An undervalued sector embedded in the transition to green energy

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

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