The continuous rise in natural gas prices and market volatility outline a worrying scenario, with consequences both on the real economy and on investment choices. It can be read in the report by Antonio Amendola, manager of AcomeA PMItalia ESG fund of AcomeA SGR, according to which as the winter months approach, the most feared scenario is the possible inability to reach sufficient levels of gas storage, to cope with the greater demand of the winters to come. Looking at the data from Gas Infrastructure Europe, the report reads, the current total European gas storage capacity is about 100 Bcm (billion cubic meters) and as of 7 September it is 83% complete, compared to 70% last year. The level reached satisfies the minimum requirement of 80% established by the European Commission to be reached by 1 November.
However, continues Amendola, what is worrying is the sustainability of the natural gas supply, which has now reached prices never seen on the market: the peak of August 2022 is 340 € / MWh, against an average of 30 € / MWh normally observed on the market. The graph shows, in addition to the percentage of gas stored by Europe and Italy, the trend of the European reference index TTF (Title Transfer Facility), which determines the price of natural gas. The TTF is an exchange market for gas trading contracts (especially futures) in Europe, used by both producers and storage companies as well as companies and governments. From the trend of the index it is easy to see how the gas price rally started as early as September 2021 and was followed by a very rapid and volatile rise. In fact, the TTF is a very liquid market and therefore very volatile and sensitive to fears and changes in supply / demand (without being able to exclude speculative transactions).
The moves of the G7 and Russia
Among the mechanisms being evaluated to alleviate this excessive price increase, the G7 has proposed an agreement on the imposition of a price cap on oil imports from Russia, with two purposes: on the one hand to limit financial flows to Russia and therefore the profits needed to finance the war in Ukraine, and on the other hand to reduce the continuous increase in energy prices which contributes to the general inflationary pressure. Russia’s immediate reaction was Gazprom’s non-reopening (following a brief maintenance stop) of gas flows from the Nord Stream 1 pipeline indefinitely, citing an engine failure near St. Petersburg.
The effects of this situation, according to Amendola, will have a certain impact on the capacities of importing countries to restore gas storage, especially for the future winter of 2023, if the flows do not resume. An additional effect is the upward pressure on gas and electricity prices in the coming months, with a negative impact on GDP growth.
The price cap dilemma
At EU level, work is being done on several fronts to plug the current crisis while awaiting more structural solutions of a geopolitical nature. Therefore, Amendola analyzes the consequences of introducing a price cap, in particular with regard to energy prices and the subjects that should bear the weight. In detail, we are talking about a price cap “on the seller”, that is, on the price of gas imported from Russia; the main purpose of the introduction of the measure is the reduction of energy costs which would end up impacting the final consumer (energy-intensive companies and low-income families in primis). In fact, the increase in the price of gas leads to a dramatic increase in electricity costs, by virtue of the strong link that exists between the two. So, if the goal of the price cap is to reduce the impact of energy inflation, according to Amendola it is necessary separate the link between gas and electricity and find financing methods to protect the most fragile consumer groups from price increases. Among the possible solutions, it identifies taxation systems (eg windfall taxes on extra-profits) or the issuance of debt at the community level.
Another way discussed to mitigate the energy crisis is the gradual one replacement of the use of natural gas with other energy sources: among the most plausible is the use of LNG (among the prevailing substitutes), nuclear power and renewable sources. However, warns Amendola, the current energy supply is not compatible with the industrial needs and the current competitive market: Russian gas cannot physically be replaced in its entirety by renewable energy in a short time, but a combination of LNG, renewables and natural gas coming from alternative countries to Russia.
Among the alternatives to the introduction of a price cap, the report reads, there is certainly room for the voluntary reduction of demand and consumption of natural gas by European countries. Some EU members have adopted the consumption reduction program “Save Gas for a Safe Winter”, currently on a voluntary basis (but may provide for a mandatory extension in emergency cases). According to Amendola, the reduction in demand from industrial companies could contribute to higher levels of stored gas, but at the expense of EU GDP growth.
A last resort suggested by the AcomeA manager is the partial reopening of coal plants, which, however, is impractical: many countries have begun the dismantling of coal-fired plants with a view to energy transition, with the idea of relying on renewable energy and nuclear power in the near future. This was the prevailing idea in the EU until recently, before the energy scenarios changed as they do now, showing that the duration (understood as speed of adaptation) of the energy sector is greater than that of the market.
The titles of the Star most sensitive to gas
Considering the Italian scenario, today there are 10 natural gas storage fields, for a total capacity of 16 Bcm (currently 83% filled). In the report, Amendola tries to examine the reaction of a sample of stocks in the Star segment of the Italian Stock Exchange, by calculating the sensitivity (Beta) of the cost item in the income statement for the last quarter to the change in the price of TTF gas. With this analysis we can find which stocks are most sensitive to the price of gas.
The companies that we find in the upper right quadrant, the report reads, have the greatest sensitivity and the greatest impact in terms of energy price costs, unlike those in the lower left quadrant. In the chart below we see the Price-Earnings (in green) and Enterprise Value-Ebitda (in white) multiple of the Star index. As we can see, we are well below the historical average for both metrics. According to Amendola, it is interesting to start look with interest at the titles in the upper left quadrantas they have the greatest potential in the event of resolution, even partial, of the energy crisis.
The companies most penalized in terms of performance for the energy issue, according to the report, they can offer significant increases if a solution is found at the community level to buffer the emergency and / or in the event of a structural solution of a geopolitical nature. According to Amendola, the most promising companies are: Zignagno Vetro, Wiit, Aquafil, Tesmec e Piovan.