UK energy crisis: Big firms positioned for further gains

FTSE 350 Oil Gas and Coal has risen 9.3%

1.5 million UK customers have been left out in the cold without a gas provider in recent weeks.

However, perverse though it may seem, it is the gas sector that is winning from an investment perspective and it could see further benefits as industry commentators expect the government to rethink their energy transition strategies.

In the month to 22 September, the FTSE 350 Oil Gas and Coal index has risen 9.3%, while the FTSE 350 has risen just 0.2% and the MSCI ACWI Climate Paris Aligned index has returned 0.1%, according to Morningstar Direct figures.

Some of the top gainers in the Oil Gas and Coal index include Centrica, which was up 8.4% in the five days to 23 September and Tullow Oil up 3.3%, Royal Dutch Shell up 3% and BP up 2.4% over the same time period.

“There have been some gains as far as the bigger energy providers are concerned given that the failures of smaller companies would extend their customer base significantly,” explained Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

Countries’ climate action plans point to rise in emissions by 2030, UN warns

Harrison Williams, equity research analyst at Quilter Cheviot, agreed and said Centrica and E.ON were both “positioned well for further market consolidation”.

Both Streeter and Williams also thought some of the share price uptick was down to conjectures on the UK Government’s next move.

Streeter pointed to “speculation that the UK Government could provide extra funding for the bigger companies to take on stranded customers”. However, she expects that to be “short lived”.

Williams said a more long-term shift could be in the UK Government “tweaking or dropping entirely recent proposals for further increasing competition in the space with the proposals for opt-in switching from 2023 and a trial for opt-out switching to make it easier for consumers to find a cheaper deal.”

However, it is not just government policies on the sector itself that could lead to long-term boosts to the big oil companies. The shortage, not just in the UK, but across Europe and in Texas, has highlighted the need to re-think climate change proposals and incentives, according to Robert Minter, director of investment strategy at ASI.

“Many governments worldwide have sought to restrict capital flows to fossil fuel companies,” explained Minter.

Has the wind gone out of alternative energy?

He highlighted the global depletion rate of oil production is 5%-7% per year, which means if no investments are made into future production, the oil supply constricts naturally by five-to-seven million barrels per day.

“The plan of governments has been to restrict capital, allow oil supply to fall by this amount or more, and force users, the demand side, to shift to alternatives,” explained Minter. “While this is a ‘cheap policy’ that does not affect government budgets, it does nothing to incentivise people to demand more renewable energy.”

Clive Hale, chief strategist at Albemarle Street Partners, agreed that lack of investment was playing a significant role but said there were other important factors when it comes to the UK’s recent shortage including that France is short on power-generation and there has been a fire at the UK end of the under-Channel power cable,  “which will be running on much reduced capacity until next spring”.

So where next for government’s climate change policy?

“There has to be more focus on other alternative generation and energy storage sources that complement the intermittency to ensure energy security,” according to Richard Lum, co-CIO of Victory Hill Capital Advisors.

However, Streeter said it could be that gas is seen as “a vital transition fuel” going forward, particularly liquefied natural gas.

Streeter added the big oil companies are diversified in low carbon energy so “if gas proves a vital transition fuel as we move toward a lower carbon energy mix, then oil majors are in a position to capitalise on that short-term gain and future green investment at the same time”.

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