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The Bid 196. “Access To The Energy Transition in Public Markets”

Episode Description:

 The shift to a low-carbon economy will demand more capital than any of us have seen in our lifetimes—far more than private actors alone can provide. Public markets—the securities that make up the bulk of most investor portfolios available on stock exchanges—are set to play a much larger role in this transition. So, while private markets may have a head start, public markets are catching up quickly.

In this special episode, Mark Wiedman, Head of BlackRock’s Global Client Business, will lead a conversation with BlackRock investors Evy Hambro, Olivia Markham, and Will Su about the transition opportunities they’re seeing in public markets—and what it will take to fully unlock their potential.

Sources: BHP Insights “How Copper Will Shape Our Future” Sep 30 2024; Bloomberg New Energy Finance Outlook 2024; Our World In Data “Energy Mix: Explore global data on where our energy comes from, and how this is changing”, January 2024; ExxonMobil Global Outlook, 2024; “Energy Explained” Energy Administration EIA, 2022; “Strategic Perspectives on U.S. Electric Demand Growth”, Center for Strategic and International Studies, May 2024; “Decoding Data Centers: Opportunities, risks and investment strategies”, Boston Consulting Group, July 2024; “U.S. Energy-Related Carbon Dioxide Emissions, 2023” EIA 2024; “Monthly price of uranium worldwide from January 2020 to June 2024”, Statista; Global Price of Uranium 1990-2024, FRED Economic Data

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Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.

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<<TRANSCRIPT>>

Oscar Pulido: In the transition to a low-carbon economy, the focus is often on private markets, companies that aren’t listed on the stock exchanges. These might include investments into low-carbon energy projects, clean-tech startups, government partnerships, and the acquisition of physical assets like solar or wind farms. But that’s just one side of the story.

Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing the economy and finance. I’m Oscar Pulido.

The shift to a low-carbon economy will demand more capital than any of us have seen in our lifetimes—far more than private actors alone can provide. Public markets—the securities that make up the bulk of most investor portfolios available on stock exchanges—are set to play a much larger role in this transition. So, while private markets may have a head start, public markets are catching up quickly.

In this special episode, Mark Wiedman, Head of BlackRock’s Global Client Business, will lead a conversation with BlackRock investors Evy Hambro, Olivia Markham, and Will Su about the transition opportunities they’re seeing in public markets—and what it will take to fully unlock their potential.

Mark Wiedman: Olivia, Evy and will, great to have you here on the. Bid.

Will Su: Thank you for having us.

Olivia Markham: Great to be here.

Evy Hambro: Thanks, Mark. Can't wait to do it

Mark Wiedman: Let's start off by talking about the path for energy, the demand that you see over the next couple of decades. Will, kick us off.

Will Su: So, Mark, I think it's important to take a long, long look back through history to understand where we're going forward. If you look back from the year 1800 to today. Energy demand has grown by about 1.6% per year globally. That might seem really, really small, but thanks to the magic of compounding, the world today uses 32 times more energy than we did two centuries ago. And we expect that demand to continue to grow because energy is just so foundational to human progress and quality of living. So, by the year 2050, most forecasts are calling for another 15% or more of energy demand growth going forward. And a lot of that, of course, will come in the form of electrification and more electricity generation.

Mark Wiedman: Evy, what would you add?

Evy Hambro: We are facing an outlook that's shifting. we're going to see a higher rate of energy consumption per unit of GDP as we become an increasingly digital global economy. And that presents a number of opportunities and challenges. What we're faced with today is how do we effectively fund this? How do we, prepare ourselves for resilience within the context of it? And how do we make sure that the opportunities that come with it are shared across society as a whole. It's a, an amazing point in time that we're at right now because it's pretty transformative.

Mark Wiedman: When you look out on the energy mix over time, how do you see the mix of carbon intensive versus low carbon energy changing?

Evy Hambro: It's clear that the area we have come from is an environment where, low cost, easy energy was able to be generated and distributed across the global economy. Going back, you know, thousands of years, it was just burning things and closer to today, we've become increasingly efficient, at extracting the most out of the resources that we had. But I think it's also fair to say that we haven't thought about the consequences of that very rapid growth that Will referred to earlier on. And now, as a society, we are thinking about this. And so therefore things are changing. So, the mix is going to move away from fossil fuels to more sustainable sources, whether that's, renewable power or fossil fuels that have a lower level of impact on the world as a whole. I think we also need to think about where else can we get the power that we need in the future, which is that base load, highly reliable power. And so, we have to think about what's going to replace that mix that we've become so used to for so long.

Mark Wiedman: Will, what are some of the forces that are pushing up energy demand through your 2050 forecast?

