Complexity in energy transition attracts investment opportunity

By: Alec Cutler, Portfolio manager of the Orbis Global Balanced Fund

While electric vehicles, batteries, solar panels and windmills dominate headlines around the energy transition, boring bits of the system may do just as much to propel the transition forward – and the companies that provide them may be much more attractive investments.

Looking at the Orbis SICAV Global Balanced Fund, 17% is invested in the stocks and bonds of companies that play some role in the energy transition. To sketch out how the parts of the value chain fit together, let’s start with a typical offshore wind project: the Galloper wind farm off the eastern coast of England. The core of the project is 56 windmills built and maintained by Siemens Gamesa, a unit of Siemens Energy. Helix, which operates a fleet of undersea robots and support ships, conducted the undersea trenching and burial work for the 56 cables connecting those turbines to an offshore substation, and Prysmian, a power and telecommunication cable manufacturer, provided some of the high-voltage cables to connect the project to adjacent windfarms and then 45km back to shore.

As the world adopts broadly dispersed power farms located far away from cities, our energy system will become much more cable intensive. Cables can represent a quarter of the cost for an offshore wind project, and to support wind farms and international interconnectors, the world will need to roll out about 5 000km of subsea cables every year (outside of China, which uses its own suppliers). That is good news for Prysmian, which is the largest of only three major Western firms with the specialised factories to make those cables and the specialised ships to lay them. All that underwater work also augurs well for Helix.

Wind farms are not the only source of growing cable demand. Existing grids need cables too, in part because the world’s electric grids are ageing. The US Department of Energy reckons grid infrastructure will need to be expanded by 60% by 2030. Globally, that translates into US$650bn of estimated grid investment every year. A system juggling intermittent power sources, batteries, home solar panels, power-hungry artificial intelligence data centres, and electrified cars and factories will be more burdened than the grid is today. More electricity needs to travel, and Siemens Energy and Mitsubishi Heavy Industries (MHI) – both make electricity transmission and distribution equipment – are well placed to provide the increasingly sophisticated gear the new grid will require.

As systems become more reliant on wind and solar power, they need to keep the lights on when the wind isn’t blowing and the sun isn’t shining. Drax, a UK power generator, provides reliable baseload electricity, as it can run its biomass plant 24/7. Drax also plays a role in energy storage. The move to a cleaner

energy system is bigger than just the electric grid; it also involves industry and buildings. Siemens Energy offers a suite of products to help companies electrify their operations, while MHI focuses on helping companies switch their heat source from coal to gas, cutting carbon emissions by about 40% in the process.

These companies are applying their skills in innovative ways to move both their own businesses and the broader transition forward. We have built positions in these companies at attractive prices. Drax trades for less than five times earnings. Helix and Signify trade for less than 10 times free cashflow. Siemens Energy is struggling to work through quality control issues at its wind turbine unit, but in our view the long-term value of its businesses is substantially higher than its current market capitalisation. MHI has begun to attract attention, but still trades at a lower valuation than the typical global stock – as does Prysmian.

The energy transition features no shortage of complexity and controversy. Put those together, and it also features plenty of investment opportunity.