ContourGlobal sees opportunity in volatile power sector

  • Dividend program promising 10% annual increase will stay in place despite power sector volatility
  • Renewable energy supply chain issues and changes in European electricity policy pose some risk

It’s not often that a company brags about deals it didn’t close. But specialist in energy production Global Outline (GLO)which owns a mix of fossil fuel-burning and renewable energy assets around the world, did just that in its 2021 results. The turnaround came on a “large acquisition of thermal and renewable assets in the Americas” after pricing became too difficult in the upside market last year.

The financing and pricing of the deal was on difficult ground due to supply chain challenges on the renewables side of the deal. “With the hindsight brought by the surreal events of early 2022, our caution has delivered the best returns of the year,” said ContourGlobal CEO Joseph Brandt.

Real returns weren’t bad either in a volatile market. The company’s adjusted cash profit of $842m (£638m) was up 17% on last year, and it stuck to its 10% annual increase in dividend payouts quarterly. The thermal unit – mainly gas-fired power plants – contributed most of the increase in adjusted cash profits, thanks to the $642 million acquisition of US-based Western Generation and Trinidad and -Tobago.

This resulted in a huge increase in the thermal division’s electricity production as well as an increase in net debt as cash was used to pay it, leaving reserves much reduced. Net debt stood at $3.8 billion as of December 31, although the company said project-level refinancings had “locked in” lower interest rates and made higher dividends possible.

Going forward, the massive shift in European electricity markets is likely to lead to greater coal generation and hence demand for ContourGlobal’s carbon capture services, while the introduction of regulated pricing would have “a positive impact” on its European thermal assets, the company said.

ContourGlobal also discussed its renewable energy assets in Europe, particularly onshore wind in Austria, but also clarified that green energy alone would not be enough to keep the lights on in the absence of imports of Russian gas. “We are in the middle of a long [than assumed] transition that will see a bigger role than expected for power generation based on lignite, nuclear and liquefied natural gas,” said Brandt.

Consensus estimates call for lower sales this year (to $1.76 billion) but with higher margins, which means cash and operating profits should be maintained. The company cited shortages of key ingredients for renewable energy projects as a problem this year, as well as rising commodity prices, but maintained a “positive outlook for growth”. We believe that betting on an electricity supplier in the current crisis is a good idea. To buy.

IC Last Seen: Buy, 197p, Aug 9, 2021

ORDER PRICE: 199p MARKET VALUE: £1.3 billion
TO TOUCH: 198.2-199.2p TOP OF 12 MONTHS: 210p LOW: 172p
NET ASSET VALUE: 56ȼ NET DEBT: $3.8 billion
Year at December 31 Revenue (in billions of dollars) Profit before tax ($M) Earnings per share (ȼ) Dividend per share (ȼ)
2017 1.02 40.6 3.00 2,600
2018 1.25 27.8 2.00 1:40 p.m.
2019 1.33 59.4 4.00 14.80
2020 1.41 72.3 2.00 16.20
2021 2.15 143 12.0 17.86
% change +52 +98 +500 +10
Ex div: March, 31st
Payment: April 14
£1 = $1.31

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