Will Su: The key to remember here is that coming decades will for sure be the age of electrification and Gen AI, which has all the buzz today, is going to be just one of several drivers for that demand. You'll also have increasing penetration of electric vehicles. You also have industrial reshoring in a period where we have elevated geopolitical tensions. So, if you just look at the US for example, after World War II, our power demand has grown by about 5% per year, compounded into the early two thousands. And then for the last 20 years, it's really kind of stagnated to not a lot of growth.

But now thanks mainly to the massive investments that the hyperscaler Gen AI leaders are making, we expect electricity demand growth in the US to re-accelerate to 2 to 3% per year into 2030. And data centers, which make up only 2.5% of power demand in the US today is going to be closer to 10% by the end of the decade. So, huge numbers that we're dealing with, and there's going to be challenges along the way. We already have a bit of a power crisis in this country from an affordability perspective. But I'm an optimist, and you might appreciate this, but the word for crisis in Chinese is Vay-tee . So, the first word is danger. The second word is opportunity. And there's going to be a lot of investment opportunities to have here.

Mark Wiedman: So, Will, you're laying out a thesis of a re-acceleration of electrical demand across the west. Olivia, what does that imply for actually electrifying the materials we need?

Olivia Markham: So, in very simple terms, materials are the building block of electrification and the energy transition. Think about the sheer uplift in steel demand. Rare earth demand with wind turbines, silver, aluminum with solar panels or the batteries we need, or the battery materials we need for the electric vehicles. And then we need to connect all of this electricity and distribute it via copper.

But the numbers are simple. We need substantially more materials in the future than what we use today. Bloomberg New Energy Finance, their latest report estimates $2.1 trillion to be invested into energy metals between now and 2050. These numbers are very difficult to comprehend. The sector can't fund that level of investment at current commodity prices. And we really need to think about, what are the best options that we can tackle this huge uplift in materials that we believe that we're going to see as a result of increasing energy demand and the transition more broadly.

Mark Wiedman: I thought materials were the problem. Why do materials matter to electrification?

Olivia Markham: So, this is somewhat the conundrum, right? So, materials companies are in essence carbon intensive or 'dirty' sectors. And we need more materials for the transition, which in turn means we're going to have higher emissions. So, we need to crack the code, we need to find a solution to be able to produce these materials, but in a lower carbon way. And if we can do this, we are going to be able to accelerate the transition overall. And I believe unlock a significant amount of value for companies who have been derated over recent years because of their carbon risk or their carbon intensity.

Mark Wiedman: Let's talk about copper as an example of one material in the transition toward a much more electrified society. Do current prices reflect your vision?

Olivia Markham: No, the copper price that we need to incentivize new supply, and then the sheer amount of new supply that we believe that we need in the future. And there is a disconnect and we're not seeing the investments being made because companies are essentially being much more disciplined in how they're allocating capital today than what they did in the past. It's quite interesting, BHP has just recently put out a new report on copper and they estimate that by 2050 we need to see 70% more copper demand. That's a staggering number. This is being driven by the transition by investments into AI and the power needs there, but also just traditional demand drivers. So, copper for me, essential for the transition. You can almost think of the backbone of electrifying everything around us.

Mark Wiedman: Evy. We've talked about the price of copper being too low today relative to our forecast of demand. More broadly, how do you see the markets appreciating the central relevance of materials in the energy system?

Evy Hambro: I think that we are looking at a situation today where everybody is focused on what they can see, feel, and touch. And when it comes to the transition, you look out of the window, you see the electric vehicle, you see the solar panels, you see the data centers going up, you see the wind turbines, it's really, really easy to see that.

And when you see that, that's obviously an area that you then focus on, and you orientate your investment towards. What you don't see is what's going on behind the scenes. And that supply chain is completely and utterly mispriced. all of the components that are going into these end outcomes, the materials that are going in to manufacture the components. As you go further and further up the supply chain, each of the individual sectors gets cheaper. And by the time you get to the source of it all, the mispricing is just extraordinary.

I mean, just think right now, the, the daily change in market cap of Nvidia, is often bigger than the valuation of the 10 largest resource companies combined. The supplier of trucks, Caterpillar, so the resources company is bigger than the world's biggest mining company. This sector relative to its integral role in delivering everything that we're speaking about today is trading at an irrelevant valuation, depending upon, compared to how much we need it.

Mark Wiedman: Let's talk about traditional hydrocarbons. And Will, I'm going to turn to you first. Oil and natural gas. How's that mix going to change over time? And which one would you invest the most capital in?

Will Su: So today the world uses very little oil when it comes to power generation, and we have a long-term replacement plan for more and more electric vehicles on the road as well. So, let's focus in really on natural gas. As one of the most misunderstood themes in the energy transition, natural gas releases half the carbon dioxide of coal in power generation. It's the ideal partner for intermittent renewables like wind and solar because it is available 24/7, 365. And coal of gas switching has been responsible for 60% of the decarbonization in the US power grid over the last 20 years. So natural gas is not just a bridge fuel, it's a foundational part of the energy transition in the decades to come.

