Energy rationing: who are the likely “winners”?

Oil companies have made extraordinary profits this year as prices have soared, with Royal Dutch Shell posting gains of £9billion in the second quarter, while BP posted its biggest quarterly profit for 14 years, at £6.9 billion.

But other stocks should be boosted, especially if the European Commission decides to activate a binding rationing target across the EU.

Germany looks particularly vulnerable, with the Bundesbank estimating that gas rationing would cause German GDP to fall by 5%, and the country being hampered by its lack of alternative energy sources.

Spain, however, has invested more heavily in liquefied natural gas (LNG) terminals and can therefore import more from countries like the United States and Qatar, while France also has a strong electricity base. nuclear.

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But according to Randeep Somel, portfolio manager at M&G Investments, while this winter is likely to be difficult for consumers and industrial businesses across Europe, “we should be in a much better position at this time next year as our Energy imports will not be as concentrated in a single producer and the infrastructure will be in place to provide greater flexibility”.

LNG ‘sea change’

In terms of increased investment in Europe, gas and electricity infrastructure should be given a boost, given the need to address transport imbalances across Europe and as stakeholders urgently scramble to connect the floating LNG terminals off the German coast. Government subsidies will also likely play a role.

According to Will James, manager of the Premier Miton European Equity Income fund, assuming that Germany gets the replacement of LNG or gas from Norway and energy shipments from the United States, the focus will be on the consequent triggers from an energy point of view.

He said funds could be available for building insulation panels to make infrastructure more energy efficient, ensuring the environment is not as impacted as it is likely to be over the next six months, while Germany is falling back on coal-fired power plants.

“At the moment the focus is on the losers, but it’s also important to look at who the potential relative winners are going to be,” he said.

“There has been a real sea change in the approach to natural gas. After many years of delaying the approval of LNG terminals, Germany has now, within months, approved the construction of these terminals to facilitate the import of gas.

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The French company GTT is one of the actions likely to benefit from it. The engineering company manufactures membranes for LNG carriers up to specialized container ships, mainly liquefied gas transport ships.

Acceleration of renewable energies

The EU has raised its clean energy target for 2030 from 40% to 45% and according to Somel, this acceleration will benefit utilities focused on renewable energy, as well as companies that supply solar and wind energy equipment. .

Indeed, this will likely be further boosted by the commission’s €210 billion public-private investment target set out in its REPowerEU proposal to be independent of Russian supply by the end of the decade.

Nitesh Shah, head of commodities and macroeconomic research for Europe at WisdomTree, said the rations would also accelerate the transition from hydrocarbons to renewables, with enablers such as battery manufacturers likely to be the clear winners. , even if the price of key inputs will increase.

“The materials used to make them, such as copper, nickel-aluminum, zinc, cobalt and lithium, could see increased demand. However, in the short term, the supply of these metals could decrease as smelters are reducing capacity with energy rationing whammy could drive up metal prices,” he explained.

However, there is an ongoing debate as to whether renewable sources will be able to fill the oil and gas supply gap. As a result, Germany may have to rethink its plan to phase out nuclear energy by the end of the year, as the Russian-Ukrainian crisis necessitates a return to the use of nuclear energy and former national coal-fired power stations.

Elma de Kuiper, portfolio manager of European equities at RBC Global Asset Management, said that while the threat of shortages would likely be a boom for companies that meet sustainability requirements, many different factors would ultimately drive it up. the price of gasoline.

She also noted that shortages would benefit gas companies able to meet short-term gas demand from non-Russian sources.

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ESG shift?

Rob Crayfourd, portfolio manager at CQS, reiterated that the main winners would be producers of other energy sources – European gas and global coal and oil – as companies shift to diesel generators.

“It’s both on the back of short-term profits and a changing policy environment, moving from net-zero policies to encouraging new supply from those same producers, following a strong awareness by governments that the energy transition cannot happen overnight,” he said. said.

The CQS Natural Resources Growth and Income fund is the longest running energy fund in the seven years since Crayfourd took over the fund, with holdings of 39.2% currently split between the oil, gas, coal and uranium.

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“Energy producers have been the most attractive for a long time,” he said. “Many funds have been unable to hold them in size, if at all, due to ESG constraints, as we see an improvement in the perception of the sector by investors and governments, which could facilitate a multiple revaluation, due to the enormous importance they have in the face of the energy crisis.”

Downside Opportunities

Adam Whiteley, head of global credit at Insight Investment, explained that from a macro perspective, markets have already priced in much of the downside risk from energy shortages and a dramatic decline in assets in Europe has begun. to create attractive investment opportunities for patient investors. .

“For context, European credit markets are not far off the levels we saw at the height of the pandemic,” he said.

“In the current investment landscape, we find attractive opportunities in the chemicals sector, as well as with the relative value of European assets versus US assets, as European assets currently have a larger cyclical premium.”

James Sym, head of equities at River & Mercantile, said historically when earnings have fallen it was often a good time to buy.

“Going forward six months, the cost of living is likely to come down. The Fed is no longer raising rates and inflationary pressures on corporate margins are becoming tailwinds,” he said.

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