John Stepek: What form of energy are you most excited about from an investment angle?
Alastair Bishop: Longer term, probably natural gas, particularly in America. With the advent of shale gas, the US has some of the lowest gas prices globally, so gas use is likely to grow. Companies involved in that, from gas producers to chemical groups that use it as a raw material, to those who supply the related infrastructure, could offer opportunities.
Edward Guinness: There are also some exciting potential niche opportunities on the transport side, such as natural gas vehicles, if the price stays low. It's also going to be very interesting to see what happens with electric vehicles over the next ten years. But trying to pick winners on the technology side is hard right now. I'd look at the material suppliers instead the lithium producers, for example.
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Richard Hulf: We think we are still in the hydrocarbon age, so we are looking for the next frontier oil basin. We've been keen on east Africa for some time and it's starting to pay off. We are also keen on the eastern Mediterranean, east Siberia, and parts of South America, specifically Brazil.
There are as many frontier plays today as there were 20 years ago. It's just incredible that players like Lundin Petroleum and Den Norske, for example, could find the third-biggest oil field ever discovered in the Norwegian North Sea just a few months ago.
John: Going back to shale gas, which many people describe as a game changer': what kind of impact do you think it's going to have, Alastair?
Alastair: America now has lower electricity costs than China, and labour costs have been falling because of broader economic weakness. So manufacturing jobs could return to the States. Already Dow Chemical has announced plans to invest in new chemical capacity, as have ConocoPhillips and Chevron. So cheap gas gives America the ability to recreate a manufacturing base that has been lost over the last ten or 15 years because of higher electricity prices.
Edward: The caveat is that gas prices may not stay this low in the future. Coal plants in America are switching to using natural gas. Some conventional natural gas producers are not producing anymore. There's also a drilling slowdown: the rig count is seeing a meaningful drop. Longer term there's the potential for export via liquefied natural gas (LNG). All this points to higher prices.
Richard: Gas has a great future. But for now the global market is fragmented. There's too much gas and not enough use
for it in the States; there's not enough gas and too much demand in the Far East; and Europe is somewhere in the middle.
Long term, you will end up with global gas spot prices and you won't have to liquefy it because there will be plenty of pipelines. But that's 30 or 40 years away. So the way to make money now is to find niche opportunities. Gas processors in America are a good example. They process gas on a volumetric basis, so they don't really care what the price is. They also strip out the liquids and sell them on at a decent profit.
John: Last time you all came in was about a year ago, in the wake of the Fukushima disaster in Japan. That put paid to any hopes of a resurgence of nuclear power. Has that situation changed at all?
Alastair: Japan is restarting two of its 52 nuclear plants. But that's purely due to fears about voltage dropping in the summer peak period. The country is definitely shifting away from nuclear: 100,000 people marched through the streets of Tokyo in protest against those two plants starting back up.
Pre-Fukushima, the plan was to raise nuclear from 30% to 50% of the energy mix. Now expectations are that nuclear will be cut from 30% to 15%. The shortfall is likely to be met with more LNG, oil, and increased support for solar. Elsewhere, the US says there are no safety issues around nuclear, but that it's just not competitive. China is moving ahead with some of its projects. Britain is still committed, but again there are question marks about the economics.
Richard: I can't see any way of making money from nuclear. But we try to make sure that at least one company we own has some indirect interest in the area. For us, that's Centrica (LSE: CNA) because it's got an option to invest with EDF in the British programme. But I don't think we'll get into trouble for having inadequate nuclear exposure.
Edward: The trouble is, there will potentially be a big squeeze on national grids around the world when new nuclear power doesn't come online. That will push electricity prices higher.
John: How will we deal with that crunch?
Alastair: Britain is in a difficult position, as indeed is a lot of Europe, because it has set itself bold targets, whether you are talking about carbon emissions or just keeping the lights on. It wants to promote renewables and nuclear, but there doesn't seem to be a joined-up policy response. Some departments say we need to cut carbon emissions, others that we need to limit costs for consumers.
For utilities it's a catch-22: they've been told to invest to meet all these targets, but if they try to put up prices to pay for that then they are going to be hauled over the coals. So it's not clear whether governments both here and in Europe are being totally honest with voters about what it means to meet these targets.
Edward: You'll probably need blackouts and drops in voltage (brownouts) to change public opinion and create the
political will to change things.
Richard: That political risk factor is is why utilities are no longer safe havens.
Edward: The quality of debate in the popular press is not good at all. When the Daily Mail argues that a renewable energy policy will add £100 to people's bills over a 15-year period, there is no comparison with what the impact of a 10% move in the natural gas price would do.
Alastair: And renewables are only expensive because the government favours offshore wind, which is one of the most expensive types of fuel. It won't let the free market decide because Nimbys don't want onshore wind. Yet onshore wind probably costs a third of the price of offshore wind. Even solar is cheaper than offshore wind.
John: Even in Britain?
Alastair: Even here. The price of a solar panel has dropped by 50% in the last 18 months, mainly due to benefits of scale and increased competition. It's cheaper to put a solar panel in the south of England than to build an offshore wind farm.
John: Experience suggests that it's very hard for investors to make money out of solar though. Are there any breakthroughs on the horizon?
Edward: The big breakthrough has been the huge shift in costs, which has not yet filtered through into demand. The people
who are making money are those who install and own these projects they are making 10%-15% quasi-government-backed
returns on an unlevered basis, over 20-25 year periods. The risk is reasonably low, which is why you see these huge surges when the opportunity becomes available in various countries. The big change will come when some of the largest countries, such as America, mobilise towards solar.
Alastair: Put it this way, if prices halve again in the next 12 months, which is not impossible, then this time next year we won't be sitting here talking about solar versus offshore wind. We'll be talking about solar versus natural gas.
