StockBeat: Engie, EDP Play Catch-Up in Energy's Big Growth Sector

StockBeat: Engie, EDP Play Catch-Up in Energy's Big Growth Sector  | May 22, 2019 10:15

StockBeat: Engie, EDP Play Catch-Up in Energy's Big Growth Sector

By Geoffrey Smith -- Europe’s electricity giants have had a hard time moving beyond fossil and nuclear fuels into renewables, but the continent’s climate policy agenda leaves them no choice.

That explains, in part, the announcement by France’s Engie (PA:ENGIE) and Portugal’s EDP (LS:EDP), two of Europe’s old-style legacy incumbents, to team up in the fast-growing sector of offshore wind.

The two said on Monday they intend to have up to 7 gigawatts of installed capacity – the equivalent of eight or nine old-style gas or coal-fired generation plants - operating by 2025, with another 5 to 10 gigawatts at an advanced stage of development. They have cooperated at a project level already since 2013, and already have 5.5 GW in construction or under development, but that is still a hefty expansion plan.

The logic of the deal seems clear enough, although it may be a slow burner in terms of value creation. EDP’s stock rose 1% on Tuesday and is up another 0.2% today. Engie’s would have been up a similar amount had it not gone ex-dividend.

Europe’s bourses are in mixed spirits Wednesday, with the benchmark Euro Stoxx 600 down 0.1%, while Germany’s Dax is flat and the U.K. FTSE 100 up 0.4% largely due to sterling weakness.

Their aim is to become the second-largest wind farm developers in the world behind Denmark’s Oersted (CO:ORSTED), and leap-frogging Spain’s Iberdrola (MC:IBE). Orsted has been one of the biggest stock market successes in Europe of recent years, up more than 125% since its IPO in June 2016, skilfully exploiting a sector where government subsidies and market dynamics are in constant flux.

Iberdrola has needed longer to take off but its stock has risen 35% since October. Conspicuously, both of those stocks have been immune to the general increase in market volatility in the last eight months.

Both EDP and Engie could do with a little bit of Orsted/Iberdrola magic.

EDP is looking to move beyond the collapse of a takeover attempt by China Three Gorges, a state-controlled generator. Its stock lost some 15% from the start of April as that episode unravelled.

Engie investors, meanwhile, have yet to buy into CEO Isabelle Kocher’s plans to streamline the sprawling business, although she made a promising start in February by promising to get out of 20 of its 70 markets. It has a headache with its investment in the new Nord Stream 2 gas pipeline, which has landed it in the U.S. administration’s crosshairs. The U.S. confirmed on Monday that it is preparing new sanctions against the Russian-controlled pipeline, in which Engie has a 10% stake.

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