An undervalued sector embedded in the transition to green energy

Alison Savas

Antipodes

The retrofitting of global energy systems designed to run on fossil fuels is a shift unsurpassed by anything since the industrial revolution.

While on the surface it appears significant progress has been made, globally fossil fuels still account for about 80% of primary energy.

The task ahead is enormous, complicated by the fact that while changing the piping of our energy systems, we need to maintain living standards and allow developing countries to increase their energy consumption as their wealth increases.

This scale issue is one of the biggest challenges in the decarbonisation of economies. It’s a multi-trillion dollar and multi-decade investment process, yet there are market participants trying to fit decarbonisation into a typical 1 to 3-year investment horizon.

The transition fuel

Over the coming years, renewables will continue to rapidly expand in all parts of the world. But our research and industry engagement indicates the scale issue, along with the reliability of renewables, will lead to an expansion in global gas consumption over the next decade.

Natural gas produces half the emissions of coal per unit of electricity. It is a transition fuel that isn’t fully appreciated by the market and we see natural gas players as being materially undervalued when considered within the decarbonisation narrative.

As grids are growing increasingly unstable due to the higher penetration of renewables, they’re burning more gas. So, we have two powerful drivers - the first is the replacement of coal and the second is this balancing act within power grids.

This is a potent combination and significantly reduces carbon emissions.

Taking advantage of greater global gas demand

The broad shift in power generation in the US towards gas and renewables, and away from coal is estimated to have reduced carbon emissions by 25% since 2007 and we see the US growing into a more important exporter of natural gas.

US gas prices are currently US$10/unit cheaper than global gas prices, and this will attract a lot of exports out of the US. This could have a profound impact on the US gas players which have effectively been landlocked for the past decade.

We own Exxon (NYSE: XOM), which is a natural gas producer and is shifting towards more gas, and we have exposure to a variety of other leading US natural gas players.

We see these powerful demand drivers remaining and strengthening globally - and the increase in LNG exports will bring much higher global pricing to the US players because the US gas market is being globalised.

ESG and the energy transition

As the focus on ESG amongst investors continues to sharpen, decarbonisation dominates the discussion.

But when considering the energy transition, a backwards-looking approach and intransigent stock screening is not the answer to affect change or to generate alpha.

Investors want to drop carbon exposed stocks like hot potatoes because it’s becoming problematic to own high carbon emitters. But is divesting carbon exposed stocks the answer? Does anyone want these companies to disappear into the private sector with no shareholder oversight?

A more sensible approach to ESG involves managing this transition period towards decarbonisation and having a seat at the table.

Take power utility companies as an example - most score poorly on a backward-looking basis because of carbon intensity, yet many are investing in renewable capacity because it’s essential to the long-term solution to decarbonise economies.

High carbon emitters are some of the most important pivot points to decarbonisation and for investors there can be significant value owning companies that are misunderstood from an ESG perspective.

This is where ESG can be a source of alpha, along with affecting positive outcomes for society.

Podcast: Uncovering opportunities through an ESG lens

In this new episode we discuss:

  • How ESG can be a source of differentiated alpha.
  • How shareholders can support positive outcomes, including Antipodes’ recent experience voting against Exxon management to improve governance.
  • How engagement can be used to build confidence around investment cases, including Antipodes’ experience with Norsk Hydro, a leading global aluminium producer with a CO2 footprint significantly lower than peers



Never miss an insight

Enjoy this wire? Hit the ‘like’ button to let us know. Stay up to date with my content by hitting the ‘follow’ button below and you’ll be notified every time I post a wire. Not already a Livewire member? Sign up today to get free access to investment ideas and strategies from Australia’s leading investors.

........
This communication was prepared by Antipodes Partners Limited (ABN 29 602 042 035, AFSL 481 580) (Antipodes). Antipodes believes the information contained in this communication is based on reliable information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distribution and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so in light of their specific investment objectives and financial situations. Any person considering action on the basis of this communication must seek individual advice relevant to their particular circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws, Antipodes disclaim all liability to any person relying on the information contained on this website in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. Any opinions or forecasts reflect the judgment and assumptions of Antipodes on the basis of information at the date of publication and may later change without notice. Any projections are estimates only and may not be realised in the future. Information on this website is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained on the website is prohibited without obtaining prior written permission from Antipodes. Pinnacle Fund Services Limited ABN 29 082 494 362 AFSL 238371 is the product issuer of funds managed by Antipodes. Any potential investor should consider the relevant Product Disclosure Statement available at www.antipodesonespartners.com when deciding whether to acquire, or continue to hold units in a fund. The issuer is not licensed to provide financial product advice. Please consult your financial adviser before making a decision. Past performance is not a reliable indicator of future performance.

Alison Savas
Portfolio Manager
Antipodes

In almost two decades of investing in equities based in Sydney and Singapore, Alison has worked through various market cycles and navigated major market events. Alison is a portfolio manager at Antipodes and a member of the senior investment team....

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.