How leaders leverage the energy crisis for future growth? - Industrials

Interview Transcript

Article | How leaders leverage the energy crisis for future growth? – Industrials
1st November 2022 Atheneum Team

Expert Profile


Investment Director




Giancarlo has created and led the sustainability Corporate Venture Capital vehicle of Honeywell PMT with focus in Green Hydrogen, Biofuels, Energy Storage & Plastic Circularity. Notably Giancarlo’s first investment in Alder Aviation fuels was presented at the White House event on Sustainable Aviation.

Section 1: Energizing Growth During Crisis

1.1. How have increased energy prices impacted your industry?

In the first half of 2020, there were a lot of major oil and gas companies put their investments on standby because they wanted to wait until the dust settled. From June, policies became clearer, so investment restarted with a little bit more emphasis and speed. There was sentiment that evaluations were somehow dropping, and a lot of people, especially in the investment space, were trying to capture that moment to invest at lower evaluations.

Between 2020 and 2021, there was a period of four months or five months where variation increased quite a lot, mainly due to injection on capital by federal banks and valuations increased quite substantially, especially at the beginning of 2021. Then there was a gradual, stable period, and from 2022, there was a drop.

The appetite of investors considering the recent pandemics and crisis was divided in these three phases: standby then renewed appetite considering the lower evaluation, and then from then on valuations drop a little bit, stayed constant, and then from 2022 forward kept dropping, and now they’re at the lowest. So, there is a lot of interest in investing.

1.2. Has it changed the way you manage your energy?

There was a big change, this is time where evaluations were low, so it could be a good opportunity to invest in few companies. If you have a specialized approach in specialized energy like hydrogen; or if you have large funds and you can deploy substantial capital, this is probably what 30% or 40% of investors are thinking in the corporate world. But there is a group of people that are still waiting for the dust to settle, and another group is proceeding, but more cautiously, more carefully.

We can say that there are three or four groups, but my personal view, especially in Honeywell and it was the same also in Shell, is that this is a great time to invest, especially if you can deploy large amount of capital, so you if you leverage scale effects or if you really are specialized in one sector and you can go a little bit earlier, essentially you can optimize your position by leveraging your own expertise.

1.3. What practices have you applied to maintain business performance during the energy crisis?

We can see the major operational maneuvers that companies like Shell or Honeywell put in place, first, they put measures against inflations and tried to understand where this inflation was coming from. They did that asking themselves if it was passed on from the suppliers.

The first phase was really to analyze how this inflationary pressure was transferred to us. Then based on that, we basically did the ranking of the top, the top inflation producer for us. We use a ratio that is essentially – what is the cost of a measure here? And what is the likelihood that will have an effect?

It is a prioritization mechanism where we analyze where to start first, and then we start implementing these measures. One of the first was to have renegotiated contracts with our suppliers, leverage a wider base of suppliers or use independent, less known, providers of services and products.

Another one was to negotiate a lower price by having longer term contracts. And again, to renegotiate some of the energy supplies, PPAs in general. However, in the last six months, four to six months, PPAs increased, so good PPAs were negotiated in the first six months of 2021.

Another measure was to make sure that, especially in our oil and gas business, our customers, especially the top customers that were suffering from inflationary pressure, were having a little bit more flexibility for payments just to make sure that they were ready to sustain this period of inflationary pressure in the long term. So, we negotiated some of the payment agreements, especially where there were some critical situations and where there was not a critical situation, we tried to anticipate cash flows rather than waiting for it, for example, we negotiated some recurrent revenues contracts offering certain discounts versus lump sum in three years’ time.

1.4. What immediate changes did you implement to your operations?

The first one was renegotiating energy contracts, PPAs and fuel supplies, especially for manufacturing facilities.

The second was renegotiating conditions where possible because Honeywell and Shell were also involved in selling fuels therefore, we are negotiating also these sales contracts’ increasing prices.

Sometimes we also embedded the pricing for services that were originally free. For example, in certain contracts, we were embedding logistics for free or transportation for free just because the margins were allowing that to happen, and after that period, we started charging for deliveries, especially above a certain distance or in certain periods of the year.

1.5. Where do you see opportunity in leveraging the current energy crisis into a long-term benefit?

The current energy crisis is essentially created by a lack of supply, especially in the measure gas side, and it is mainly a time challenge. There is a period of two, three years where these contracts need to be renegotiated.

There are two ways to deal with that, one is to look for additional gas sources and Shell is a little bit more exposed to that, Honeywell a little bit less, but what Shell has been doing is renegotiating spot markets.

