In 2021, PM Capital wrote about the seismic shift underway in energy markets and how this next great energy transition might play out. This transformation stands to change the world far beyond the energy sector, creating investment anomalies that the PM Capital Enhanced Yield Fund is well positioned to take advantage of.
David Murray, Senior Credit Analyst at PM Capital, outlines recent Fund investments that put this energy-transition theme into practice.
Russia’s invasion of Ukraine saw corporate bonds sell off globally and highlighted, among other things, the West’s urgent need to reduce reliance on Russian oil and gas.
During this sell off, PM Capital initiated a position in NextEra Energy, a leading US green-energy business that we have wanted to own for some time. Should the yield premium above cash return to pre-Ukraine crisis levels - as we expect - the investment can deliver a 5%+ return over the next 12 months.
NextEra is a combination of two distinct and complementary top-quality businesses. The first, FPL, is a power company in Florida that earns stable cashflow by generating electricity and supplying it to homes and businesses of its 5 million customers. FPL’s asset base ranges from nuclear power plants and solar panels to electrical substations, gas pipelines and thousands of kilometres of power lines.
As one of the most efficient utilities in the US, FPL provides a stable platform for the second business, NextEra Energy Resources (NEER), which builds and operates electricity generation.
NEER generates more wind and solar power than any other company in the world. NEER is able to build more efficiently than its competitors because of its scale, experience and early-mover advantage. The entire development process can be done in-house, giving NextEra complete operational control.
Consider a wind farm. Developing one means finding the right site, gaining state and regulatory approvals, locking in long-term power sale agreements, constructing the asset, and operating and maintaining it for decades. The large upfront investment is repaid steadily for many years, creating a revenue stream well suited to bond investing.
This type of project typifies the massive investment required to move through the current energy transition. NextEra, with its scale advantage and best-in-class position, has a leading role to play.
Westpac and ANZ
During the Russia-Ukraine sell-off, PM Capital identified a rare opportunity to buy green euro bonds at anomaly prices. Issued by ANZ and Westpac, these 4-year bonds paid 0.50% more in yield than equivalent Australian-dollar bonds.
The two bonds are part of green bond programs used by the banks to finance sustainable projects like renewable energy, green buildings and low-carbon rail, while keeping the same risk profile and protections as non-green bonds.
All else equal, we would buy these bonds above non-green bonds every time. Green bonds normally price at a small premium, so to be paid an extra 0.50% was an excellent outcome.
A return to pre-Ukraine crisis yield premiums would see these investments generate a 4%+ return over the next 12 months.