Petrofac (PFC LN) and that old risk: execution

Petrofac’s profit warning highlights execution risk. While the company’s backlog covers revenue expectations well, profitability is far more uncertain. As a name with an increased risk perception, the ytd relative outperformance vs the sector might reverse.

Petrofac has delivered its second profits warning on the Laggan-Tormore project in the North Sea on bad weather and cost overruns. The company will recognize a GBP 195m loss on the project. This follows the downgrade to guidance (USD 500m down to USD 460m) in February.

The company has a strong backlog of USD 21bn including 2015 order intake. The 2015 share covers 80% of consensus revenues. Even though that will provide some hedge, the oil price impact is clearly visible. And it has a good share of risky projects. Revenues might come through, but profitability is uncertain.

Even though the shares have underperformed the sector by 9% since the news, PFC is still outperforming the sector by 22% ytd. There is chance of reversal of performance, in fact performance has already reversed for the start of this quarter. A name that is not spotless and delivering very strong execution is likely to underperform a sector that where sentiment is already weak due to commodities. Earnings momentum is solidly negative. The attractive valuation of the shares will now be seen as a discount reflecting execution risk.

On that account, other names look less risky, namely Technip (TEC FP). Technip trades on similar multiples: Technip’s 2015e P/E is 11.1x vs 10.4x for Petrofac, the yield is 3.8% vs that of Petrofac 4.6%, but Technip’s cash dividend cover is stronger.

Slippery oil and clean communication

Clean energy needs to find strong messages of perspectives and viability in the weak commodity price environment. The arguments exist in the contribution to lower energy prices as well as prolonged resource life. Communication also needs to go further and proactively address business viability long term under prolonged oil and gas price weakness. Those sectors that can achieve that will be at a distinct advantage in the view of investors and policy makers alike. I see good chances for that in solar, storage, smart energy and industrial solutions.

Clean energy performance has been historically and remains still correlated to the oil price. There are perception and direct earnings reasons.

The clean energy sector faces a new struggle with low oil and gas prices.

The idea of ever rising conventional energy prices needs a re-think with big implications for the clean energy sector. Oil and gas prices are cyclical and have and will experience material down turns. Clean energy needs to re-evaluate its communication on ever increasing fossil fuel prices and in many a case business models predicated on an uninterrupted rise of oil and gas prices. It needs to consider its argument and commercial viability for prolonged fossil fuel commodity weakness.

The oil vs clean correlation is cyclical and self-perpetuating. Increasing supply of alternative energy along with energy conservation (in our universe part of alternative energy) has a negative impact on competing fossil fuel demand and prices. Demand reduction and increased supply (through renewables) lowers prices and at the same time increases supply through prolongation of conventional resource lives.  In here, I see an argument for clean energy. It is contributing to reduction in costs of energy and energy security indirectly.

The grid parity goal post has moved materially.  I estimate a new entrant cost in the order of Eur 96/MWh for Europe and USD 130, both of which provides retail grid parity. That will remain the case even when commodity induced price reductions come through. The difficulty lies in commercial segments where PPA (power purchase agreement) has slowed as a result of weaker commodities, ie grid parity. The sector needs to strongly communicate in all directions how it is addressing that through cost reductions. The scale and high tech based sectors are at an advantage, namely solar.

The peak oil argument has been largely put to a side some time ago. Peak oil is further away than ever, at least on markets’ minds. The urgency to build up alternatives has decreased materially.

A similar thinking to a point is on the mind of many policy makers. The urgency to build up alternatives has decreased materially, even though long term energy security considerations are still a concern.

It is demand weakness amongst others that has induced the latest commodity weakness. With priority off-take rights, the market has further shifted towards a higher weight of renewable energy. See above, the circular correlation.

The sector has another argument to rely on, climate change. With that, it heavily depends on politics and regulation. Public powers that are supportive of the sector for whatever reason are considering the issue. It may help to hold incentives up for longer. But without a doubt, the base will get thinner, because many a politician will look at the other side of the equation.

For it to be viable, the clean energy sector needs to find a sustainable (in a business sense) way to wean itself off regulation and incentives.

It needs to find new avenues that are more independent of the oil argument. It will never fully rid itself of the oil and gas connection, its ultimate competitor, though.

