- Snam delivers an unsurprisingly resilient Q2, demonstrating the low business volatility of regulated utilities.
- Snam continues to expand on its assets in new geographies, presiding over more valuable gas ‘toll roads’.
- With flexible assets to deal with a potential hydrogen transition, there’s option value in that too.
- With a yield above 5%, Snam remains an attractive income vehicle.
Snam (OTCPK:SNMRF) continues to be our favorite gas transmission pick into Q2. Not only have they continued to expand their asset base, setting up for a more geographically diversified stream of 'toll road' income, but their efforts to expand on the ESG side of things continue. With discrete efforts to get more involved in the energy transition, as well as their higher asset flexibility for the transportation of hydrogen should it become an essential fuel, they position themselves as a long-term player well entrenched in the EMEA utility infrastructure. With a dividend yield above 5% under-girded by reliable cash flows, Snam is an excellent income pick for the current environment.
H1 Looked Good
Snam performed for the quarter in a manner befitting a regulated utility. Sales went up slightly due to minor commodity effects as well as growth in the RAB, and EBITDA remained in line.
(Source: Snam HY Results Presentation)
Moreover, 111 million EUR was spent in investments in Mieci and Evolve to further position Snam in businesses related to the energy transition. These additions to the SnamTec portfolio give Snam access to businesses in infrastructure and energy efficiency management.
Another critical stake was taken by Snam this quarter as well. Abu Dhabi has sold its stake in its natural gas pipelines, ADNOC, to a consortium of infrastructure and private equity investors including Snam and the Singaporean Sovereign Wealth Fund GIC. About $8 billion of the $10 billion ticket was financed by debt. Snam, which was the only strategic sponsor in the transaction, had an outlay of $250 million. This gives them equity in yet another important gas transmission infrastructure in EMEA. ADNOC's network spans thousands of kilometers, again benefiting from the attractive 'toll road' economics that exist for pipeline assets.
(Source: Snam HY Results Presentation)
As a regulated utilities operator, Snam will benefit from an AA credit-rating counterparty in the UAE, as well as a more consolidated position in the Gulf Area, which of course is an extremely important and well positioned geography to run a network. The need for a quality operator is high with complex networks running from both onshore and offshore fields. We are very optimistic that the affiliate income, which will come in dividends paid on a quarterly basis to Snam, is highly reliable. We think that it is likely that this income will be paid out as planned for the 20 years duration of the concession.
Another important matter is that of hydrogen. As we noted in the earnings call for Enagas (OTCPK:ENGGY), analysts are beginning to pay more attention to the hydrogen opportunity. Indeed, hydrogen fuel cells are an idea that offer better energy economics than many of the currently fashionable renewable energy sources. Although gas, relative to crude oil, is less abrasive to environmentalist agendas, there is definitely an attractive proposition in the idea of having assets that can carry hydrogen in the off-chance that it becomes a highly emphasized source of fuel. When Enagas were asked point-blank about the flexibility of their assets relative to Snam, it became clear that they could not answer to the higher quality assets in Snam's network. Indeed, Snam benefits from the fact that its currently instituted gas transmission lines are capable of transporting hydrogen as well as natural gas with minimal incremental investment. Although Enagas is trying to create option value contingent on the blow-up of hydrogen energy through off-loading facilities and other infrastructure, their transmission asset as they are do not offer the same flexibility.
There are other gas transmission players to consider, for example Enagas. However, Enagas is in a position that they are trying to diversify their Iberian risk with investments in diversified transmission affiliates. In Iberia the looming risk of Spanish politics remains, which has consistently buffeted regulated utilities through unfavorable, albeit demand-decoupled, remuneration schemes. Snam, although it offers a lower dividend yield, clearly is more defended from risks in any individual jurisdiction, and where their exposures are more concentrated they can rely on precedent of more investor-friendly behavior. With recent equity income added from the high-reliability ADNOC concession, as well as the greater optionality in their transmission network with respect to the hydrogen opportunity, a 5% dividend yield is not one that we would pass up. Where reliable income is key in a market that will likely be characterized by continued volatility, Snam remains a favored pick.
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Analyst’s Disclosure: I am/we are long SNMRF, SNMRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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