Mark Wiedman: So natural gas. Where should I be investing? Where should I see the opportunity?

Will Su: I'll give you two great areas to focus on. One is production in the us. You've seen a wave of consolidation in the shale patch that we think will continue for years to come. Take for example, a company like EQT. This company has grown massively in recent years through a string of acquisitions of private companies and assets, and now supplies more than 5% of all domestic natural gas production.

So, when you have that kind of scale, you're really reducing your marginal cost and able to deliver growing free cashflow yields and dividends to your shareholders in good times and bad, but just producing the natural gas, it's only half the story.

You're going to have to move these molecules from resource rich exporters like the US and Australia towards regions with a structural deficit, especially in Asia, where economic growth continues to lead the rest of the world and countries like China and India generate 60 and 75% of their power through coal. So fun fact here, in order to move that gas across the globe, you chill it down to 165 degrees Celsius or 265 degrees Fahrenheit so that it turns into a liquid, and you put it onto a ship. That's called LNG or Liquefied Natural Gas. And the global leader for that is Shell. They handle 15% of the world's LNG trade volumes and run 11% of the world's LNG tankers. And to pull that off, you really are going to need the liquidity balance sheet and human capital that you're only going to be able to find in these multi-hundred-billion-dollar public companies. So that's the opportunity in the public energy markets.

Mark Wiedman: Olivia a moment ago, Will referred to gas as quote the ideal partner for renewables. What do you think about nuclear?

Olivia Markham: I think one of the things that he didn't say is that obviously gas has carbon associated, but there is a source of energy which is base load reliable, 24/7. Carbon free, and that's nuclear. And so, I think nuclear is a very good compliment to intermittent renewable energy and is really well placed to take share of the growing electricity needs that we have out there.

Mark Wiedman: I hear nuclear is where money goes to die. Help me out. True, false?

Olivia Markham: I think this is not the case and I think it's not the case going forward because we are seeing advancements in the cost of nuclear reactors and how it's becoming much more competitive on a levelized cost of energy. So, I think in the past we've had challenges in terms of the cost of building new reactors, absolutely. We've got a number of case points, particularly here in the UK, but when we look at some new technologies and some of the SMR or small modular reactors that are coming out, we are seeing the costs of construction come down substantially. And that's also in turn, bringing down the levelized cost of energy.

Mark Wiedman: Carbon capture. We talked about natural gas as a supply of energy, but it emits carbon as Olivia has poked back at. Will, is carbon capture a feasible technology in the next 10, 20 years?

Will Su: 100% it is, and it's really interesting. Calling back to the earlier comments of the US majors shying away from some of these transition technologies they have actually become some of the leaders in carbon capture. They've invested in these vast thousand-mile pipeline systems in order to transport the carbon to the carbon sink. And the interesting thing there is some of the ideal places to store carbon away for a long period of time is actually depleted reservoirs for oil and gas. So, there's a lot of expertise in terms of handling the molecules and owning the assets to put them away. And you're already seeing some of these big projects come online in places like the North Sea. You're seeing them being planned out in places like the Gulf of Mexico, and nobody is better placed to do this than the traditional energy companies because of the years of know-how they built it.

Mark Wiedman: ExxonMobil is a company that is really leading in this department, through a big acquisition they've done two years ago. They've built out a large pipeline of carbon pipelines. They also have a lot of strategic relationships with the industrial players for petrochemicals, blue hydrogen along the Gulf Coast. In order to sign these contracts and take away their carbon for storage for many many years into the future.

Olivia, you were talking about nuclear. Nuclear needs fuel too. What do you see as the outlook for the fuel for nuclear plants?

Olivia Markham: So, for everyone listening who may not be as familiar, uranium is the fuel for nuclear and if we have a look forward and we look at the amount of uranium that is contracted by the nuclear utilities, it is largely under contracted. We are going to have to have more uranium supply. We're going to have to see substantial uranium growth if the nuclear reactors and the utilities want to deliver on their plans into the future. Now, when we look at uranium, I, I think there's been, you know, really somewhat of a price renaissance in many respects. Three years ago, we saw a uranium price of around about $30 per pound. Today the price is above $80 a pound. With contracts being set are higher levels than that.

Mark Wiedman: There's been a sea change in western consciousness, Japanese consciousness around nuclear. What's changed and what's recently moving things forward?

Olivia Markham: So, in terms of what's changed, I think people have really begun to understand the role that nuclear has to play in terms of its benefits of being carbon-free and a base load source of power, and also being very competitive from a pricing perspective. You mentioned Japan, Japan, has almost done a 180 on nuclear from being a very strong supporter of the past to shutting reactors down post-Fukushima, to now reopening reactors and extending the lives of those and uranium being very much back in the energy mix there supported by government policy.

