Barclays On Energy YieldCos: Buy NextEra, Hold TerraForm

NextEra Energy Partners LP NEP gained momentum with a series of upgrades this month. The optimism has since pushed the stock into favor above industry peers.

The Ratings

Barclays analysts Moses Sutton and Eric Beaumont upgraded NextEra to Overweight and raised their price target from $52 to $61.

They downgraded TerraForm Power Inc TERP to Equal-Weight but maintained an $18 price target.

The Thesis

For a while, NextEra Energy inspired concerns over convertible equity dilution and uninhibited growth. The company also lost steam with the bankruptcy overhang of PG&E Corporation PCG and poor wind resources.

Barclays is leaning in to NextEra’s underperformance to capture a resurging market trend.

“YieldCos have swung back into favor as energy investors and generalists alike hungrily seek 1) new avenues to capture yield amid ever-declining interest rates; 2) sustainable growth in a late-stage economy; and 3) recession-proof characteristics,” Sutton and Beaumont wrote in a note.

By their assessment, NextEra’s price performance and relative yield, near-term growth prospects, the Meade pipeline acquisition, declining interest rates and industry tailwinds make NextEra a choice purchase.

Notably, their upgrade reflects relative performance. They anticipate the yield spread between NextEra and TerraForm Power to contract over the next three years and invert by 2023. This shift could drive marginal investors from TerraForm to NextEra.

“For long-term investors, TERP still offers as strong a total return profile as does NEP,” they wrote. “...TERP continues to be one of the best LT renewable investment options.”

Price Action

At time of publication, TerraForm Power was down 2.6%, while NextEra was up 1.1%.

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