Time to step-up some investments

The current energy crisis has put UK and German distributors under pressure while the US shale recovery is gradual. Small utility companies have already seen financial stress, particularly in the UK. In a very fragmented market, a number of small UK distribution companies, which buy power on the wholesale market and sell it to final clients but did not hedge their supply while offering guaranteed low prices to customers, will likely go bust.  Germany’s market structure is similar to that of the UK and the market is mostly unsupervised. As power futures are expensive, some distributers and suppliers with fragile cash positions could run into liquidity issues or even become insolvent in the coming months. In the O&G segment, majors and large players in the sector have been recovering, thanks to increased demand and higher oil prices. Despite high oil prices, the US shale sector is experiencing a cautious recovery, with many firms still focused on financial consolidation over revenue generation.

The energy transition and lack of oil reserves to put pressure on investments. The energy sector is traditionally a sector with higher capex than other industrial ones. However, investments in the power sector have been mostly stable while there is a very large consensus that the world will need more electricity in the future. First of all, growth and demographics provide an organic support for electricity demand, but also the ongoing green transition will require switching from fossil fuel to electricity in many areas from transportation to heating. Consequently, huge investments are required and the sector is currently nowhere near the required levels. The O&G sector has also been underinvesting over the past decade and even with the green transition, current proven reserves will be insufficient to match demand over the next 30 years. The sector needs to invest heavily: to sustain consumption through 2050, about 140bn needs to be sourced (about 30% of required volume might be missing and at least USD3trn capex for the industry).

Overall, the energy sector’s positive run should continue: In 2022, turnover growth is expected to be at around 3% for the power sector and 7% for the O&G segment while EBITDA growth in 2022 should be around 5% for power companies and about 10% for O&G firms. However, risks are skewed towards the downside, especially for O&G as crude oil prices are expected to decline and adverse events (Chinese slowdown, potential lockdowns due to Covid-19 outbreaks) could put pressure on revenues.