Invest Like the Best with Patrick O'Shaughnessy
· Matthew Smith
[00:00:00] S1: There are some clear natural gas producer winners. Expand Energy is probably at the top of that list. They probably control 70% of the remaining core Haynesville wells, the very closely known parameters of rock where we know it to be very productive. And so Expand, we think, is far and away the biggest winner. Uniquely, Expand is CEO-less right now. There was some turnover early in the year, they're going through a search. The stock has plummeted over the last six months as a part of that search, and it's trading at four times EBITDA on a forward curve where no one believes what I'm telling you to be the case, even though we think modeling the facts gets you to a much higher gas price. The stock has dropped. The assets have not changed. It has some of the highest quality rock in the country. Highest quality upstream company in Appalachia is probably Range. Range has significant room to grow production and materially grow returns to investors. So those would be the upstream companies. It's not going to be obvious in the first pass through this equation for most, but natural gas sits as the marginal fuel for the next-in-line power-generating asset in each power market. As natural gas goes, power prices go in the country. And so if you think about the dispatch curve of different generating assets in the country, there are some where the fuel is free. Maybe solar, to a lesser extent wind, hydro. Solar assets, which are growing meaningfully, they've been 90% of the interconnect queue with batteries in the last ten years in terms of new assets coming on other than gas. Solar assets stand to benefit from a windfall where electricity prices are going up because the margin of plant taking fuel where the price is increasing is rising while sun costs the same. We think there are some companies positioned very well for margin expansion, for no incremental capital costs. XPLR, ticker XIFR, formerly NextEra Yield Co., which is an interesting set of assets. They have a windfall coming in the latter part of the decade because they mark their PPAs to market at much higher values without any CapEx. Clearway Energy would be another one, similar circumstance. And so solar assets at the utility scale especially stand to win.
· Matthew Smith, Patrick O'Shaughnessy
Maybe more interestingly, as it relates to some of our discussions in the past, residential solar, which has been suffering from really the first removal of tax incentives to install residential solar since the late '70s. Residential solar assets are really one of the only ways to protect yourself from what's going to happen during the time of 10:00 AM to 6:00 PM once gas gets really tight in the electricity markets, what you pay for electricity at your house. So we think residential solar grows exponentially from here, even without tax incentives. For the first time, it's very economic with where electricity prices are likely to go — to install solar, especially when it accompanies batteries, which make the electricity much more available around the clock. [00:00:00] S0: I think it's important to say you're an investor — you have money behind this work. Beyond those two categories, are there any other surprising winners, do you think, in all of this? What about nuclear? What about Westinghouse or places like this?
· Patrick O'Shaughnessy, Matthew Smith
[00:00:00] S0: I think it's important to say you're an investor — you have money behind this work. Beyond those two categories, are there any other surprising winners, do you think, in all of this? What about nuclear? What about Westinghouse or places like this? [00:00:00] S1: What we're talking about is a complex dynamic system where there'll be choices to consume electricity or not at different times. And as I go through this, I want to make sure I acknowledge that there's no silver bullet solution for what I described as a convex situation with natural gas and therefore electricity prices as the decade closes. And there's no bridge fuel other than solar and wind, because currently natural gas is the only flex fuel to get us to when we can bring on nuclear. We have spent a fair amount of time as well in the nuclear ecosystem. To us, large-scale nukes are the only solution that makes sense. Which point us primarily to the AP1000 Westinghouse units that— [00:00:00] S0: Don't those take like five years to build or something?
· Patrick O'Shaughnessy, Matthew Smith
[00:00:00] S0: Don't those take like five years to build or something? [00:00:00] S1: More than that. But at least they have a storied past and — very brief history. We've built two nuclear reactor units in 30 years in the US, Vogtle 3 and 4. Around that time, we also tried to build one in South Carolina called V.C. Summer, another nuclear project at the time, nearly bankrupted SCANA, which was later pushed into the arms and the project was shut down. The muscle memory from trying to build large-scale nuke, especially on the back of Fukushima in 2011, Chernobyl, Three Mile Island. For three decades, nuclear engineers and scientists and companies moved away from nuclear. And then the Vogtle 3 and 4 experiment where it costs three times as much and took 15 years, I think, from birth to commercial service. That's the recent memory of these nuclear units. But if you go out to the 2030s, what I'm describing in terms of gas deficit only gets worse in '31, '32, and beyond. And so in our mind, the only viable solution is to build large-scale nuclear as fast as possible, which would mean it needs to come on in 2033 or 2034, which is as soon as it can come on. Regulated utilities, hyperscalers, regulators should all align around that goal. But because people don't really believe that gas is in short supply as the decade goes along, they don't believe in the problem. [00:00:00] S0: They don't like the solution.
· Patrick O'Shaughnessy, Matthew Smith
[00:00:00] S0: They don't like the solution. [00:00:00] S1: So they need to be convinced of the problem. And the country has a history of building pipelines to solve problems that exist today, not problems that will exist in five or ten years. And so we're trying to get out ahead and see where the puck's going, and where it's going is we are going to need large-scale nuclear by 2033, 2034. [00:00:00] S0: You don't think SMRs can be a solution where you use smaller reactors to power individual data centers behind the meter and this just never touches the system?
· Matthew Smith
[00:00:00] S1: Many of the SMRs are still science experiments. The NRC and the US government are actually doing a fair number of things to break down the barriers to bringing those on to see if they work or not and what the cost will be and whether they can be scaled or not. But many of these SMR companies are not set up to manufacture and truly scale for the solution that's needed to solve this problem, which is tens of gigawatts as you go into the 2030s. That points us to these AP1000s. Since Vogtle 4 came on — and Vogtle 4 experienced very material improvements from Vogtle 3 in Georgia — today China is building 39, plus or minus, nuclear reactors.34 of them are one gigawatt plus. I think a third of those are modeled after the AP1000. We know a lot more today about building large-scale nukes than we did when these mistakes were made. So large-scale to us, where it can be commercialized on a known timeline and where the costs are probably better than where we don't even know if we can scale the businesses yet in terms of SMRs — large scale versus small probably wins in our mind. The two companies most levered to that would be Cameco, which owns 49%, Brookfield, 51%. You'll probably find that the US government, I think, agrees with what I'm describing.They seem to really be lining up and trying to facilitate commitments and early procurement, which would de-risk some of the supply chain, which will help put timelines on this. And when Westinghouse becomes public — it's deeply undervalued within Cameco today. So that's an interesting one. BWXT, which is a super interesting company, they're the primary supplier of nuclear for the US Navy. They significantly benefit from the coming nuclear cycle as well, and lots of dollar content in the AP1000 as well.