The sector is well advised to use the current commodities trough to become more competitive and accelerate the transition to main stream in order to emerge as a true alternative.

The clean energy sector can dissociate itself from the oil connection, through differing demand dynamics. This has been the case in the past: See the various speculative solar bubbles, wind build demand in function of incentive expiries, idem biomass, macro correlations for energy efficiency, lighting, the industrial argument and the like.

The changing nature of electricity supply markets, migration towards service and equipment package based businesses with strong consumer relation and brand equity components is a change for clean tech to achieve viability.

There are viable business models across the sector that can persist in a long term very weak oil environment. Storage and optimisation is one. Smart energy is another. Integration of clean features into conventional energy is also very viable. Solar will become viable even at lower oil prices, it is well equipped to address the cost challenge through technology advance still.

Yield co’s have a great advantage: yield differentiation and mature projects with stable returns and low commodities correlation. That argument has led them to hold up well. Other project developers might consider that and shed more light on the mature parts of their portfolios.

Gas is the truly important commodity for clean tech. It impacts coal and is the direct competing alternative in many instances – notwithstanding, it being a necessary complement at the same time. Clean tech has an argument that low gas prices foster clean energy through the complementarity.

I see potential for outperformance by those parts of the sector that adopt a communications strategy that focuses on commercial and consumer merits as well as the direct and indirect contributions to the energy system. Investors and policy makers will find those as credible and viable sectors and focus their support there.

Solar manufacturers: Who can benefit from demand growth?

As the solar sector continues on the path of volume recovery, we look at the module manufacturers in an environment of increased differentiation. Canadian Solar stands out as the name that may have the most to gain on fundamentals, while JA Solar is the cheapest on multiples among the large names. Small module manufacturers need to offer very distinct differentiation on niche products.

Montpellier Analysis forecasts global solar demand to grow by 12% y/y to 52GW. The US, China and Japan are the key growth markets. Within Europe, the UK will likely be the strongest market. The supply demand balance in the market is favourable for manufacturers. We see increased differentiation and consider the module manufacturers below.

Solarworld (SWV GR) is reaping the benefit of having secured strategic investors, but is not likely to outperform its peers. Management has issued new guidance, for a return to positive Ebit and shipments in excess of 1GW. That implies 17% volume growth y/y. The company’s US exposure is now coming to the rescue. That is in our view the underlying driver of the volume guidance. But, we still expect it to lose market share globally. Its manufacturing costs are still not competitive, and we gage the acquisition of the Bosch facilities gives it scale but aggravates the cost issue. The company’s operating margin of 2.4% is significantly below the sector average. Leverage is now at the low end of the sector since the financial restructuring. That and the support from its strategic investors will allow it to go through with its planned capacity expansion to 1.6GW and thus keep up with the market. But we see risk for disappointment. Revenue guidance implies 23% y/y growth at least, thus does not account for pricing pressure. The company continues to insist on a high end strategy, but we doubt that will shelter it from pricing pressure.

Jinko Solar (JKS) is coming through as one of the stronger names. It has been one of the beneficiaries of the 2014 recovery and reported FY 2014 earnings above expectations. Guidance was also better than expected. Management is looking for 40% y/y volume growth and c 20% external volume growth, thus the company should be gaining market share. Gross margins are still expanding at a very high level, despite pricing pressure (22% likely 2015 gross margin, ie 200bps improvements). That and additional operating margin should lead to earnings growth well above the sector.

Canadian Solar’s (CSIQ) strong integrated business model should continue to support the share price. 2014 earnings were below consensus, but Q1 guidance was above. Y/Y shipment growth guidance is for 21% at the midpoint, before own project shipments. Including those, brings volume growth up to 50% at the high end. The balance sheet is strong which allows for expansion. The announced plans for a yieldco are a positive for financial flexibility.

JA Solar (JASO) is the cheapest name on valuation, it trades on an EV/Ebitda of 6.0x 2015E and P/E of 6.5x 2015E. The volume outlook is in line with the market, at 22% y/y shipment growth. Earnings growth of 27% y/y is at the low end. But there may be room for multiple expansion and a catch up on relative performance vs the sector peers.

