Uranium and gas big winners from Europe’s energy backflip

Uranium and natural gas are coming in from the cold with potentially profound implications for investors.

Despite being two of the most efficient sources of relatively low pollution energy, both uranium and gas have been treated as enemies of the environment – putting them off limits to some fund managers.

The reality of energy-starved Europe, and power-hungry Asia, is changing that narrative and turning assets recently seen as unsuitable in an ethically-focused portfolio into desirable investments.

This is thanks largely to a clerical adjustment in defining what’s “good” energy.

Technically what’s happened is that the European Union (EU) has turned to the obscure world of “taxonomy”, the business (or science) of naming and classifying things into groups with common roots.

Until recently uranium and gas were lumped into a set which included oil and coal and therefore sharing a common negative classification of not being environmentally sustainable – as defined by EU regulations.

Reclassification results in desirable investment status

With a single, but very far-reaching change in their classification, the EU now regards gas and nuclear energy as “sustainable sources of energy in some circumstances” with the most important condition for gas producers being that it is sustainable if used to generate electricity to heat or cool a home, while new nuclear plants (and modified old ones) are equally welcome under the new taxonomy.

The first effects of the EU policy shifts can be seen in recent share price moves across the Australian energy sector where discovery news, once ignored, can now produce a spectacular response such as the 81% rise over the past few weeks by Northern Territory uranium explorer DevEx (ASX: DEV).

Though still a long way from knowing whether its rich uranium strike at the Nabarlek South project will prove to be commercial, let alone whether DevEx will ever be able to export any uranium, the stock has risen from $0.21 in early July to last trades of $0.38.

Other uranium stocks are also riding the wave of enthusiasm for the low-carbon fuel as governments recognise that the nuclear fuel cycle is the lesser of two evils and might even play a leading role in offsetting the effects of climate change

Paladin Energy (ASX: PDN) and Boss Energy (ASX: BOE) have been two of the leaders of the uranium revival story as they prepare to re-start mothballed mines. Boss is up 30% over the last month and Paladin is up 22%.

Uranium itself is sitting at around US$48.70 a pound on the spot market – down on its 12-month high of US$65/lb reached in April, shortly after Russia invaded Ukraine, but double the US$24/lb of two years ago.

Gas on a winning streak

Gas is also on a winning streak as Europe scrambles to replace dwindling Russian pipeline supplies with liquefied natural gas (LNG) at US$60 per million British thermal units compared with US$40/mbtu in Asia.

This could potentially spark a trade war as some LNG producers consider breaking contracts with Asian customers to catch the peak prices in Europe.

Australian gas-exposed companies are riding high.

Beach Energy (ASX: BPT) has risen 40% since the start of the year thanks in part to local gas sales but also because it is a rare example of a relatively small producer finding a way into the export-focused market through a deal with BP on its share of gas to be produced from the Waitsia field in WA.

Driving the change in the way the EU and investment markets see uranium and gas is the Ukraine war and the realisation in Europe that Russia has a stranglehold on the region’s energy supplies – especially the fossil fuel trifecta of gas, oil and coal.

Soaring prices for gas and electricity has sparked a rush to source alternative supplies which has, in turn, upended the global trade in gas and coal, which is good news for Australian producers who are on a wave of strong demand for non-Russian energy.

Coal also rocketing

Coal producers have, so far, been the big winners from the seismic shifts rumbling through the global energy market with local leaders, such as Whitehaven Coal (ASX: WHC) delivering a 600% share price gain over the past two years to investors prepared to ignore the political incorrectness of investing in coal.

The coal rush is likely to continue with Europe soon to introduce an outright ban on Russian coal with Australian, US and South African miners moving to plug the hole.

Over the past three years some fund managers and banks have adopted a fossil fuel free investment policy, while uranium has been a no-go sector for decades.

But, as the energy crisis in Europe is demonstrating a blanket ban on certain types of energy is hard to sustain when the potential environmental harm is far outweighed by the economic damage.

What that means for Australian investors is that some industries, especially gas and uranium, have been restored as suitable investments courtesy of desperate times in Europe and a growing energy crisis in Asia.

ESG-focused funds take positions

An early hint of what’s to come can be found in the shifts underway in funds with a strong environmental, social and governance (ESG) theme which have been significant underperformers relative to funds with exposure to fossil fuels and uranium.

Without even apologising for getting it wrong for the past two years, some ESG funds have quietly amassed big positions in fossil fuel companies ostensibly because they want to influence management decisions but more likely because of the high price of not being exposed to a winning sector.

Perhaps the two most remarkable changes can be found in a report by Bank of America which put oil companies at the top of an ESG list of top environmental performers, and a study which showed that 6% of European ESG funds now own shares in Shell whereas none did last year.

Russia’s invasion of Ukraine has changed the world in many ways on a geopolitical level, but it is also starting to have a profound effect on the investment decisions of professional fund managers.

The same forces driving ESG funds into fossil fuels (especially gas) and uranium should be influencing private investors.

There is a sea change underway in the energy sector as some resources previously consigned to the investment sin bin are reclassified, not only because they are being recognised as environmentally acceptable but also because they are economically essential.