Another area of interest is the rise of re-gasification facilities, especially in Spain, Italy, and Northern Europe. These are areas where Shell and Honeywell have huge exposure, so making sure that these plants are choosing our company as a partner of choice.

Then there is a third one, diversification. It is essentially how to put in place few products that can help, and here there is a full list of products that can help. It’s about energy efficiency, it’s about hydrogen, it’s about renewable power production. One line is also about blending hydrogen in the current natural gas line so that there is a list of 10, 12 topics.

1.6. How has the crisis impacted your Net Zero strategy?

It was a strong acceleration and alignment, if you consider 2020 for example, Shell was heavily investing also in oil and gas. Now there has been a shift in renewable energy interest and a bigger commitment in net zero, both in Shell and in Honeywell.

Section 2: PROACTIVITY: Rethinking Future Energy Strategy

2.1. What are the drivers and challenges in rethinking your future energy strategy?

The first challenge is that we are now deploying all these new technologies, wind power hydrogen plants, and there is the will to increase and scale up those facilities. What is really missing, and I think it’s an opportunity for Honeywell and for Shell as well, is the old connectivity of these units to the plan. So having that ramp up will need to modify the grid.

This all-interconnection problem will be a bottleneck. And even if wind and solar are ramping up, one of the challenges is that the network is still not yet already, and this will be evident.

The second challenge is that now with a very high interest rate infrastructure funds will tend to slow down and will have less appetite for new technology because the IRR will drop. So, they will tend to focus on reliable technology, and there will be less projects like that, so the infrastructure fund will have less appetite to invest.

The third area is supply chain bottlenecks, we are still gradually healing from the supply chain bottleneck that we had, and this ramp up of new edges will increase drastically new types of bottlenecks. And as for today, these are still not solved.

2.2. Where do you see opportunities to grow ROI & capitalize from Decarbonization, Energy Diversification and Energy Transition?

All three are areas of interest. Energy transition, decarbonization, especially for very initial intensive companies.

What is really becoming evident is that it is less about reducing emission and complying with net zero pledges, but more about existing in 20 years from now. If you look at companies like Shell, they are trading at two times their revenues, maybe even 1.5 and they’re very profitable. So, the market is discounting the future value of this company massively.

Honeywell is completely different because its 155 market cap is trading 5x revenues. This shows that oil and gas companies are really penalized, so it is becoming evident that if these companies want to exist, even from the financial standpoint, they need to diversify heavily. And that awareness was probably not there two years ago, and it’s now becoming evident.

2.3. How do you expect the energy value chain to transform along with the decarbonization strategy?

These things change in decades, so even if there is an acceleration now, they are not going to transform themselves in five years or less. If you consider how there will be more reliance on electrons rather than molecules, there is an overall trend towards electrification and with electrification, what is missing is cobalt, graphite, the old lithium and nickel.

These are all things that are missed for batteries. For solar, it’s about PV cells and poly Silicon shortage and Waffer for solar production. And then for hydrogen, as hydrogen is coming up as an alternative, there is platinum, palladium, all proton exchange membranes, electrolysis, pipelines as well these new hydrogens will require new type of methodologies for pipelines and so new type of ships. These are all things that are popping up as a key bottleneck.

2.3.1. What main benefits and opportunities do you see from electrification?

The benefits are that electrons will increase in price and there is a big segment of electric users, especially on small mobility, electric cars, and this is a need that was simply not there.

So, for utilities, for companies that are selling electrons that are essential, this is the opportunity of a lifetime to capture a completely new market. If you were a utilities company 10 years ago, the number of users was fixed, the possibility of expansion was limited. Now you have suddenly a new type of growing market to capture, and that is the real opportunity.

At the same time the whole generation is dropping because people are growing, installing decentralized energy resources, so this is how you still capture value from those customers that are striving away from centralized production and capture at the same time the new type of markets like EV or other decentralized energy resources markets.

2.4. What role will technology play in energy management transformation in the future?

The energy transition has three essential pillars: technology, a big component on regulatory frameworks, political involvement, and investment, and then there are capital deployments. Technology has a big role, at least 40% of the acquisition is about deploying the new technology, but it’s not only a technology game, but that is also very clear.

There are areas where technology still needs to do this new course. Hydrogen fertilizer, ammonia production, less on wind and power where technology is more mature, but especially in the de-carbonization, how to make sure that we capture CO2 and we produce our products with less CO2 and hydrogen, these are areas where technology could have big role to play.