Energy infrastructure shares – 3 investment ideas for the long term

To make LNG, natural gas is super-cooled into liquid form, creating fuel with much higher energy density. This allows for more efficient transportation by road, rail and sea, facilitating exports and reducing reliance on pipelines.

LNG is cleaner burning, releasing less carbon dioxide than some fossil fuels, so it’s widely seen as an important part of the energy transition. To complete the circle, Baker Hughes also has a compelling offer in electricity generation and low-carbon technology.

We think the Middle East crisis could create demand for global LNG development, to try reducing reliance on any one region and potentially even drive reconstruction or replacement of damaged facilities. But the recent disruption also highlights concerns around LNG’s energy security credentials and long-term competitiveness with other energy sources. So there’s no certainty order intake will accelerate.

Performance from the group’s oil field services and equipment division has been more lacklustre, as drilling in the US shale basins has slowed. That’s been partially offset by the resurgence of demand for exploration and development in deepwater locations. We think there’s the potential for a further acceleration in activity as well as a revival of onshore drilling in the US.

Revenue forecasts for Baker Hughes have barely moved recently, but we think there’s significant upside if an energy investment super-cycle does emerge from this crisis. However, ongoing geopolitical tensions have the potential to cause significant disruption to the business in the near-term. With the valuation riding high, investors need to be prepared for volatility.

Shell – the middle-man

Shell is the world’s biggest trader of LNG. This is supported by significant LNG liquefaction and transport capacity, meaning that Shell not only trades its own fuel but also third-party supplies. That helps Shell react to fluctuating demand and provides a layer of resilience against supply disruptions. Meanwhile, Shell continues to invest in its existing facilities, which offer attractive returns on investment compared to new-build developments.

Shell’s trading activities typically generate excess profits during periods of extreme volatility. However, the current turmoil in the market is exceptional, and Shell’s infrastructure in Qatar has been directly damaged. The company’s declaration of ‘force majeure’ on some related contracts should provide some protection from recourse from customers. But finding cost-competitive replacements for its Qatari supply will be a challenge, one that’s compounded if demand is further damaged by longer-term concerns around LNG’s viability.

As an integrated oil & gas major, Shell offers more than just LNG trading, and its upstream (exploration and development) activities could benefit from the recent spike in oil prices. That’s reflected by a valuation that’s strengthened significantly so far this year, meaning the scope for capital appreciation could be limited, particularly if commodity prices decrease significantly.

However, if oil prices remain elevated, this could further boost the balance sheet, which is already one of the strongest amongst the European majors. While the 3.4% forward dividend yield looks well supported, and we see further growth potential in dividends and share buybacks, obviously no shareholder returns can be guaranteed.

DCC – the last mile

Ireland’s DCC provides goods and services to businesses and consumers across a diverse geographic footprint. It’s been on a journey to simplify its business, having recently fully exited its healthcare division. If it delivers on its promise to complete the disposal of its audiovisual business this year, that will leave DCC focussed entirely on energy.

Within energy, its Mobility division comprises a network of service stations. This is a cyclical business that can suffer in times of economic weakness. However, the addition of fleet services for haulage companies, like fuel cards, digital apps and tracking can help to support revenue visibility and margins.

The other string to DCC’s energy bow is Energy Solutions, which is currently dominated by the sale of energy products like liquid gas and fuel, primarily to consumers and industrial customers whose needs aren’t met by the energy grid. We think this provides a sticky customer base and leaves DCC well-positioned to help customers adapt to changing trends in energy consumption and power generation.

Enter the group’s smaller Energy Services arm, which provides turn-key installations for solar power and other emerging energy technologies like heat pumps. It also advises users on energy efficiency, adding to DCC’s one-stop shop credentials.

The markets in which DCC operates are highly fragmented, creating the opportunity to expand through acquisitions, an area where the group has been successfully investing. Volatile energy prices are placing pressure on DCC’s end markets. But the company’s borrowings look to be in check, and a good record of cash generation means it’s capable of pouncing on further consolidation opportunities if smaller players show signs of distress.

That also underpins a forward dividend yield of 4.9% and the potential for further share buybacks. The valuation doesn’t look too demanding either. However, it’s worth noting that the reiteration of full-year guidance came before the latest disruption to energy supplies, so there’s some scope for disappointment in the near-term.