Ian Cowie: how to profit from transition to energy self-sufficiency

Our columnist outlines three investment trusts in his ‘forever fund’ that may benefit from global effects on energy markets.

‘Gastastrophe’ isn’t a word yet but might soon become one as Russia and the rest of the world struggle to control the supply and demand for liquefied natural gas (LNG). Economic escalation of the Ukraine war squeezed LNG prices 25% higher this week to trade above €195 per megawatt hour, more than five times their level a year ago.

That’s bad news for everyone who wants to keep warm and in work this winter. But it could be good for businesses supplying LNG, or alternative forms of energy, and investment companies providing professionally managed exposure to them.

Russia supplied 40% of the European Union’s LNG before it invaded Ukraine. The EU responded by blocking the planned opening of a new LNG pipeline, Nord Stream 2, and imposing sanctions on Russian oil.

Russia reacted by closing the crucial Nord Stream 1 pipeline for “annual maintenance” earlier this month. Then it reopened at reduced volumes, pumping only 20% of full capacity.

This prompted the EU’s 27 members to agree on Tuesday to aim to cut their LNG consumption by 15% in a bid to reduce the risk of a catastrophic energy crunch this winter.

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Fortunately, Britain is less reliant on Russian energy - official figures show it accounted for 4% of our LNG, 9% of oil and 27% of coal in 2021 - but is affected by turbulence on global markets, with squeezed supply and surging prices.

Energy self-sufficiency used to be regarded as ‘nice to have for future generations’ but is now seen as an urgent necessity today. That should be good for existing electricity and gas suppliers, as well as alternative assets in renewable energy - such as hydrogen, wind and solar.

Ecofin Global Utilities & Infrastructure (LSE:EGL) gives broadly diversified exposure to a wide range of energy generators and suppliers. Its top holding is NextEra Energy (NYSE:NEE), an American utility business and one of the biggest suppliers of renewable electricity in the world. Second place is held by RWE (XETRA:RWE), the Germany-based multinational that claims to be the global number two in wind power.

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EGL’s third-biggest holding is Drax (LSE:DRX), the Yorkshire-based electricity business based on biomass, hydro, solar and wind. Drax generates about 5% of Britain’s electricity and reported higher than expected first-half profits on Tuesday with adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA) surging by 21% to £225 million.

That demonstrates how higher energy prices can help pump up suppliers’ profits. More specifically, EGL shares I bought for 152p in September 2019 cost 221p this week and yield 3.4% dividend income. They trade less than 1% above their net asset value (NAV) and I intend to buy more when dividend income allows.

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Gulf Investment Fund (LSE:GIF) has just over 28% of its assets invested in Qatar, a small country in the Arabian Gulf that is one of the world’s biggest sources of LNG. Although this investment trust is diversified across several commercial sectors - led by nearly 19% of assets in financial services - all may benefit from rising LNG prices.

GIF shares I bought for $1.86 last February cost $2.02 this week and yield 2.5% dividend income. Despite the remarkable hat-trick of being the top performer in the Association of Investment Companies (AIC) ‘global emerging markets’ sector over the last decade, five and one-year periods, GIF continues to trade within 1% of its NAV.

Gore Street Energy Storage Fund (LSE:GSF) gives indirect exposure to inevitable fluctuations in the supply of solar and wind power by providing industrial-scale batteries. On Tuesday, it reported 13% growth in NAV during the year to March with 11% share price  total returns.

GSF is a technically complex business, which I struggle to understand, but am willing to pay hefty management fees of 2.2% in hopes that costs will fall with economies of scale in future. Shares I bought for 105p in November 2020, cost 123p this week and yield a scintillating 6.5% income.

Other holdings in my ‘forever fund’ that may benefit from global effects on energy markets include the American oil giant Exxon Mobil (NYSE:XOM); the Sheffield-based green hydrogen-maker ITM Power (LSE:ITM); the London-listed shipping investment trust Tufton Oceanic Assets (LSE:SHIP); the Australian LNG exporter Woodside Energy Group (LSE:WDS) and the self-descriptive investment trust, US Solar Fund (LSE:USF).

With both sides in the Ukraine war seeking to dominate energy demand and supply, intended and unintended effects are being seen across the global economy, creating winners as well as losers. Individuals can’t do much about this, either way, but investors can help to capitalise the transition to energy self-sufficiency and may even benefit from it.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Ecofin Global Utilities & Infrastructure (EGL); Exxon Mobil (XOM); Gore Street Energy Storage Fund (GSF); Gulf Investment Fund (GIF); ITM Power (ITM); Tufton Oceanic Assets (SHIP); Woodside Energy Group (WDS) and US Solar Fund (USFP) as part of a globally diversified portfolio of investment trusts and other shares.