Look Here for the Next ‘10 Bagger’: Renewable Energy and Battery Metals

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Profit Watch has spent the last few weeks pondering the outlook for energy firms in the oil and gas sector.

It’s not so much where the oil price is today or tomorrow. It’s the threat of asset write-downs and divestment.

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Today’s Australian Financial Review reports…

Oil Search has axed its workforce by a third to cope with the dramatic collapse in oil prices which has wreaked havoc in the industry and ensnared global oil major Royal Dutch Shell.          

Analysts and investors expect substantial write downs of Australian oil and gas producers as a wave of new cases in the United States has revived uncertainty in the oil and gas sector…

Romano Sala Tenna, portfolio manager at Katana Asset Management, expects a modest reaction from Australian investors to expected write-downs but warns the full carnage from the oil price drop will hit in the fourth quarter.

With this in mind it will be hard to see the valuations remain as is, our base case is that there will be substantial write-downs in the coming reporting season — if not earlier — and this is one reason we have moved our weighting to close to zero.

Overall, there are too many headaches here.

But think on the flipside…

Last night I spent about an hour with an energy renewable analyst and investor based over in the UK.

He spoke about the returns he was getting in the renewable sector. Shiver me timbers! Some of his stocks were up hundreds of percent in months.

One was even a ‘10 bagger’ — 10 times your money — in under a year (from memory).

It’s hard to identify similar fervour here in Australia. Perhaps it’s because the investable options seem more limited…and the federal government support for the whole idea less than effusive.

Of course, we can always try and play this theme through battery metals.

But my renewable analyst told me the same thing as clean tech guru Tony Seba: the battery tech keeps changing.

What they mean is that the battery makers keep tinkering with the chemistry that defines the battery.

That means any long-term forecasts for these metals from battery demand is highly uncertain. They make a good story, but we can’t guarantee the targets will be anywhere near accurate in 2025.

Essentially, we’ve already seen this happen after the lithium boom of 2015–17. The price for spodumene is way down off its highs. Investor interest has migrated away to gold and pay now, pay later stocks.

But opportunity could lie here. Now’s the time to go over the stocks left behind, dropped, forgotten, and unloved and see what’s happening.

One thing analysts can agree on is that lithium-ion batteries are unlikely to be superseded in the next 10 years. That means the demand is coming.

As always, it’s a question of timing.

It also wouldn’t surprise me in the slightest to see renewed merger and takeover interest here.

We’re already seeing some evidence of that via the tussle now for Infigen Energy.

However, I cannot yet tell you all the implications of the powerful movements forming here. I need more time to go over all the implications and factors at work.

For now, our highest priority is to avoid the coming wave of write-downs and dud earnings from the big energy firms. Protect capital first is the highest instinct of all investors.

Then we can knuckle down to see who might win from the big transition happening now.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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