Trina Solar (TSL) should gain some market share, but at a lower rate than the other major competitors, it already being a high market share manufacturer. We expect 25% y/y volume growth. The shares trade on a 30% P/E 2016E premium to the rest of the sector which we see as reflective of its leading market position. But we see limited scope for relative multiple expansion vs the peer group.

Yingli (YGE) is still very leveraged. That puts it at a disadvantage when it comes to the quest for market share. That is visible through the guidance of 3.4-3.6GW including to own projects: It implies 6.4% y/y volume growth. Under the central assumption of ongoing pricing pressure, revenue growth will be close to nil. That makes it very hard to see any material improvement in earnings. The problem is circular. The company would require scale and expansion in order to turn to profit. But, it does not have the financial flexibility for the required capex.

There should be room for niche producers to make inroads, off the large volume path. But they will have to bring a much differentiated proposition to the market, be it on technology, efficiency, system or product integration etc.

Green and grey energy convergence

RWE’s acquisition of RUMM is small but makes strategic sense and reinforces credibility that RWE is focused on its innovative energy strategy as a path to a long term sustainable business. We see more large to small transaction activity in a context of energy and services convergence, and sustained multiples amongst opportunities aplenty.

RWE (RWE GR) is acquiring Remote Utility Monitoring & Management (RUMM) in a deal that values RUMM c GBP 10m. RUMM provides cloud based software and remote demand management for large industrial businesses.

The deal is small in scale in the greater scheme of RWE, but it is important in that it continues the path of its recent transaction activity and strategic direction. We have seen a step up in the company’s efforts to increase presence in new energy and build up a comprehensive package offering of renewables, energy efficiency, smart energy and services. Recent deals as well as organic activity have served to step up equipment exposure and brand equity.

RUMM gives access to industrial energy efficiency and smart energy. We see this as a crucial sector for margin protection and expansion for RWE. That is a difference with regards to the company’s recent activity. The required offering and market strategy is similar to the low volume segments, but still requires differentiation at various levels. RWE’s presence is still limited and it makes sense that it expands through acquisitions. We have seen acquisitive activity by competitors in the sector.

We think it makes sense for RWE to follow a strategy of small deals in order to gain expertise in the new energy business. The niches that the company needs to get into are very new. Almost by definition, they are occupied or created by new ventures and small companies. Those are the ones that can offer differentiated kit or services (or both), which is what RWE needs. RWE can take RUMM to scale in a win win proposition.

We can see sustained M&A activity of this type, large to small, established to new ventures. There should be exit opportunities for early venture investors on sustained multiples. We see activity by utilities, but also new entrants to downstream energy from various sectors as energy, technology, consumer and financial services in the sector, as well as renewables and other services converge.

Nuclear champ(explos)ion?

Risk outweighs benefit from a potential minority investment by EDF in Areva.

French press reports suggests that EDF is considering a bid for a stake in Areva. EDF management had previously ruled out any minority investment in Areva. The change of mind could have various origins, but we gather the market will take a specific interpretation, the political one, as the most probable.

EDF’s investment would be concentrated onto the former Framatome activities, ie nuclear build, engineering and services. Below, we consider the potential positives and negatives.

Tighter integration of the nuclear engineering capacity could yield a benefit to EDF’s nuclear new build. Integrated execution could lead to improved project management, greater timeliness, in tandem with it materially lower financing cost. Ultimately, EDF should be able to build at lower cost per MWh and ease the case for new build. It will not likely reap any enhanced benefit of standardization, because according to our calculation its capex strain is too great to deliver a larger new build fleet within a shorter than currently envisaged time frame. And, permitting and external processes do not correspond fully to the required background environment for that either. Lastly, its new build is (other than the UK fleet) geographically diverse.

It is uncertain whether EDF would have real operational influence in such a way that would benefit its own new build programme. Reportedly, EDF has made an investment conditional upon majority control of the above mentioned activities. It could thus be a manager, but would not be a capital allocator to these activities from the wider Areva group. It may have to rely on help from political powers’ interest in the business as the core of the French nuclear industry.

