Energy stocks have sneakily been some of the best performers in the S&P this year.
In this podcast, Motley Fool analyst Nick Sciple joins host Ricky Mulvey for a conversation on the biggest energy stories of the past year. They also discuss:
- How the US has gotten more efficient at extracting oil from the ground.
- The challenges facing companies hoping to build small nuclear reactors.
- Flatlining investor interest in renewables.
Nick Sciple: For me, I think there’s really three buckets you can look at to invest in nuclear power. It’s folks who own and operate existing nuclear sites. Think about these as the utility companies we talked about earlier. You can have folks who are playing the supply chain, whether that’s folks like BWX Technology who make fuel components, that sort of thing, or the uranium producers, which is an interesting segment of the market where there’s a potential and a crunch there, or you can look at folks who are developing reactors. If it’s me, I’m really looking in those first two buckets, folks that have operating businesses today that have been doing this for quite a long time.
Mary Long: I’m Mary Long, and that’s Nick Sciple, an analyst for our Fool Canada service and an energy industry watcher. As we close out the year, we’re sitting down with a number of analysts to look back on key industries to review what’s happened and what might be coming in 2025. To kick us off, my colleague Ricky Mulvey caught up with Nick to look at the energy sector. They talk about AI’s insatiable need for power, how the US has gotten better at getting oil out of the ground, growing interest in small nuclear reactors, while investors have soured on renewable stocks, and some other stories that Nick’s keeping an eye on in the year to come.
Ricky Mulvey: As we wrap up the year, we’re looking back on some industries on the show. For energy, one of the industries that has dominated the S&P top performing stocks of the year, even though you may not have heard about it as much, we’re bringing in Nick Sciple to talk about it. Nick, what are your top energy headlines for 2024?
Nick Sciple: Thanks, Ricky. Great to be here. I’d say really that the big energy headline this year, the headlines that dominated everything this year is AI and how is that related to energy at all? It’s really this is the year. Energy demand or expectations around electricity demand really went straight vertical. I think a lot of folks don’t realize energy consumption in the US hasn’t really increased that much in the past 20 years, up about 5% since 2005. Now we’ve got energy consumption, end user demand from AI expected to increase rapidly, both from AI and other data center applications, training an AI model uses more energy than 100 households do in a year. Some of these next generation AI data centers might need as much power as some big cities. Estimates of AI energy consumption or that it’s expected to more than double by 2026 could triple by 2030 and that would take data centers responsibility for energy demand from 2% than it was in 2022 up to 6% more in the coming years. That doesn’t sound like much. But again, a four or five percentage point increase in energy demand is what we’ve seen in the past 20 years. This is just the beginning of what we expect AI energy demand to drive, and that’s what’s been driving lots of activity in the energy space this year, and some of the companies we’re going to talk about.
Ricky Mulvey: There’s a pretty close correlation between economic growth and energy usage when you look at developing and modern economies. But when we think about the grid right now, one of the great questions that a lot of these big tech companies are trying to figure out is, can we power the needs of artificial intelligence? Right now, where the grid stands, is it ready for the demands of AI?
Nick Sciple: As of today, no. We need additional energy capacity. You’ve seen Elon Musk talk about this. You’ve seen Sam Altman from OpenAI talk about this. You mentioned all the big tech companies rushing to try to acquire energy to meet their long term power demands. Just over the past year and a half, you look at electric utilities estimates, they’ve doubled their forecasts for the additional power they’re going to need over the coming decade, and that’s really again, creating incremental demand, seeing folks rush to secure energy supply, whether that’s nuclear, natural gas, or others.
Ricky Mulvey: Energy taking the top spot, many of the top spots in the top five best performing stocks of the year. Three of them Vistra, Constellation, and GE Vernova. Vistra has the top spot, and this is a power generator with the capacity to serve 20 million homes. Right now, it serves about five million. This company plays in natural gas, coal, solar, also has a few nuclear plants. You may be surprised listening to the show that the top performer in the S&P 500 is, in fact, a utility company. Nick, why have investors become so excited about Vistra over the past year?
Nick Sciple: Yes, you mentioned Vistra Energy, Constellation Energy, both of these companies, independent power producers. Meaning, these are companies that compete in the competitive energy markets that’s as compared to your regulated utility that earns a regulated rate, obviously, this expectation of increased electricity, demand for folks with existing generation as demand goes up, you expect them to benefit. Also, I think, importantly, these folks are two of the largest nuclear power generators in the US, Constellation, the number 1 and competitive nuclear power generation, Vistra, number 2, and those assets have become significantly more valuable in the past year, you’ve seen existing plants get license extensions where they can last for another 20 or 30 more years. You’ve also seen Inflation Reduction Act subsidies that have helped these companies, produce more nuclear power and keep some of these plants online. There’s been growing demand.
Again, as I mentioned, for new nuclear capacity, both these companies have existing sites that can expand their production. A lot of headlines this year, Microsoft working with Constellation Energy to bring back online the 3 Mile Island nuclear plants. These existing nuclear facilities aren’t valuable just for the power of the plants that exist, can generate, but they can be upgraded and also you can add a disc in capacity over time. So really, these companies are direct beneficiaries from the expectations for increased electricity demand over time, and that’s part of why those stocks have moved up into the right.
Ricky Mulvey: You keyed in on the expectations.
