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Catharina Hillenbrand-Saponar
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Catharina is an expert in the energy sector, including utilities, oil/gas, cleantech and unconventional/alternative energy. She has been a ranked analyst for global investment banks for many years. Her analysis covers thematic ideas and long as well as long/short stock picks.
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  • Cool Energy - Can They Make It Hot. Further Musings On Risks And Opportunities Of E.ON's Split

    E.ON's new strategy embraces the change and structural shift I anticipate for broader energy markets. It now needs to consider its pr and marketing in competition or partnership with much stronger brand equity consumer sectors. It will be involved in battles of boundaries, but may be able to turn that to its advantage. Equipment and consumer ownership, service provision and margin structures are all impacted. Commodity risk will arguably increase, as will financial risk. E.ON has reduced political risk, but increased execution risk.

    E.ON's big bang announcement of the split of its generation and upstream businesses begs further long term thoughts on risk and opportunities.

    Is this the emergence of "cool" energy companies, akin to the Apples of the consumer world? With branding that emphasises new energy, a young and dynamic image, smart features, and clean tech, all along with a pr strategy that brings it much further up the curve. From E.ON's current perception to cool energy, there is a long way.

    Product, ie hardware may become an integral part of such a strategy. That means, branded appliances with consumer appeal. Those will more likely than not come from a different set: household goods and consumer goods manufacturers, but also the clean tech sector and broader tech sector. The utility will be involved in a battle of boundaries as every sector tries to get a share of new energy. It may find opportunities through partnerships that bring the benefit of a step up in consumer and public image.

    E.ON will be well advised to bring package offerings to the market. It may have to enter into partnerships for hardware sourcing as said above. Services are an integral part of that, as recognised by management. In that, E.ON now stands out in the sector with a very consumer services driven model.

    Should management eventually take things a step further and go down an acquisition route, I would anticipate a negative reaction. There are potential targets amongst the vast debris of renewables developers and equipment manufacturers with strong consumer brand equity.

    Who will own the equipment? The utility? The consumer? The manufacturer? I gather, consumers will own small appliances. But, as they may develop new, energy related features, such as storage, there may well be interest in changing ownership structures. Distributed generation may be owned by the consumer or not. It may be leased. In which case, will the utility be the owner or the manufacturer? If the manufacturer remains the owner, the utility's ultimate share in the margin of the product has to be questioned. If the utility is the owner, it has to take distribution and channel risk and with it risk of depreciating working capital. That risk per se is not new, but it is new for supply utilities.

    Commodity risk will increase. In absence of vertical integration, the generation hedge will disappear, leaving the company exposed to commodity risk - on the other side than what it has faced so far. I envisage forward purchasing rather than forward selling, as currently the case. At the moment, power price risk may not be a prime concern. But, power cyclical, cycles are very long, and eventually the cycle will turn.

    Short term volatility and mismatches between commodities moves and end customer tariff adjustments will need to be managed. Working capital requirement will increase.

    A supply business can command an Ebit margin in the order of 4-6% without vertical integration. An enhanced supply business, ie with value added service offering, service/product packaging and consumer brand equity, may be able to enhance that by 100-200bps. But, that is still less than an integrated generation business.

    Compressed margins require reduced leverage in order to maintain financial ratios, particularly interest cover.

    Has E.ON de-risked its business or increased risk? It is grasping the opportunity of a paradigm change in the shape of the energy sector. Without a question, in my mind, execution risk has greatly increased. Financial risk has increased. The flipside is a reduction in political risk - most likely.

    Dec 11 6:18 PM | Link | Comment!
  • What The Numbers This Week Tell Us

    The oil sector begins to feel the pinch of commodity weakness. Services are worst hit, as evidenced by Subsea 7 (OTCPK:SUBCY). The E&P sector is still sheltered through hedging and selective names can outperform on production growth.