Assuming EDF achieves operational control, investors should consider EDF’s expertise. The company’s core skills are in power plant management and not necessarily in the OEM, construction and services parts of the business. Those demand very different expertise and management.

EDF would acquire exposure to a business with great litigation risk and liabilities. Amongst others, investors should have questions on their mind regarding liabilities relating to existing projects but also future litigation risk management. They might remain with Areva, but ultimate exposure might still be there.

EDF’s ability to source a global nuclear new build order book and execute on it for the business also merits a thought. The French government’s commitment to reduce nuclear from 75% to 50% of electricity production deprives it of domestic growth. There might be growth potential for the utility business as future operator or stakeholder of plant to be built in new geographic markets. But, the company would be taking on a big task.

It is worth noting, that China, the most important global market for nuclear new build, is increasingly developing its own technology. Western suppliers’ share is continuously falling.

EDF might be in control of operations, but it will not be in control of capital allocation to the business, other than from its own sources. And those are constrained by the heavy capex burden over the next years.

There might be some relief on return on capital. If EDF could classify the investment as dedicated asset offsetting against nuclear liabilities, there would be a lower ROCE requirement. The trouble is the risky nature of the business to which is not akin to such a view.

Any transaction would highlight the prevalence of industrial policy over corporate management. The state intervention overhang weighs heavily and repeated reminders are unhelpful for market perception with regards to overhang.

The reality is not far from perception. In the event of a transaction, there would be many points where various interests cross and many issues of conflict. Political intensity of the company’s profile would certainly increase.

Gulf investment in RWE?

A minority investment in RWE by sovereign Gulf investors would make sense for both sides. RWE needs funding for balance sheet repair and growth and is looking for new growth regions. The Gulf region lends itself to that, and a stable shareholder and cooperation partner could facilitate the path. RWE’s multiples are low which could be attractive to a long term investor into an asset heavy business. I have been expecting M&A in the sector for a while, and the potential for a deal confirms my view that M&A prospects can underpin valuations.

RWE has confirmed that it is in talks with Arab investors on cooperation. The company has said it is looking at several potential routes of cooperation and would not rule out anything. Gulf investors could take a minority stake, possibly 10%. Dubai’s Sheik Mansur bin Zayed Al Nahyan is being mentioned. A stake at those levels would amount to c. Eur 1.5bn at RWE’s current market capitalisation.

A full take-over is very unlikely. German municipalities hold about 25% of RWE. That has been a hard stop of any potential deal in the past and will likely remain so.

The interest by RWE in cooperation with Gulf investors, including a potential minority investment could be on several levels. Firstly, to acquire a stable shareholder that would not likely take material influence on operational management decisions. There are other big German companies with minority investors from the Gulf region, notably Siemens, Deutsche Bank and. RWE could look for a similar deal.

The company needs funding for investment in renewables and down stream electricity, its new focus areas. Its capex is now close to maintenance levels, after the most recent reduction that came after company reiterated its focus on cash preservation during its 2014 earnings call. The company is barely cash generative in its generation business, which accounts for approximately 36% of total Ebitda.

Beyond that, there could be potential growth avenues for RWE in the Gulf. Energy demand growth is amongst the highest globally, and there is keen interest in renewables (aside from new nuclear, but I think it is unlikely that RWE will get involved there). RWE has mentioned it is looking for new geographic growth regions. Masdar, one of the largest global clean energy developers is owned by Dubai.

RWE has announced it is taking a minority stake in solar manufacturer and developer Conergy recently, in my view a transaction that makes a lot of strategic sense for RWE (see previous post – “RWE/Conergy – Let the sunshine in”). It might need funding for growth coming out of that deal. Gulf investors might find that an attractive proposition.

RWE is cheap on headline multiples, at a P/E of 11.4x 2015E, vs a sector average of 16x, EV/Ebitda of 6.6x and a yield of 3.8%. That is another attraction for a potential investor, despite the weak earnings outlook. Sovereign investors tend to look for long term underlying assets. Even though those have below average cash generation prospects, there still of high asset quality which makes them appealing for such a deal.

While I only see short term out-performance for RWE from this, there is some positive from the funding impact and potential signal towards valuation underpinning. I have been expect sustained M&A activity in the energy sector going forward. This confirms my view.

