3Q 2014
Oil Going South
Recent price activity around oil has had widespread implications for the broader equities markets, with indiscriminate
weakness throughout the energy complex from oil & gas
services through to MLPs and as far-reaching as renewables
and YieldCos. OPEC shocked the equity markets on November
27, stating that it would maintain its prior level of production at
30.4 million barrels of output per day. The commentary implied
a realization that the global supply picture has changed as
US shale oil has ramped production appreciably since 2009
as new basins including the Eagle Ford, Permian, Bakken
and Utica have dominated the headlines with monthly output
increases amid a slowing global demand picture. Over the
weekend of December 12, the Saudi Oil minister inferred that
production targets would stay intact even if oil were to trade
as low as $40 per barrel, perhaps setting a quasi-near-term
floor in investor’s minds. Compounding this, the International
Energy Agency (IEA) has twice cut its 2015 oil demand outlook
in the past month. We cannot profess to know the floor in
crude price, but the plunge in oil has unquestionably opened
opportunities elsewhere.
As mentioned above, the decline in oil as a “proxy” for
energy has been widespread, and captured a disproportionate amount of attention among investors. Volatility creates
opportunity, and across the energy complex, the practice
seems to have been “shoot first and ask questions later”.
In the case of direct shale-related names, the commodity
services providers that rely on drilling services have dropped
in some cases as much as 70% depending on the amount
of leverage on the balance sheet, as well as the geographic
focus of their operations (such as offshore exploration,
high-cost oil sands or infrastructure-challenged basins). More
specialty names that are driven toward land-based production and well-optimization have fallen less, and the pullback
has opened an opportunity to buy quality at a sharp discount.
Less foreseen has been the weakness seen across the
renewable energy stocks, particularly the solar value chain.
Undeniably, we have seen this as an opportunity rather than
a reason to “throw the baby out with the bath water”. Most
importantly, oil represents less than 2% (at best) of OECD
electricity production, with countries most reliant including
Saudi Arabia, India and South Africa. The declining cost of
solar over the past five years has been unmistakable — a
solar panel five years ago cost upwards of $4 per watt; today
that same panel costs $0.60 and expectations are that it
should drop to $0.40 by 2016. This cost decline has opened
up significant market potential for solar (and wind) given
there is zero marginal cost of production (no fuel). In the US
specifically, the annual market has grown from 4 megawatts
(MW) in 2000 to an expected 6,500 MWs in 2014. As more
markets see cost parity as cost declines, the global annual
sales of solar panels has risen to almost 50,000 MWs and
the industry is on the verge of becoming capacity constrained
once again. Progress is evident. In the period since November
28 however, solar stocks (as measured by the Guggenheim
TAN Solar ETF) have declined more than 12%.
With the cost declines across solar, entire systems can now
be procured by homeowners for less than $3 per watt, by
commercial buildings for less than $2 per watt and at utility
scale at less than $1.50 per watt. This creates significant
opportunity in names including SunPower, Vivint, SolarCity
and SunEdison, which are starting to set power purchase
agreements at below $0.10 per kilowatt-hour (kWh) (these
average US household pays between $0.10-$0.15 per kWh).
The economics or residential rooftop systems are even more
attractive to homeowners given there are no transmission
and distribution costs, so “grid parity” is achieved in states
with high solar insolation including California, Nevada,
Arizona and New Mexico. The Investment Tax Credit (ITC) on
US solar is set to step down from 30% to 10% at the end of
2016, and we expect 1) a significant push for solar installs
ahead of its expiry and 2) material cost reductions by manufacturers that will likely make the economics as favorable to
the homeowner should the credit not be renewed.
We believe that the growth of solar and wind is dependent
on cost reductions and have always been of the mindset that
“green has to be green” both in terms of payback and economic return to developers. Upwards of 30 states could be
at “grid parity” to the homeowner by 2020, opening up a US
market that could be as large as 100,000 MWs. The disconnect today is that solar stocks are trading less on reality and
more on perception. Stressing the fundamentals, the correlation between solar energy and oil is nearly non-existent. The
stocks, however, have displayed a high degree of correlation,
especially over the past month alongside the slide in oil to
$55 from its recent peak above $100 at the start of July.
Generally speaking, we see natural gas or coal as more
competitive threats to renewables than oil in power generation. Natural gas prices have been seasonally stronger as
we enter heating season and storage levels progressively
decline through the winter. Our expectation is that there is an
increasing role for natural gas in baseload power generation
as more aged and inefficient coal plants are retired as a
result of maintenance requirements as well as challenges
in meeting stringent new emission requirements set by the
EPA. Given the abundant supply of natural gas in various
dry basins as well as associated gas in wet basins, many
geologists have estimated in excess of 100 years’ supply at
current demand levels. Accordingly, with emissions levels half
that of burning coal and no associated waste products such
as fly ash, we expect natural gas can serve a major role in a
baseload capacity for years to come.
