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GDF Suez is uniquely positioned to capture the benefits of changing energy markets. Its vertical integration mitigates against the fallout from commodities, especially in LNG. The shares should see a re-rating as management delivers growth ahead of the sector. One of my core names for exposure to the mega trends of energy. The positioning of GDF Suez in global energy across various value chains is unique. Management has highlighted an area of strength and taken the next strategic step in the current energy cycle: Return to growth. That should see a positive reaction and lead to a re-rating of the shares. GDF Suez has highlighted its areas of strength for growth , Asia, Middle East and Africa. The company is building these as core growth regions. That makes sense given its already strong position in those regions and above average growth. Looking through current weakness, energy demand growth will likely exceed 7% CAGR to the end of the decade (source: IEA). Management also has proactively moved to the post deleveraging phase by committing to new growth. The company targets growth capex of Eur6.5-7.5bn for 2014-18. It is looking to dedicate about 20-30% of growth capex spend to Asia, Africa, and the Middle East. With that, GDF Suez stands out, not only amongst European utilities who are undergoing slow and painful transitions in order to identify new growth opportunities. It also stacks up very well against the global oil and gas sector that is struggling to deliver reserve growth whilst cash flows are strained by weak commodities. Asia, Africa, the Middle East are regions of strong new growth so it makes sense that they are at the core for GDF Suez. IPP, LNG and energy services are the key growth businesses, in line with its tested strategy. The company’s target regions account for over 80% of global energy growth over the next 20 years. The latest guidance implies power capacity growth in the above target regions of 6% CAGR, 2P reserves growth of 8.8% CAGR and energy services revenue growth of 7.9% CAGR to 2020 on the target areas. The regions currently account for c 7% of Ebitda. Visibility on growth is very good. The pipeline provides for 30% power capacity growth to 2020. I would only consider capacity under construction at this stage, which is just short of 1GW. The IPP model is tried and tested and merchant risk very low. GDF Suez has a very good track record of securing PPA’s at good conditions and in strong local partnerships. I expect that and the strong execution capability to continue to as the basic earnings driver. E&P reserves growth of 5-7% is at the high end of the sector, and the gas focus in line with the broader sector. But I see GDF Suez better hedged than the average of the E&P sector, because of its vertical presence all the way through the chain. With that, I think it stands a better chance of profitable reserves conversion to earnings growth to 2020. LNG is a risky sector at this moment. Asian demand weakness and weak oil prices are leading to price falls. Over-capacity is creeping into the market. New capacity build risks not meeting its hurdle rates. Suez currently has a feasibility study under way for an Indonesian LNG terminal. There I see risk of delay. The same goes for the floating LNG terminal project in India. I also see risk of lower utilization of the US terminals. The US Cameron liquefaction terminal may escape the heart of the storm, it won’t come to market before 2018. But the company’s vertically globally integrated business provides for mitigation. Pricing risk for the Japan and Taiwan LNG contracts is in my view relatively low as they were concluded at very tight pricing in the first place. Eventually, gas demand in Asia will recover. On average, the IEA estimates demand growth of 4%pa to 2035 with corresponding infrastructure investment requirement. The industry estimates over USD 100bn of liquefaction and storage capex requirement alone. And for that, the company’s positioning across upstream, infrastructure and power generation is second to none. The changing structure of energy markets with distributed generation, renewables and gas/power convergence are all playing to the company’s strength. The energy services business will be a major beneficiary and additionally deliver strong synergies to these new growth businesses. It will also be a growth driver in its own right in China and a door opener for other business development. GDF Suez has a unique advantage through the combination of its IPP, global gas and energy services business. That is in my view the true attraction of the company. Sentiment will likely be cautious on commodities, but should increasingly return to reflect the early move and strong position on long term growth. This is one of my core names for exposure on the global energy mega trends. The shares trade on a 20% discount to the European utilities sector and offer a well supported 5% yield. Editor’s Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks. Scalper1 News
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