| Liran Lublin, Director of Research Department, IBI Investment House
The war that is taking place these days in Europe has taken over the renewable energy sector in a not-so-simple period. The challenges of 2021 still accompany us in the current year as well, among other things, the high prices of equipment and transportation alongside the prices of electricity that have risen substantially in Europe and caused government intervention in some European countries.
Looking at the companies representing the sector in Israel, it seemed that there was no significant trend change in the last week that was mostly before the Russian invasion of Ukraine (except for a few companies with significant reports) but a continuing trend related to fears of rising world interest rates. The situation changed drastically on Sunday, with a dramatic rise in most of the sector’s shares, after crossing Israel’s borders, a similar trend was recorded last Friday.
Possible effects of the war on the sector in the longer term can be many and varied.
First and foremost, the rise in energy prices that began in 2021 may continue, in light of the rise. Europe is dependent on Russian gas, so a break or disruption in its supply could skyrocket electricity prices.
Of course, an increase in electricity prices is positive for the sector, especially for companies operating in Europe in sophisticated markets. On the other hand it should be borne in mind that most governments will want to maintain reasonable electricity prices which is likely to result in the intervention and over-taxation of the industry companies gaining excess profits as a result of the situation, such as Spain and Italy.
Europe’s energy independence, which is currently being felt in full force, is expected to accelerate the development of renewable energy projects and lead to an increase in the volume of tenders expected in the next year or two.
If until now the main motive for the rapid development of the sector was the reduction of emissions, today the need is added to the equation to minimize dependence on Russia.
Also, in a state of war and slowdown in the economy there is uncertainty regarding the planned rise in interest rates. The level of interest rates in the economy has a significant effect on the renewable energy sector in light of the high levels of leverage in which activity is characterized.
Along with the positive effects there are of course also negative effects such as a continued rise in raw material prices which could bounce the prices of equipment which has experienced a significant increase in the past year.
| Israel: In the gas and oil sector, influences from abroad in the background of a positive atmosphere in the region
Tensions between Russia and Ukraine have far-reaching effects on the global energy map, with some European countries’ dependence on Russian gas and oil and transmission pipelines passing through Ukraine. .
However, looking at the local sector in most assets it is difficult to point to a direct impact and the increases in recent months in the sector’s shares are not necessarily due to price increases and crisis in Europe but more to the demand environment established in the region in the post-Corona period.
As is well known, most Israeli partnerships have very low exposure to spot prices in contracts in the domestic market, but export contracts for oil prices may have an effect on the price of gas sold to export markets.
In Levitan’s contract with NEPCO (Jordanian Electric Company), the price of gas at current Brent levels rises to levels above $ 7 per unit of heat. This trend of stable domestic market prices versus rising export prices in the background of the oil price environment has contributed in our estimation to the performance gaps between the various partnerships in the sector.
Regarding pricing, we believe that the current price of Whale shares is pricing to some extent the expansion of the project and the implementation of Phase 1B. The positive demand environment in our area supports this thesis but it is important to mention that there is still uncertainty around a number of issues and until these become clear it is difficult to reliably price the value of the future potential inherent in the reservoir:
- Programming for the long-term grounding of Egyptian demand at the high levels we are experiencing today
- The development outline of the second phase of the project and its costs
- The time constants for development that will significantly affect the date of receipt of the future cash flow that the market has begun to price.
Bottom line, after many years in which the sector has shown poor performance it can certainly be said that this year the wheel has turned in support of an embracing macro environment and intense demand that seems to only increase from the direction of Egypt.
The effects from Europe support the rise in the price of oil but are not really the most significant vector pushing the sector to the high levels at which it is based during this period.
The pricing levels of some of the shares in the sector (those exposed to the Whale Reservoir) embody the further development of the project to the next stage and at this stage We recommend reducing the exposure a bit and waiting for a little more certainty.
The author is the director of a research department at IBI Investment House and has no personal interest in the review. This review is not a substitute for investment marketing that takes into account the data and special needs of each person.