While we do not invest in oil and gas companies directly,
we do invest in some of the service providers that are
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helping make shale extraction sustainable in areas such as
water protection, water reuse and conservation, methane
leakage, solid and liquid waste and environmental damage
to roads and communities. Many of these companies are
direct beneficiaries of increased regulation around US shale
drilling both at the state and federal level. We believe that a
pragmatic approach is required in looking at the shale energy
opportunity, and see natural gas taking a larger role in power
generation alongside a requirement for reduced emissions
and our thirst for energy independence.
Beyond energy, the drop in oil is providing a Christmas bonus
to the consumer that is being seen in rising consumer confidence data alongside improving employment figures that
sets up for likely upward revisions to GDP growth in coming
quarters. We see a world where sustainability opportunities
are virtually endless. Global infrastructure is rapidly moving
in the direction of lower emissions, higher efficiency and an
increasingly “wired” world that benefits the end consumer.
Equity
Market
Context
Over the last 12 months,
sustainable infrastructure
equities continued to outperform the broader market
throughout the quarter.
The companies that embrace these challenges are being
favored by consumers today and they are gaining market
share. Most importantly, we are finding these companies
that are winning because of sustainability in the well-known
universe of S&P 500 and Russell stocks that are most often
not as well recognized for their growth as a result of their
efforts in providing sustainable services and products.
We are buy and hold investors, and we intend to find that
growth potential early and be rewarded for it over the long
run. Increasingly, we are seeing large institutions and endowments divesting of fossil fuel investments and putting their
investment dollars where they can earn a return at the same
time as making a difference. We also see great potential in
diversifying away from the exposure in fossil fuel-related
investing, given the commodity exposure associated with
these companies. GCA brings a team of seasoned public
market investors combined with the global depth of our
organization to provide those superior investment returns.
3Q2014
Sustainable Infrastructure vs Broad Equity Market
150%
3Q2014
150%
140%
137%
140%
137%
130%
130%
120%
110%
100%
118%
120%
118%
110%
100%
90%
Sep-13 Sep-13
90%
Dec-13Dec-13
Mar-14
Mar-14
Jun-14
Jun-14
GCA Sustainable Infrastructure Index
Sep-14
Sep-14
MSCI The World Index
GCA Sustainable Infrastructure Index
MSCI The World Index
LTM Performance by Subsector
85%
Fuel Cells / Clean Technologies
49%
Wind
24%
Transportation
Solar - Downstream
73%
47%
Solar - Upstream
(4%)
Solar - Midstream
28%
Solar Equipment / Systems
(1%)
Energy Storage
2%
Environmental Services
17%
Renewable Power Generation
11%
Pollution Control
(12
(5%)
Advanced Lighting
Water
0%
Biofuels / Bioproducts
Advanced Materials (12%)
9%
Demand Side Management
S&P 500
(20%
17%
-20
0
20
40
60
80
100
2
M&A Market
Compared to 2Q 2014, 3Q 2014 M&A activity increased significantly and has more than doubled in Europe. The value of the
transactions remained trending towards small to mid-size deals, with the exception of a few large transctions at the beginning
of the quarter.
3Q M&A Activity
By Target Geography
By Target Subsector
APAC
11%
Central and
South America
3%
Transaction Volume ($mm)
Central and
South$12,954
America
3%
# of Transactions
APAC
11%
2%
Transactions > $250mm
14
EMEA
38%
EMEA
38%
North
America
48%
Water
8%and
Air
Environment
24%
Hydro
9%
Water
8%
Source: Clean Energy Pipeline
North
America
48%
Wind
31%
WindBiomass
31% 2%
43Biomass
Hydro
9%
Solar
12%
Energy
Efficiency
14%
Air and
Environment
24%
Solar
12%
Energy
Efficiency
14%
3Q Top M&A Deals Announced
Date
Announced
Transaction
Value ($mm)
Target
Acquiror
7/29/14
Wheelabrator Technologies
Energy Capital Partners
7/31/14
Rhodia Eco Services
CCMP Capital Advisors
890
Air and
Environment
7/17/14
Off-shore Wind Farm (252MW)
Gode Wind II
PKA A/S, Industriens Pensionforsikring A/S,
Laerernes Pension, Laegernes Pension
821
Wind
8/21/14
On-shore Wind Portfolio (1,101MW)
EDP Renovaveis
Fiera Axium Infrastructure
609
Wind
Onshore Wind Farms (250MW)
Wroblew & Project 2
Enlight Renewable Energy, China-CEE Fund
405
Wind
Solar Thermal Plants (131MW) – Solacor 1
& 2, PS10 & PS20 and On-shore Wind Farm
(50MW) - Talas de Maciel II
Abengoa Yield
323
Solar
On-shore Wind Farm (165.5MW)
Gullen Range
New Gullen Range Wind Farm
300
Wind
8/26/14
Jiangsu Huayuan New Energy Technology
Shenzhen Jiawei Photovoltaic Lighting
292
Solar
9/19/14
Sound Global
Sound Environmental Resources
277
Water
Clean Earth
Compass Diversified Holdings
243
Air and
Environment
9/1/14
9/22/14
7/9/14
8/7/14
1,940
Sector
Waste / Waste-toEnergy
Source: Clean Energy Pipeline
3
Financing Landscape
Compared to 2Q 2014, IPO activity decreased in 3Q 2014 in terms of transaction numbers and aggregate volume.
