Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Patrick O'Shaughnessy, Matthew Smith
[00:00:00] S0: Who are the big losers, do you think, in this future? [00:00:00] S1: Well, sadly, the biggest losers of this will be the US consumer, to the point where you take what I'm saying and if we're even partially right, electricity prices rise, which you can see some of on the forward curves in these different markets. As electricity prices rise, you start to think about the trade-off. Are we going to export natural gas to foreign buyers? Are we going to use it for AI compute, or are we going to try to keep consumer electricity price bills low? It's an awful trade-off. I think it will probably start to contribute more to the public dialogue. The NIMBYism that we're seeing already pop up in some places. We think AI is tremendously transformational. We're not anti-AI, but it consumes a lot of power, and we need to really focus on the 2030 to 2035 period. And the US consumer's probably going to pay the bill in the meantime. Please note that most of the solutions being proposed by the government are to consume more gas because everybody believes it's plentiful. Bring your own generator or generation. BYOG is a thing today. That's what the hyperscalers are being asked to do to site their data center in a certain lat and long. That means more gas, not less. And so every time you read a press release from Bloom or from— [00:00:00] S0: Think more gas.
· Patrick O'Shaughnessy, Matthew Smith
[00:00:00] S0: Think more gas. [00:00:00] S1: And you can use the energy efficiency of each one of those units and understand exactly how much more incremental gas beyond the base case that I just shared is dangerously tight. Another loser, and I want to be respectful, but some of the biggest winners so far, at least in the stock market, have been the manufacturers of gas turbines or distributed power gensets. And when you think about those companies, it's been somewhat boom and bust. In the early 2000s, there was a boom to build as many gas plants as we could. The capacity was overbuilt and the industry really languished for a long time until now. And you've had tremendous profitability and equity returns come from these companies over the last two years. But as you look at 2028, 2029, most of them are adding more capacity again, just like they did in the early 2000s. [00:00:00] S0: What kinds of companies are these?
· Patrick O'Shaughnessy, Matthew Smith
[00:00:00] S0: What kinds of companies are these? [00:00:00] S1: Just like Caterpillar. Caterpillar, I think, is doubling their Solar Turbines capacity between now and the end of '29, which I would judge is at the exact wrong time when people may be questioning whether they even want to deploy those assets because the gas is much more expensive than they planned. Bloom Energy, they've been topical recently because of other things that folks are talking about, the rare earths they use in their manufacture, for instance. But for us, we don't think that Bloom Energy's assets at two gigawatts or more will be able to get natural gas in competition with all of the other assets that are being deployed that will consume gas given the scarcity that we see. So those are two, we'll call it manufacturers of distributed generation or BTM generation that we think are probably more poorly positioned than investors appreciate. It really doesn't make sense to us, beyond 2029-2030, to build large-scale natural gas generation until we ramp up production meaningfully and you can make sure we have the security of deliverability of supply of gas that's consistent with our model. We could see orders slow very meaningfully for natural gas generating assets, even at large scale, as '26 progresses. And those could be some of the losers — it may not make sense to use gas for power generation for new or incremental assets after a certain point.