2022/04/04

European utilities: threats and opportunities arising from European gas crisis

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Since Russia invaded Ukraine, we have witnessed natural gas, coal and oil prices increase by c.63%, c.95% and c.2%, respectively. It is now clearer than ever before the huge dependency that Europe has on Russia's resources; we would highlight the little short-term alternatives some European countries have, leaving them in a very vulnerable position, especially for the procurement of electricity sources for 2023.

Europe is currently facing a very complicated situation, mainly due to its significant dependency on Russian energy sources (oil 26.9%, coal 46.7% and gas 45.3%). EU countries will have to find energy sources elsewhere, which will undoubtedly disrupt the value chains of some utilities. However, we think this will create opportunities for other utilities. In this report, we analyse the implications of the gas crisis, the exposure of individual countries and utilities to gas (especially Russian gas) and how well utilities are positioned (in the short and long term) to benefit from potential alternative sources.

Most exposed countries
a. Germany (15% electricity generated from gas; over 60% Russian gas); nuclear phase-out in 2022 (currently 13%).
b. Italy (50% electricity generated from gas; over 40% Russian gas); alternative pipelines from Northern Africa.

Least exposed countries:
c. Spain (25% gas; c.10% Russian); well positioned in renewables and best LNG infrastructure in Europe.
d. Portugal (35% gas; less than 10% Russian); well positioned in renewables; good interconnection with Spain.

Best positioned utilities
e. EDP – 60% of EBITDA from renewables vs. c.5% from conventional generation, of which 10% is gas-fired.

Worst positioned utilities
f. ENGIE (large exposure to gas at c.50% and over 20% to Russian gas; partners in Nordstream 1 and Nordstream 2
financing).
g. NTGY (large exposure to gas at over 60% of total generation; gas networks in Spain; over 10% of gas from Russia;
well positioned in LNG).

Our trade ideas are as follows:
1. Buy EDPPL 1 5/8 EUR’27s green bond at B+110.00 (1.38%).
2. Sell ENGIFP 0 3/8 EUR’29s green bond at B+130.00 (1.69%).
3. Buy RWE 0 ½ EUR’28s green bond at B+103.00 (1.42%). Sell NTGY 0 3/4 EUR’29s at B+112.00 (1.52%).

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