ContourGlobal sees opportunity in unstable power sector

It’s not often a company boasts about the deals it hasn’t done. But energy generation specialist ContourGlobal (GLO), which owns a mix of fossil fuel-burning assets and renewables around the world, did just that in its 2021 results. The U-turn came on a “large acquisition of thermal and renewable assets in the Americas” after the pricing became too difficult in the topsy-turvy market last year. 

The deal financing and pricing were on rocky ground due to supply chain difficulties in the renewables side of the deal. “With the benefit of hindsight provided by the surreal events of early 2022, our caution provided the best investment returns of the year,” ContourGlobal chief executive Joseph Brandt said. 

The actual returns were not bad either in a volatile market. The company’s adjusted cash profit of $842mn (£638mn) was up 17 per cent on last year, and it has stuck to its 10 per cent annual dividend increase for the quarterly payouts. The thermal unit – largely gas-fired power plants – contributed most of the increased adjusted cash profits, thanks to the $646mn acquisition of Western Generation, a US and Trinidad and Tobago outfit.

This drove a sizeable increase in power output from the thermal division – as well as an increase in net debt as cash was used to pay for it, leaving reserves much reduced. Net debt stood at $3.8bn on 31 December, although the company said project-level refinancings had “locked in” lower interest rates and made higher dividends possible. 

Looking ahead, the significant upheaval in European power markets will likely see more coal generation and therefore demand for ContourGlobal’s carbon capture services, while the introduction of regulated pricing would “positively impact” its European thermal assets, the company said. 

ContourGlobal also talked up its renewables assets in Europe, particularly onshore wind in Austria, but also made clear that green power alone would not keep the lights on in the absence of Russian gas imports. “We are in the midst of a lengthier [than assumed] transition which will see a larger than previously expected role for power generation based on lignite coal, nuclear and liquefied natural gas,” said Brandt. 

Consensus estimates see sales falling this year (to $1.76bn) but with higher margins, meaning cash profits and operating profits should be maintained. The company has raised shortages of key ingredients for renewables projects as an issue this year, as well as higher commodity prices, but maintained a "positive outlook for growth". We think betting on a power provider in the current crisis is a good idea. Buy. 

Last IC View: Buy, 197p, 9 Aug 2021