Tools of the Transition: Picks & Shovels
Although renewable energy has been gaining increasing traction over the past decade as the costs of renewable energy generation and perhaps more importantly, energy storage have fallen, 2020 was a seminal year for transitional energy investors driven by governments seeking to “build back better” after COVID-19. The US has committed US$2.25trn largely focused on the energy transition while the EU has committed US$0.54trn with companies around the world including China committing to net zero targets. Bloomberg NEF reports a record US$501bn was deployed in 2020 itself across all subsectors of the energy transition. To date much of the attention has been on a handful of leaders within the various sub-sectors whether it be Tesla (TSLA US) in Electric Vehicles (EVs), ITM Power (ITM LN) in hydrogen which rallied 609% and 524% between March 2020 and their January 2021 peaks.
Whether a single EV or fuel cell design, these companies rely on a wider network of new technologies and service providers to deploy charging infrastructure, hydrogen storage, wind turbine servicing and tethering which to date, have largely gone under the radar for investors. With trillions in capital due to be deployed into transitional energy, we have identified a number of companies providing services and technological solutions to support the transition. The world is in the early stages of a secular growth trend and with new capital budgets only approved within the last 12 months much of this capital has yet to be deployed and contracts for service providers are in process. Consequently, we believe this is an ideal time for investors to review ahead of a re-rating which has already taken place for the core businesses within each sub-sector.
The metaphor which underpins this is the California Gold Rush where although some gold prospectors achieved success, a more reliable trade was selling picks and shovels or indeed denim jeans to the many hopeful prospectors who were unsuccessful. The parallel today is the wide range of competing technologies for energy storage in terms of car marques, battery technologies, fuel cells compared to the charging points for EVs or steel storage for hydrogen which will be necessary to support the rollout of the core technology.
Our report focuses on three sectors within the energy transition and with a bias to UK small cap opportunities. Oilfield services businesses which are adapting their business models to support wind are Lamprell (LAM LN), James Fisher (FSJ LN) and Tekmar (TGP LN), in hydrogen support services Pressure Technologies (PRES LN), Johnson Matthey PLC (JMAT LN) and James Cropper (CRPR LN) and finally in electrification Nexus Infrastructure (NEXS LN) and Volex (VLX LN). These have the potential to experience impressive earnings growth over the coming decade while others may prove to be attractive takeover targets.
Phil Smith, Head of Technology & Transitional Energy | T: +44 (0)20 3617 5187 | E: [email protected]
Taro Kiley, Energy Analyst | T: +44 (0)20 7096 9581 | E: [email protected]
Oliver O’Donnell, Head of Research | T: +44 (0)20 3617 5180 | E: [email protected]
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