climbing every year.

How about the Revenue?
2016: 16.1
2017: 17.2
2018: 16.7
2019: 19.2.

Generally 5% year-over-year growth. That’s not bad.

How about the Operating Cash Flow?
2016: 6.3 b
2017: 6.4 b
2018: 6.6 b
2019: 8.1 b

What about how much investment they are having to do? Relative to operating cash flow, are they any different than an E&P who has historically outspent and grown debt? Their climbing debt would suggest growth capital still exceeds operating cash flow. Does it?

2016: 8.1 b
2017: 8.9 b
2018: 11 b
2019: 16.2 b

Every single year, invested cash flows have exceeded operating cash flows to achieve their 5% top line revenue growth, which is why their debt keeps expanding.

One more fun fact…. they pay 2.6b a year in dividends and trade at 19x operating cash flow and outspend it every year.

Knowing what you know about E&P and outspending cash flow and growing debt, how would you expect them to have traded from 2016 – today?

Did you guess up 250%? Sure, EBITDA has grown roughly 9% per year but it’s been using debt. Hmmm. Not investment advice but walk me through the value thesis again? Oh! They have the words ‘wind and solar’ in their business plans (on an EBITDA basis… NextEra Energy Partners generated 643 mm in H1 EBITDA, approximately 15%).

Growth capital is more important than operating cash flow….. where have I seen that before?

#hottakeoftheday