Global energy demand is expected to remain strong for the foreseeable future, with renewable energy making up an increasingly larger portion of total demand. This is effectively elevating the business prospects for renewable energy companies like Northland Power (TSX:NPI). Yet, this renewable energy stock is down over 35% in the last five years, resulting in a strong, undervalued opportunity for investors.
Here’s why I think Northland Power stock is on the cusp of strong performance in the years ahead.
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New projects to drive cash flows for this renewable energy stock
As you can see from Northland Power’s stock price graph below, this renewable energy stock has had a rough time in the last five years. This price decline was a function of many things, such as rising interest rates, leverage, and inflation.
Today, the macro environment is much improved, with lower interest rates and inflation. This is bringing positive changes to Northland’s financial position. Also, Northland’s battery storage project is now completed and in operation, and two of its other major projects, Baltic Power and Hai Long, are nearing the end stages of their development. This will mean lower capital expenditures as well as a significant ramp-up in cash flows in the coming two years.
These projects will add $600 million to Northland’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Also, they will add $200 million to Northland Power’s free cash flow.
Northland Power: A diversified renewable stock
Northland Power has a global footprint of 3.4 gigawatts of energy in operation and 2.2 gigawatts under construction. This footprint is diversified both geographically and by energy source.
From Canada to Northern Europe to Taiwan, this diversification gives Northland more stability in its operations and financial performance. Looking ahead, the two new projects that are expected to come onstream in the next couple of years will provide further diversification.
Furthermore, Northland’s renewable assets are also diversified across energy sources. With clean-burning natural gas, wind, solar, and battery energy storage assets, Northland is ready to meet the demand growth for renewable energy.
A strengthening balance sheet
Finally, I’d like to address Northland’s balance sheet. As you know, the company’s business is highly capital-intensive. Back in 2021, Northland’s long-term debt peaked at over $7 billion. Today, the company has managed to bring this debt level down to $6.1 billion.
Also, as you know, interest rates have come down significantly in recent years. They hit 5% in 2023, but have since declined to the current 2.75%. This, coupled with Northland’s debt reduction, is resulting in lower interest payments and healthier financials. The company currently has $1.1 billion of liquidity on the balance sheet to fund new projects.
Management’s guidance for adjusted EBITDA in 2025 is $1.3 billion to $1.4 billion. This represents an increase of between 3% and 11% versus 2024. As we head into 2026 and 2027, cash flow will get an additional boost from the newly completed projects, Hai Long and Baltic Power.
The bottom line
In closing, this renewable energy stock is gearing up to really see the benefits from its recent capital-intensive years. As its two new projects come into service in the next couple of years, cash flows will get a boost, and Northland’s risk profile will decrease. As a result, the stock’s valuation will rise.
