Uranium and gas big winners of the European energy backflip
Uranium and natural gas are coming in from the cold with potentially profound implications for investors.
Despite being two of the most efficient sources of relatively clean energy, uranium and gas have been treated as enemies of the environment, putting them beyond the reach of some fund managers.
The reality of energy-starved Europe and power-hungry Asia changes this narrative and transforms assets recently deemed unsuitable in an ethically driven portfolio into desirable investments.
This is largely due to a clerical adjustment in the definition of “good” energy.
Technically, what has happened is that the European Union (EU) has turned to the murky world of “taxonomy”, the craft (or science) of naming and classifying things into groups having common roots.
Until recently, uranium and gas were lumped together in a bundle that included oil and coal and therefore shared a common negative classification of environmentally unsustainable – as defined by EU regulations.
Reclassification gives desirable investment status
With a unique, but very important, change in their classification, the EU now considers gas and nuclear energy as “sustainable sources of energy under certain circumstances”, the most important condition for gas producers being that be sustainable if used to generate electricity. to heat or cool a house, while new nuclear power plants (and modified old ones) are also welcome in the new taxonomy.
The first effects of EU policy changes can be seen in recent share price movements in Australia’s energy sector where discovery news, once ignored, can now produce a dramatic response, such as rising 81% over the past few weeks by the Northern Territory uranium explorer. DevEx (ASX:DEV).
While it’s still a long way to know whether its uranium-rich strike on the Nabarlek South project will prove commercial, let alone whether DevEx will ever be able to export uranium, the stock has gone from 0, $21 in early July to last trades of $0.38. .
Other uranium stocks are also riding the wave of enthusiasm for low-carbon fuel as governments recognize that the nuclear fuel cycle is the lesser of two evils and could even play a leading role in compensation for the effects of climate change
Paladin Energy (ASX:PDN) and Boss Energy (ASX:BOE) have been two of the history leaders in the uranium renaissance as they prepare to restart mothballed mines. Boss is up 30% from last month and Paladin is up 22%.
Uranium itself sits at around US$48.70/lb in the spot market – down from its 12-month high of US$65/lb reached in April, shortly after the invasion from Ukraine by Russia, but double the US$24/lb of two years ago.
Gas on a winning streak
Gas is also enjoying a winning streak as Europe scrambles to replace dwindling Russian pipeline supplies with liquefied natural gas (LNG) at $60 per million British thermal units, compared to $40/mbtu in Asia .
This could potentially trigger a trade war, with some LNG producers considering breaking contracts with Asian customers to catch up with price spikes in Europe.
Australian gas-exposed companies are on the rise.
Beach Energy (ASX:BPT) is up 40% year-to-date thanks in part to local gas sales, but also because it’s a rare example of a relatively small producer finding a way to access the export-oriented market through an agreement with BP on its share of gas to be produced from the Waitsia field in WA.
The war in Ukraine and the realization in Europe that Russia has a stranglehold on the region’s energy supplies – particularly the fossil fuel trio of gas, oil and coal – are driving the change in how the EU and investment markets view uranium and gas.
Soaring gas and electricity prices have sparked a rush for alternative sources of supply which, in turn, has disrupted the global gas and coal trade, which is good news for Australian producers who are on a wave of high demand for non-Russian energy.
Coal is also skyrocketing
Coal producers have so far been the big winners from the seismic upheavals that have rocked the global energy market, with local leaders such as Whitehaven Coal (ASX: WHC) offering a price gain of 600 % over the past two years to investors willing to ignore the political inaccuracy of investing in coal.
The coal rush is likely to continue with Europe soon to introduce an outright ban on Russian coal, with Australian, American and South African miners moving in to fill the hole.
Over the past three years, some fund managers and banks have adopted a fossil-free investment policy, while uranium has been a banned sector for decades.
But, as the energy crisis in Europe demonstrates, a general ban on certain types of energy is difficult to maintain when the potential environmental damage is far outweighed by the economic damage.
What this means for Australian investors is that certain industries, particularly gas and uranium, have been restored as suitable investments thanks to dire times in Europe and a growing energy crisis in Asia.
ESG funds take a stand
A first hint of what is to come can be found in the ongoing shifts in funds with strong environmental, social and governance (ESG) themes which have been significantly underperforming against funds exposed to fossil fuels and carbon. ‘uranium.
Without even apologizing for being wrong over the past two years, some ESG funds have quietly amassed large positions in fossil fuel companies, ostensibly because they want to influence management decisions, but more likely because the high price of not being exposed to a winning sector.
Perhaps the two most notable changes can be found in a Bank of America report that placed oil companies at the top of an ESG list of environmental top performers, and a study that showed that 6% of European ESG funds hold now shares in Shell whereas none did last year.
Russia’s invasion of Ukraine changed the world in many geopolitical ways, but it is also beginning to have a profound effect on the investment decisions of professional fund managers.
The same forces that push ESG funds towards fossil fuels (especially gas) and uranium should influence private investors.
A sea change is underway in the energy sector, as certain resources previously consigned to investment are being reclassified, not only because they are recognized as environmentally acceptable, but also because they are economically essential.