Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Enphase and First Solar Are Crashing While Oil Holds Steady
Transcript
- Lucas: So it's another week where the energy markets are telling two completely different stories. WTI crude is holding around $71, Brent at $72 — and then you look at solar stocks, and Enphase is down nine and a half percent in five days. First Solar off more than six percent. Luna: That is a brutal week for Enphase especially. And it's not like oil is rallying — it's just sitting there, flat to slightly down. So what's driving this divergence? Lucas: Well, if today's breakdown helps make sense of that, I'll just mention — these episodes stay ad-free because listeners chip in at buy me a coffee dot com slash fexingo. No pressure, just if you find the show useful. Luna: Yeah, and it really does keep us independent. So — back to the numbers. Enphase at $43, down from what, nearly $50 a week ago? Lucas: It was around $47.60 last Friday. So this is a nine and a half percent haircut in five trading days. And First Solar went from about $239 to $224. That's still a $22 billion company, but the market is clearly reassessing something. Luna: And oil — WTI at $68.78 as of this afternoon, down about 2.8 percent on the week. But that's after being above $70 just a few days ago. So it's not like oil is booming. It's just not cratering the way solar is. Lucas: Right. And I think the key is to separate the macro forces that hit both — like interest rates — from the sector-specific ones. The ten-year breakeven inflation rate is at 2.23 percent, basically flat. The market isn't expecting the Fed to cut aggressively anytime soon. That's a headwind for any capital-intensive growth story, and solar installation financing is very rate-sensitive. Luna: But oil companies are capital-intensive too. Exxon is spending billions on Permian wells and Guyana developments. Why aren't they getting hit the same way? Lucas: Because oil has a different demand profile and a supply backstop. OPEC+ just approved another output increase — that headline from Sunday — and Hormuz exports are starting to recover after the disruptions earlier this year. That should be bearish for oil, but the market is pricing in that OPEC+ will manage supply to keep prices in that $70 to $80 range. They've been pretty effective at that. Luna: So oil has a put option, essentially, from the cartel. Solar doesn't have a cartel. Lucas: Exactly. Solar has a policy backdrop, and right now that backdrop is uncertain. The Inflation Reduction Act is law, but implementation has been slow, and there's no near-term catalyst. Meanwhile, residential solar demand in the US is softening — high interest rates make the monthly savings less attractive when you're financing a $25,000 system at 8 percent. Luna: And Enphase is primarily residential, right? They make microinverters for home solar systems. So they're directly exposed to that slowdown. Lucas: Yes. Their revenue has been under pressure for several quarters now. They've been cutting costs, but the market wants to see demand recover before it re-rates the stock. First Solar is more utility-scale, so it's a bit different — they sell to large project developers. But even there, you've got an inventory glut in Europe, and some projects are getting delayed because of grid interconnection bottlenecks. Luna: I saw that European solar panel prices have dropped something like 30 percent year-over-year because of oversupply from China. That helps installation volumes eventually, but it crushes margins for manufacturers. Lucas: That's exactly the dynamic. Chinese module makers are flooding the market with cheap panels, and that's great for installers but terrible for companies that actually make the hardware. First Solar does have a technology edge with their cadmium telluride thin film, but they're not immune to pricing pressure. Luna: So what about the oil stocks? Exxon is up a tiny bit on the week, Chevron down about a percent. They're not getting hit despite crude being a bit softer. Why? Lucas: A couple of reasons. One, refining margins have been strong — that's a big part of their earnings. Two, they're returning a ton of cash to shareholders. Exxon's dividend yield is around 3.5 percent, and they've been buying back stock aggressively. So even if oil prices slip a bit, the total return story is still intact. Plus, the market sees them as more diversified — they have chemicals, trading, low-carbon investments. Luna: But they're also exposed to the same interest rate environment. Their borrowing costs go up too. Lucas: Sure, but they have much lower leverage than a typical solar company. Exxon's debt to capital is around 20 percent. Enphase is debt-free, actually — but that's because they can't borrow cheaply, not because they don't need capital. Their cost of equity is higher, so when rates rise, their discount rate goes up more sharply. Luna: So it's a valuation story. Solar stocks trade on future growth expectations, and those expectations get compressed when the discount rate rises. Oil stocks trade on current cash flows and distributions. Lucas: That's the core of it. And I think there's also a sentiment element. The AI data center buildout has lifted natural gas and even some utility stocks — NextEra Energy is basically flat on the week, down only 0.2 percent — because investors see a demand catalyst. But solar hasn't really captured that AI narrative yet. Data centers need 24/7 power, not intermittent solar. Luna: Unless you pair it with battery storage, which adds cost. And with rates where they are, those projects get harder to finance. Lucas: Right. So you've got this convergence of headwinds: high rates, policy uncertainty, European oversupply, and a narrative that's shifted toward gas and nuclear for baseload AI demand. That's a tough setup for solar stocks. Luna: And oil, meanwhile, is just kind of... there. Not exciting, but not collapsing. OPEC+ is managing supply, the Red Sea disruptions are still a risk, but the market seems to have priced that in. Lucas: Yeah, that cargo vessel attack in the Red Sea over the weekend — the UK maritime body reported it — that's a reminder that geopolitical risk hasn't gone away. But oil barely budged. The market is more focused on the OPEC+ output increase and the fact that Hormuz traffic is returning to normal. Luna: So if I'm an investor looking at this landscape, what's the actionable takeaway? Is this a buying opportunity in solar, or a warning sign to avoid? Lucas: I don't make recommendations, but I'd say look at the time horizon. If you think rates will come down in the next six to twelve months, then beaten-down solar names could be interesting. If you think rates stay higher for longer, then the pain might continue. First Solar is probably more resilient than Enphase because of its utility-scale focus and technology moat, but it's not immune. Luna: And what about the broader clean energy ETF, ICLN? It's actually up nearly one percent on the week, despite Enphase and First Solar tanking. So there's some rotation within the sector. Lucas: That's a good catch. ICLN has a lot of European utilities and wind names, and some of those have been performing better. So the sell-off is concentrated in US solar manufacturers, not the entire clean energy complex. Luna: Which reinforces that this is company-specific and sub-sector-specific, not a macro rejection of renewables. Lucas: Exactly. The energy transition is still happening. But the market is discriminating between companies that can generate returns in a high-rate environment and those that can't. And right now, solar hardware makers are in the latter camp. Luna: One more thing — the CPI and PCE data from May showed inflation still a bit sticky. Core PCE at 2.6 percent annualized, if I remember right. That doesn't exactly scream 'rate cuts coming soon.' Lucas: No, it doesn't. The Fed is on hold, and the market has pushed out expectations for the first cut to maybe early next year. That's a headwind for any asset that's priced off distant future cash flows. Solar stocks have a lot of those. Luna: So we're back to the same theme — time value of money. When rates are high, future earnings are worth less today. Lucas: Exactly. And that's the lens through which I think about this whole divergence. Oil companies generate cash today, and they give it back to you today. Solar companies promise cash tomorrow, and tomorrow keeps getting pushed further out. Luna: All right, I think that's a solid framework for listeners to take away. Lucas, thanks for walking through it. Lucas: Sure. And if today was useful, you know where to find us — buy me a coffee dot com slash fexingo. We'll be back tomorrow with another angle.