John: So what would you buy now? Last year, Richard, you tipped Africa Oil at around C$1.50, and it has gone up by several hundred per cent since if we can have more of those, that would be lovely.
Our Roundtable tips
Alastair: I've not got an Africa Oil, I'm afraid. But I can tell you which companies we are overweight in our funds. We like Quanta Services (NYSE: PWR), a leading US energy infrastructure contractor. It builds power transmission networks and also natural gas and oil pipelines. The power transmission grid is pretty inefficient and needs to be upgraded in order to work with increasing amounts of renewable energy and other new forms of generation.
You could have said that at any point in the last 20 years, but it's only now that the money is coming through for that: $16bn in new large transmission projects has been awarded in the last two years. In the previous decade, you only saw $10bn.
John: What changed?
Alastair: In 2005 an energy policy was passed putting in place the framework to support grid investment. The policy was pushed through off the back of a huge blackout in New York. Now investment is finally coming through to get the projects
moving. So there's strong growth on that side. As for the pipeline business, more pipelines will be needed to support oil,
shale gas, and the Canadian oil sands, for example. You're going to need an awful lot more infrastructure within North America alone to get that market working efficiently, let alone support the longer term globalising of that infrastructure.
Another of our top overweights is international oil and gas company Anadarko Petroleum (NYSE: APC). It is well positioned in American shale, both gas and oil. But it's also in the early stages of developing what could be one of the world's largest international gas projects in east Africa, in offshore Mozambique. Cove Energy is the minority partner in this development it owns 8.5%. Cove is currently the subject of a takeover bid.
Anadarko is the operator of the fi eld and owns 37%. So there's positive read-across from the implied valuation of that bid. Anadarko has also had a number of other discoveries this year, which in our view have not been refl ected in the share price. It has underperformed, largely due to an ongoing court case about a legacy acquisition. We think that will be resolved in the next month or so. Once it is, I think the market will see that the underlying asset base is not reflected in today's price.
Edward: We hold China Suntien (HK: 956). A major part of its business is wind farm development. The price of wind turbines has fallen sharply, but the electricity price the company gets from those turbines has been relatively steady and looks likely to rise. So we think it is well positioned. It pays a dividend yield of around 3.5%. Its growth profile has slowed a little, but at six times earnings, I'm not too worried - the existing assets more than justify the valuation.
We mentioned lithium earlier. We recently bought a speculative company called Canada Lithium (TSX: CLQ). It will be producing lithium next year. Its lithium is not as cheap as the lithium produced in Chile, but it's still very profitable at current prices. The outlook for lithium demand is very positive for the next few years, although longer term, we do worry about oversupply.
John: What's the main driver of lithium demand growth?
Edward: Today it's portable devices such as iPods and iPads: Apple is singlehandedly moving the lithium market. Longer term, people are excited about electric vehicles and grid storage, which we think will both become meaningful markets over the next ten years. And I've got to put in a solar stock.
Trina Solar (NYSE: TSL) is as unloved as every other company in the solar sector, but it's one of the less indebted, and one of the lowest cost manufacturers. It has $600m in cash, $1bn in debt and a $500m market cap. If it doesn't survive, no one will. And whoever survives the current crunch in the solar manufacturing industry will be left with the keys to the sweetshop.
John: Do you have any idea when the solar story will come good for investors?
Edward: Realistically, probably 2013 or 2014. But I think demand in the second half of this year will be a lot stronger than analysts expect. I think global demand could reach 35-40 GW this year, with growth in 2013 from countries including China, India, and the US. We also expect some projects to commence in the Middle East. Demand will eventually create stabilisation of pricing and margins, which will support higher valuations.
Richard: A company called Providence Resources (LSE: PVR) has a discovery in the east Irish Sea, called Barryroe. I am a petroleum engineer by training. I've looked at it, and it's much bigger than they say it is. What we like about this is that it's discovered' oil they're not going out exploring for this. We like oil fields that are already established and are simply getting bigger. Our price target is £10.
Then there's TransGlobe Energy (TSX: TGL), which has assets in eastern Egypt. These were first found by the Egyptian state oil company, but with Egypt now in the process of opening up all the stuff the state neglected over the last 20 years, it is being redeveloped with technologies that can increase production. TransGlobe is good at that and it's got a good amount of cash on the balance sheet, it's well funded and can acquire other fi rms in the area.
John: Is it having any problems with the politics in Egypt?
Richard: That's the big risk. Is Egypt going to go into meltdown or are sensible people going to figure things out? But we've seen this many times with oil and gas companies military coups take place, then a month later the market realises they are still producing oil and it doesn't make any difference. And for this year's Africa Oil - in that it's a high-risk play, but it is backed by some existing assets too - is something called Karoon Gas Australia (ASX: KAR).
The thing about Karoon is that it does actually have some discovered gas in the Browse Basin in Australia, which it is developing with Conoco. If the main deal doesn't work out, there is still value there. But the place they are drilling is in Brazil, in the shallow water. The sub-salt play that Petrobras has had a lot of success with in the deep water is shown to have come up to the shallow water where Karoon is drilling some wells in the second half. So it's a similar kind of bet to Africa Oil.
John: Just out of interest, do you have a view on Africa Oil? If someone bought it last year, what should they do with it?
Richard: Well, truth be told, I had forgotten that I had mentioned it last year and was going to mention it again! We still see another 70% upside there, because now it has made a discovery within Ngamia. It is an onshore project in Kenya it has opened up a whole new play and nobody really knows about it.
It's impossible to figure out what this play is worth, but it's four times bigger in terms of breadth and depth in the ground than the adjacent Albertine Rift play that Tullow has already developed. So as far as we're concerned, even though it's gone up by more than 400% since last year, Africa Oil (TSX: AOI) is still a buy.
