Update SunPower (SPWRA)
05/03/2011 12:54 pm EST
On Friday April 29 shares of Sun Power (SPWRA) jumped $5.57 or 34.6% on news that Total (TOT), the French oil company, would take a majority stake—up to 60%--in the California solar power company at a price of $23.25. That was 46% premium to the market price before the announcement.
The deal tells you quite a bit about both the oil and solar industries at the moment.
You’re probably familiar with the oil story. New major new oil supplies are getting more expensive and harder to find for the big international majors. Most of the most promising geologies for exploration are in the control of national oil companies, leaving international majors to search in really extreme environments such as the Arctic or to sign not terribly advantageous revenue-sharing deals with national oil companies. That’s left the international majors with a lot of current cash flow but a relative paucity of places to invest for the future. Some of the majors are putting big money into natural gas from oil shares or Canada’s tar sands. Others are looking to diversify out of oil and into other energy technologies such as solar or wind. Total, which is on record with a fairly pessimistic view of the cost of finding new supplies of oil, is one of the oil majors that has decided to invest in solar.
For Sun Power the deal will address the biggest current problem for the U.S. solar sector: capital for making loans to potential customers. Customers for large, utility-scale solar installations want equipment suppliers to help finance the upfront cost. That’s been tough for U.S. solar companies to do in the tight lending environment after the global financial crisis. And the problem is likely to get bigger if the current round of budget negotiations in Washington cut solar subsidies as many Republicans are urging.
From this perspective Total’s deep pockets and the cash flow from $110 to $120 a barrel oil are critical to Sun Power, the second largest supplier of solar panels in the United States. The company’s strategy of running a vertically integrated business that does everything from manufacturing cells to developing solar plants has been constrained by a lack of capital for financing those plants. (For example, at about the same time as this deal was announced, Sun Power announced a delay in utility-scale projects under development in Italy.) The deal with Total includes an agreement for the oil company to provide up to $1 billion in credit support during the next five years.
That’s exactly what Sun Power and other U.S. solar companies need right now—cash.
In the short-term I think Total’s offer leaves this stock close to fully valued—I calculate a target price of $23 a share. In the long-term, however, I think Total’s capital will enable Sun Power to increase the pace of its own growth. The stock is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com//
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Sun Power or Total as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/