RWE/Conergy – Let the sunshine in

RWE’s investment in Conergy makes strategic sense as it takes the supply business towards the direction where we see downstream electricity heading over the long term. RWE gains brand equity, rejuvenation of its perception, a renewables offering and with it possibly long term stronger retail margin. We do not see a material short term impact on sentiment, but this is a step in the right direction.

RWE (RWE GR) is taking a minority stake in Conergy for an undisclosed amount through RWE Supply and Trading as part of a USD 45m capital increase by Conergy. RWE and Conergy have already had dealings through cooperation and partnerships. Last year, the companies have agreed a partnership to lease solar systems to commercial customers. The deal is a logical extension.

Conergy will use the funds from the capital increase for funding of its project development pipeline. Its global pipeline is about 4GW. We would not be surprised to see RWE participating in Conergy projects.

The move makes sense for both parties, other than the access to Conergy’s project pipeline, particularly from a supply perspective. It goes into the direction that Montpellier Analysis has been anticipating for the downstream energy sector to develop into for a while. We see increasing convergence between electricity supply, renewables equipment packages, smart energy, integrated services and consumer appliances and applications. We sense that downstream electricity must develop a very strong brand equity proposition from a retail standpoint, in order to compete with consumer businesses entering the market.

The RWE Conergy deal corresponds to these requirements. Conergy has a very strong brand position, despite the insolvency, and arguably one of the strongest in the German market. The Company has morphed from an unprofitable module manufacturer more and more to a downstream package and project provider.

Conergy gains customer access, RWE gains in branding, communication and package offering, as well as rejuvenation of its perception.

During recent trips to Germany, we have noted a big step up in RWE’s marketing, with a focus on new energy solutions and integrated packaging. We take that as another sign that a re-shaping of the supply business is on the way.

There might initially be a mixed reaction in the market on concern over strategic focus by RWE – on the perception of Conergy as a struggling module manufacturer and RWE being a late comer. But that should give room to appreciation of the underlying sensible strategic rationale. RWE has taken a step that gets it closer to a long term supply model that is more viable in an intensely competitive market. A renewables offering is indispensable and acquiring a stake in marketing leader in the field with hardware added in makes sense.

 Conergy is looking to grow revenues to USD 700m in 2015, from USD 500m in 2014. If the company achieved only 100bps of margin improvement, which it should with greater scale, Ebitda could double y/y, to c USD 20m, according to our gage. There could be a very small positive equity earnings contribution for RWE.

The deal is a small step and will not make any material difference to RWE earnings expectations for 2015. As such, it will not move consensus or sentiment significantly. But it is a step in the right direction. Eventually, it may be a contribution to long term stronger retail margins. Given the declining weight of generation, that is crucially needed.

RWE (RWE GR) and E.ON (EOAN GR) – It’s all about cash

Both German generators struggle with power prices weighing over new growth. E.ON’s stronger cash profile allows it to invest for growth. According to Montpellier Analysis’ estimate, E.ON’s growth capex will exceed RWE’s total capex. As a result of that and a stronger generation portfolio, E.ON stand good chances to report flat earnings for 2015, whereas RWE’s are still declining. RWE’s generation business is now hanging on a shoe string as it is even on the medium term struggling to be cash neutral. There is a great strategic void for the generation business, and management’s growth strategy through new energy is not yet delivering an earnings volume high enough to compensate. Meanwhile, the drop of the leverage target is understandable but not reassuring. A debate about leverage, and about coverage of nuclear liabilities is on the horizon for both names.

E.ON’s numbers were in line with expectations (revenues Eur 111.5bn, ccs Eur 117bn, Ebit Eur 4.6bn, ccs Eur 4.7bn, adjusted net income Eur 1.6bn, ccs Eur 1.68bn). The net loss of Eur 3.3bn was broadly in line (ccs Eur 3.2). The write-offs were well flagged and create a clean slate for the corporate split. Guidance for 2015 Ebitda of Eur 7-7.6bn is 5% short of the Eur 7.7bn consensus at the mid point. The net income outlook of Eur 1.4-1.8bn is in line with consensus of Eur 1.6bn.