3Q IPOs
Pricing
Date
Issuer
Sector
Exchange
Deal
Value
($mm)
Market
Cap
($mm)
Offer Price
($/share)
07/17/14
TerraForm Power
Solar
NASDAQ
$350.0
$1,058.0
$25.00
09/30/14
Vivint Solar
Solar
NYSE
$330.0
$1,684.8
$16.00
09/05/14
Hangzhou First PV Material
Solar
Shanghai Stock Exchange
$265.0
$1,748.7
$4.35
10/01/14
Scatec Solar AS
Solar
Oslo Stock Exchange
$107.0
$275.8
$2.94
$0.35
09/29/14
CECEP Wind Power
Wind
Shanghai Stock Exchange
$63.0
$622.2
09/02/14
Jolywood Suzhou Sunwatt
Solar
Shenzhen Stock Exchange
$62.0
$319.2
$2.67
10/29/14
Thai Solar Energy
Solar
Stock Exchange of Thailand
$54.0
$216.0
$0.12
07/14/14
ELTECH Anemos
Wind
Athens Exchange
$48.0
$158.7
$1.92
11/19/14
Sky Solar Holdings
Solar
NASDAQ
$46.0
$3,067.2
$8.00
Sinoma Energy Conservation
Air and
Environment
Shanghai Stock Exchange
$45.0
$227.9
$0.56
$937.9
$6.19
07/21/14
Average
$137.0
Source: Clean Energy Pipeline
3Q Private Placement Activity
Energy
Efficiency
23%
Private capital markets in 3Q2014
continue to be dominated by small
transactions, with less variation in
terms of subsectors represented.
Wind
20%
$1,222
# of Transactions
21
Transactions > $250mm
Advanced
Transportation
9%
Solar
38%
Transaction Volume ($mm)
0
Food and
Consumer Products
2%
Power
Infrastruction
5%
Air and
Environment
3%
Source: Clean Energy Pipeline
4
3Q Top Private Placements
Date
Closed
Transaction
Value ($mm)
Target
Acquiror
7/3/14
ReNew Power Ventures
Global Environment Fund, Asian
Development Bank, Goldman Sachs
140
Wind
8/7/14
Sunnova
Undisclosed
110
Solar
Lattice Power
GSR Ventures, Mayfield Fund, Asia Pacific
Capital, Crescent HydePark
80
INRIX
Porsche Automobile Holding SE
55
GlassPoint Solar
Rockport Capital Partners, Nth Power
Technologies, Royal Dutch Shell, Chrysalix
Energy Venture Capital, The State General
Reserve Fund
53
Solar
7/2/14
9/12/14
9/8/14
9/16/14
GCA Sector
Energy Efficiency
Advanced
Transportation
PosiGen Solar Solutions
Goldman Sachs
40
Solar
Avogy
Khosla Ventures, Intel Capital
40
Energy Efficiency
9/30/14
Quadran Energies Libres
Salvepar SA
38
Solar
9/15/14
Kateeva
DBL Investors, Madrone Capital Partners,
New Science Ventures, Samsung Venture
Investment, Sigma Partners, Spark Capital,
Veeco Instruments
38
Energy Efficiency
MicroGreen Polymers
Undisclosed
32
Air and Environment
9/9/14
7/7/14
Source: Clean Energy Pipeline.
About GCA
Our mission is to empower companies and investors who are creating a more efficient and sustainable global infrastructure. We are
purpose-built to ensure that our clients achieve success. We have deeply experienced senior bankers and investment professionals who
are sector experts and understand our clients’ industry and needs. We reach a vast global network of buyers, growth companies, asset
owners and investors, and thereby provide clients with more ways to succeed through a deeper relationship network. We have directly
relevant transaction experience which enables us to find creative structures and solutions to close transactions. We are an expert team
of 35 professionals working seamlessly on our clients’ behalf in New York, Zurich and San Francisco and through strategic partnerships in
Japan and China. Our team of experienced bankers and investment professionals provides conflict-free advice and thoughtful, innovative
solutions, and we do so with an intensely focused effort that does not stop until our clients achieve success.
Media Contact
Caitlin Stevens
T 212.946.3365
[email protected]
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