I think in the West, some much more recent developments has been from the tech hyperscalers and the very significant investments that they are making into supporting the energy system, which includes nuclear to power their AI data centers. One of the challenges for data centers is they do need reliable 24/7 base load power, and I think for many of these big companies as well, they're very committed to their own green credentials and the commitments that they make around transitioning their own businesses and nuclear just seems like such a good solution for them and they are supporting that.

Will Su: Evy five years ago renewables were all the rage. Now we have barely spoken about them. Are we missing something here?

Evy Hambro: Mark, things go in and out of fashion. I think when we had the initial excitement around that, which was a little bit longer than five years ago, the renewable space was, accompanied by a strong tailwind of falling rates. And you saw the returns available from the renewable investment, at well above the declining cost of capital. Since then, we've obviously had gone through a rate cycle and, and rates have risen and that has compressed the returns. So, the headwind that it's gone into, has been a challenge for the space. At the same time as all of that was happening, we had some of the diversification goals from the traditional oil companies and, and they were seeking to bring renewables into their portfolios and paying high prices for those assets.

So, we had a perfect storm of good stuff, and then we went into a bad point in the cycle for the assets. Despite all of that, the deployment rate for renewable capacity around the world continues to grow. You don't read about it with the same coverage in the headlines, but the amount of solar going in, the amount of wind going in, the amount of battery storage to accompany it continues to grow and exceed expectations in terms of its deployment.

So, I'm really pleased as a citizen of the world that we are seeing this going on and clearly it will start to come back as some of the kind of challenges the industry has faced decrease.

Mark Wiedman: Let's talk about Ukraine and how the energy system and investments have changed after the war. Olivia, two and a half years later, what have we learned? What do you expect?

Olivia Markham: So, I think one thing that we've clearly learned is that we cannot become overly focused on certain countries for supply. That could be the supply of energy, that could be the supply of metals. And so, we think about the disruption that was caused in Ukraine, particularly prevalent for energy, supply into Europe. We very quickly recognized that in order for Europe to achieve energy independence, it has to build out a renewable energy system and have its own independence within country. I think it also critically highlighted to us just how important. Russia was in terms of global supply of commodities to many in the market. Much of that supply is still moving around the markets today, but we've had dislocation, and with that dislocation, there's huge value opportunities alongside that as well.

Evy Hambro: Energy investors. What is your long and your short with a one-to-two-year horizon? Olivia, let's start with you.

Olivia Markham: I think copper is a great way to get exposure to the transition. We've spent the last 20 minutes or so talking about the increase in energy demand, the, increase in electrification, how do we distribute the electricity we need the copper. What is my short against that? When people used to look at the demand potential and the growth potential around the transition. They would often look to a range of low carbon renewables companies and those companies, traded on very elevated multiples. I think there are much more interesting ways to play the exact same theme through the material. So, for me, my running short against that would probably be a basket of renewable stocks.

Mark Wiedman: Evy, what's your long and short?

Evy Hambro: I think the other one that we're going to see, it's going to significantly exceed expectations over the next couple of years is uranium. We've spoken about that earlier on there's huge potential there. The thought that, when we think about the resources space, you've got companies spending tens of billions of dollars on data centers going out to uranium companies and requesting fuel supply agreements, which might only cost a few hundred million dollars.

 I think on the other side, you know, it's going to sound like an, an odd one to say. given the infrastructure needs of the world and so on, but I think the iron ore market is challenged. There are, supply, dynamics coming into place with lots of new high-grade material. We need to decarbonize the production of steel. And there's going to be some big shifts that take place in the iron ore market in terms of pricing. But I would have copper alongside uranium on the long

Mark Wiedman: Will, your long and your short?

Will Su: Easy, long for you. Three letters. LNG. The LNG market will grow for decades to come at a rate that's way above the underlying demand and supply, because there is such a mismatch between where the resource is located and where they have to go. And again, the public markets is where you want to hunt for the companies with the liquidity and the balance sheet to pull this off. On the short side, I would just generically say that there's been a number of companies that, have enjoyed this very low to zero interest rate environment that we've had. And over time they built up perhaps a capital structure or a business model that is a bit of a house of cards if we think higher interest rates are to persist. and some of these companies will no longer be able to finance their existing business models. But I think you want to build some resilience around interest rate volatility

Mark Wiedman: Olivia, Evy will thank you energy partners, for educating us all. Thanks very much.

Will Su: Thanks, Mark. Awesome to be here.

Olivia Markham: Great to see you, Mark.

Evy Hambro: Thanks a lot, Mark.

<<THEME MUSIC>>

Oscar Pulido: Thanks for listening to The Bid. If you’ve enjoyed this episode, check out our episode on “AI and the Energy Transition” where Will Su walks us through the sector’s pivotal role in the build-out and future of AI and digs into the potential investment opportunities and challenges.

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