RWE was in line line after a string of earnings misses (revenues Eur 48bn, ccs Eur 49.8bn, Ebit Eur 4bn, ccs Eur 4.1bn, adjusted net income Eur 1.28bn, ccs Eur 1.28bn). Guidance is for recurrent net income of Eur 1.1-1.3bn, the mid point being 6% below consensus of Eur 1.28bn. For this time, the dividend was in line. However, management has stated that the dividend policy will no longer be said in function of a payout target, but on much broader measures. That gives flexibility for cash conservation; but it may also be a warning message to politicians through the prospect of lower income for the company’s municipal shareholders.

RWE’s management has said it is now returning to growth mode, through renewables, networks and innovative downstream solutions. That resounds with our view that downstream and supply along with new energy will bring growth opportunities. The company looks for low single-digit growth from that and double-digit growth from renewables at large scale.

But, capex is now restrained close to maintenance levels at c Eur 2bn pa. In total, RWE will spend c Eur 1.5-2bn on renenewables growth and the grid businesses over 2015-17. That will not be enough to compensate for the decline in the conventional business, according to my estimate. It will not stop the earnings decline at group level.

E.ON’s capex is twice the amount of RWE’s, with a correspondingly higher level of growth capex. I estimate that at least Eur 2.5bn will go into growth in 2015 alone, most of which into renewables. That will build a stronger foundation for growth post 2015.

There are many other moving parts at RWE, and most of those negative. Cash generation in the power generation hangs on a shoe string. The company has taken one commodities hit, and there will be another one this year. Management has confirmed that only about 25-35% of plant delivers an operating result in excess of the company’s WACC and 55-65% is cash positive. At current power prices, RWE’s generation park is just about cash flow neutral. Power prices will not deliver the rescue. Even in a scenario of recovering commodities, structural oversupply is such that there is no prospect for a material enough recovery. The company has stated an expectation on policy action eventually, but we think that is highly unlikely. Rather, the German climate bill equates to a de facto coal shut down. The generation business is and remains a source of great uncertainty for future cash flows. Cash neutrality is by no means guaranteed.

Leverage is a target in flux for both, though we see RWE as more  in the defensive.

RWE’s Management has dropped its net debt/Ebitda target of 3x. It reasons with large amounts of liquidity post the DEA sale that it will offset against pension and nuclear liabilities as dedicated assets. Our estimate is in line with management’s assertion that net financial debt will be below 1x Ebitda post the sale. But full leverage, as considered by the rating agencies currently stands at 4.4x Ebitda and will remain well above 3x. We are surprised by the build-up of dedicated assets and sense there could be increasing pressure on utilities to build up dedicated assets for nuclear liabilities. As a side note, increasing dedicated assets will bear an impact on overall group ROIC. Management denies any connection to the debate around a potential outsourcing of the liabilities. But clearly, a dedicated asset structure would make such a structure easier.

E.ON’s leverage of 4.1x is not far away from that of RWE. But, cash flexibility is greater.

E.ON’s ability to meet its nuclear liabilities after the corporate split is subject to intense scrutiny. The government has recently commissioned legal studies, but those have not led to any conclusive outcome on stopping the deal or intervention on the structure. We expect intense debate on the issue, but see intervention as unlikely.

There is risk on consensus momentum for both, but significantly higher for RWE than for E.ON.

E.ON has outperformed RWE by 8.7% ytd, but both have underperformed the European utilities sector by 2.3% and 10%, respectively. The potential upside for E.ON is larger on the basis of the split. To that comes stronger underlying cash generation and growth spend. That and upstream commodities gearing is a foundation for out-performance on a primary commodities recovery and on the back of investor appetite for growth in the broader energy sector.

COMMODITIES VS CLEAN – CONNECT AND DISCONNECT

Clean energy should continue to outperform oil as short term forces justify a further disconnect. The sector’s fundamental earnings drivers are positive despite oil price weakness and any recovery in the oil price will restore some of the old positive correlation.

Clean energy performance has been historically and remains still correlated to the oil price.

During the oil price fall out, global clean energy has outperformed the commodity by 420pbs on the downside and 80bps on the following recovery. Note that there is long private tail end in both sectors. Those latter are very disconnected, particular as clean tech in the private sphere contains a much higher tech and new product component that oil/gas.

