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Investing in an energy crisis; a double play

The Russia/Ukraine war has turbocharged what was already a worsening energy supply demand imbalance that had emerged in late 2021. For investors, in terms of picking winners from this ongoing energy crisis, they can assess opportunities in two contexts. Firstly through the context of conventional oil and gas equities, and secondly through the fast-tracked emergence of clean energy alternatives as developed nations seek to reduce their reliance on fossil fuels. Below we present a range of research notes that address opportunities for investors from both these perspectives.

  1. Energy Multi-asset investing Ukraine StoneX

    1. A lot of losers and a few winners (energy) – investing in the age of chaos

    Every important financial and economic market will be affected by the war between Ukraine and Russia, according to this report from Vincent Deluard at StoneX. He says the Russian invasion has compounded all the major policy errors of the past decade: central banks’ misjudgement of inflation, the lack of investment in conventional energy, and advanced economies’ dependence on complex and fragile supply chains. The losers from the war, aside of course from the people involved, will be wheat and energy-importing developing countries, which will face balance of payments crisis, according to Deluard, as well as the European economy, the three pillars of which – the US military umbrella, Russia’s cheap energy and China’s endless growth – are all crumbling. He adds US assets, which are priced for peace and endless QE are also vulnerable, with his model based on inflation and military spending suggesting that cyclically-adjusted valuations should fall by 60%. In the short-term, Iran and Venezuela have the most to gain from this chaos, says Deluard, although investors may prefer safer commodities producers, such as Canada, Norway, Brazil, and Colombia. At the sector level, he says investors can still find relatively cheap chaos assets which benefit from the energy crisis: gold miners, Canadian E&P stocks, oil & gas equipment services, oil tankers, and defence contractors.

  2. Canada carbon capture Oil and Gas Veritas Research

    2. Spotlight on Carbon Capture and Storage in Canada

    If you’re not following Carbon Capture and Storage (CCS) developments closely, Darryl McCoubrey from Veritas Research thinks there is a good chance you will be soon given its potential importance to Canada’s energy sector. Canada is set to announce new decarbonization incentives, and he thinks we could see an emphasis on CCS alongside more stringent CO2 penalties. In his research Darryl shows that gas with CSS appears to cost far less than renewables with storage. CSS has yet to be proven at scale, but it could have long-term implications for investments in Canada’s oil & gas and utilities & infrastructure sectors.

  3. energy transition ESG renewables Vanda Research

    3. Who stands to initially win from Europe’s push for energy independence?

    The latest report from global positioning and flow of funds specialist Vanda Research examines the potential effects of Europe’s push for greater energy independence in the wake of the Ukraine conflict. The firm outlines what an accelerated energy transition could mean for European markets over the coming months and quarters, and highlight the potential thematic winners and losers as well as some colour on flows coming into some of these sectors. While headlines continue to focus on the immediate disruptions to Europe’s energy supply, Vanda notes that overall gas imports from Russia have not fallen off a cliff in recent weeks. Instead, the firm says focusing on what European governments – especially Germany – choose to do next from an energy policy perspective could be more fruitful in terms of mapping out the path for assets beyond the short-run distortions.

  4. clean energy energy equities Top Down Charts

    4. Energy and clean energy equities

    Callum Thomas at Top Down Charts says he has lower conviction on the bull case for energy sector equities, given the sharp shift in valuations and positioning that has occurred over the last year. However, he says upside remains as oil likely stays high and absolute valuations are not stretched. On clean energy equities, though price and valuations are still elevated, they have seen a significant reset over the past year, says Thomas. He says the current environment likely helps the longer term case for clean energy equities (both in terms of the interplay with geopolitics and surge in energy inflation).  If energy commodity prices rise further or at least remain elevated, and should there be further follow-through of interest in impact/climate related investment, then Thomas believes there will be a new golden era of capex or real investment in clean energy.

  5. Energy energy efficiency Thunder Said Energy

    5. Smart energy – new momentum?

    Rob West at Thunder Said Energy says smart energy systems optimise energy flows in real time, lowering demand by an average of 7%, with deployment times of weeks or months. They also, he says, help to prioritise during energy shortages, and thus this theme should re-accelerate in 2022. West has now screened 40 companies, 70% of which enable ‘demand shifting’, moving loads like EV charging and electric heating to times when excess renewables need to be absorbed (without expensive batteries), and 50% of which disaggregate energy demand device-by-device, helping to identify faulty or inefficient devices, whose replacement saves another 10-20% energy. Many of the 40 companies have also raised capital since his last update last year, he says, suggesting the theme was already accelerating before 2022’s energy crisis.