    I see GDF Suez (OTCPK:GDFZY)as the integrated utility major of choice for Q4 and beyond and expect its ytd outperformance vs the sector to widen. GDF Suez's 9M numbers were short of consensus, but the underlying business is delivering stronger growth and profitability than most of the sector peers. E.ON (OTCQX:EONGY) and RWE (OTCPK:RWEOY) have beaten consensus, but deliver weak fundamentals. Enel is far from a recovery still and its numbers are uninspiring. SSE is entering a phase of fundamental weakness, as witnessed by the latest cautious management statement.

    The renewables sector is delivering good year end numbers and should benefit from positive seasonality into Q4. Canadian Solar (NASDAQ:CSIQ) is this week's example.

    § Warm weather, oversupply and weak power prices have hit the entire utilities sector's 9m results. Regulation is unhelpful in the major European markets, now including the UK.

    § Those conditions will persist in Q4 and likely Q1 15. The unhelpful warm winter will be a negative as will be weak demand and pricing.

    § In that environment, European power generation and supply will underperform. Of the utility majors that have reported this week, GDF Suez stands out with two strong organic growth drivers that withstand commodity weakness and deliver sustainable growth.

    § I do not see major downside risk to consensus to most of the names. Consensus is bottoming out for E.ON and RWE. But the DEA uncertainty downside risk on RWE's net numbers. Sentiment is flat for Suez.

    § Oil is continuing to deliver weakness on guidance and order flow, selectiveness is the answer.

    § The clean tech sector is reaping the benefits of restructuring and good demand.

    Tags: energy, utilities
    Nov 14 11:00 AM | Link | Comment!
  • Chinese Infrastructure And Energy Investment - One More

    Chinese investors may be about to conclude another big European infrastructure deal, with the potential sale of a 35% stake in CDP Reti. I do not believe that this will drive up the share prices of SNAM and Terna short term. But I see the deal as attractive for the parties involved. I do see active Chinese investment in infrastructure, energy, utilities and cleantech in Europe. That should support private transaction activity, sector valuations and also operating fundamentals.

    The Italian government is in advanced talks to sell a 35% stake in CDP Reti to the Chinese State Grid National Development, a wholly owned subsidiary of the Chinese State Grid. CDP Reti holds a 30% stake in SNAM and will also hold a similar stake in Terna.

    The deal would be worth about Eur 2bn. I estimate it could exceed Eur 2bn, on the basis of both companies' current ratings. But because the stake is in unquoted CDP Reti, a discount can be justified. Terna trades at P/E of 15.3x 2015E, which is at the high end of the European utilities sector. It yields 5.03%. SNAM trades at a P/E of 14.8x 2015E and a 5.8% yield. The yields are attractive, but I do not see much room for multiple expansion at this stage.

    The cash flow attractions of first and foremost Terna, but also SNAM and their strong dividends make them prime investments for infrastructure funds. The Chinese investors will see that as one of the core attractions.

    The deal follows a string of Chinese investments in infrastructure globally, in energy in Europe, and in Italian energy, utility and infrastructure assets.

    But also, the energy context fits with the investors' broader strategy: Peoples' Bank of China's 2% stake in ENI and Enel (deal of March 2014) and Shanghai Electric's acquisition of a 40% stake in Ansaldo are intriguing.

    SNAM has the particular attraction of gas infrastructure which in my view will get increasingly valuable. It will become the backbone of the broader energy system and an enabler of affordability and system reliability. SNAM also operates LNG terminals which will in my view become highly valuable assets in a world of increasing global gas trade connection and LNG arbitrage. The Chinese interest in that element must be very high.

    Infrastructure has partnered with a Chinese connection for a while in a symbiotic way. Chinese investors are looking to gain access to strategic resources. Some of that is achieved through infrastructure investment. That in turn in many cases enables asset or resource development. The many deals in Africa are examples o that.

    The Italian government and the companies would achieve stable shareholders. There might still be concerns of strategic asset protection. But the Italian government has been looking for Chinese investment as a help to reduce its budget deficit.

    Chinese infrastructure and energy investment in Europe will continue to play an active role, see also UK nuclear and UK water. I can see this as a support factor for large scale private deals. That should also support valuations and interest in the sectors on a broader scale.

    Jul 25 8:35 AM | Link | Comment!
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