Clean tech outperformance over oil/gas is justified on the basis of the demand outlooks for the major sectors. I expect global solar demand to grow by 9% y/y for 2015 and global wind demand by 7%. Other subsectors that start from a lower base, e.g. storage, could see high growth. That and  pricing that has become manageable will be enough to support earnings for the big constituents of public global clean energy, driven by the largest markets, China, North America, pockets of Europe, South Africa and the Middle East. The private parts of the industry comprise by and large the higher new growth areas.

In aggregate, clean tech will likely deliver still patchy earnings growth of 7%, with great variation around the mean.That compares to 38% for global oil and gas. But, Headline earnings growth for large global oil and gas is higher because of restructuring and deleveraging measures. Ebit looks very different: Growth on aggregate is -39% y/y for 2015. And there is further risk to those numbers from the commodity. Clean tech benefits from a better outlook on the basic drivers: Price erosion is moderate, over-capacity has reduced, and demand is sustained. The downturn in the oil sector will likely be prolonged and at an early stage.

Gas rather than oil is the direct competitor for relative economics for clean energy, and gas prices have come up on cold winter weather in North America and Europe, supply concerns due to geopolitics and some output restrictions.

Should falling oil as it appears to on all accounts lead to cut backs on unconventional gas production, the dynamic will be further reinforced.

On that basis, outperformance of clean tech over oil should continue.

Once oil recovers, that will lend support to clean energy, even though the recovery rally of the oil sector may then surpass clean tech.

The conceptual and argumentation struggle that clean energy faces with weak oil is subject to further consideration.

I can see the merits of bulk sector exposure.  For further differentiation, solar should continue to be supported by good demand (I forecast 9% global installations growth y/y) and improving cost, infrastructure and financing availability. Storage and smart energy is also on the list of preferred subsectors. I prefer those former on a relative basis over wind where demand growth is weaker and the sector’s order outlook comes up against difficult comps. Energy efficiency is conceptually a favourite sector, but the sector is highly dependent on the oil substitution case.

GDF Suez – rock in the oil waves

GDF Suez results show that the company has enough resilience to withstand the commodities weakness and that it still has flexibility to deliver small upside from cost efficiency. Capex will deliver a credible return to growth at the high end of the sector. That is initiated this year.

Revenues of Eur 74.7bn were below expectations, but Ebitda of Eur 12.1bn beat the Eur 11.1bn consensus. The outlook for 2015 for net income of Eur 3.1-3.3bn is in line. There was weather and commodities impact hitting the numbers, but in the greater scheme of the sector that impact was very contained.

The Doel/Tihange nuclear situation is largely resolved and a major overhang removed.

GDF Suez’s distinction is its diversification and growth pipeline. Despite strong sector headwinds, global gas still delivered organic growth of 4.5% y/y.

I see the business as resilient and continuing to benefit from structural growth going forward. Weaker LNG diversion margins should get compensated for by volume and new projects as well as the company’s integration hedge. Further, management has announced credible opex efficiencies that should compensate for about one third of the commodities impact for this year.

GDF Suez is still in a strong commodities position when compared to most names across the energy sector. Gas oil spreads have actually been favourable for the company as it is net short oil. Long gas short oil price exposure will in my view remain a favourable position going forward. And, the company currently benefits from oil LNG indexing in its sourcing portfolio. This is the big attraction of the company’s integrated energy business: It has arbitrage and diversification potential that gives optionality and hedge second to none.

The power capacity pipeline currently amounts to 10.4GW under construction. There is a good share of renewables projects in the pipeline.

The company has enough flexibility for Eur 6-7bn growth capex including acquisitions despite the overall capex reduction. Net debt/Ebitda of 2.5x stacks up very favourably within the sector comparison.

The underlying business is delivering the proof in the numbers. Bottom line growth is likely to come in at low single digit levels in 2015, but return to 10% y/y in 2016. That is an earnings profile that stands out within the peer group.

At 15x P/E 2015, 6.8x EV/Ebitda 2015E and a prospective yield of 5.3%, GDF Suez stands out as good value quality with one of the best growth underpinnings in the sector.