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Three stocks to watch as Germany decides on nuclear plant future

By Angela Barnes

07:00, 1 September 2022

Illustration of whether to turn off or keep on nuclear plants in Germany
Analysts consider the impact on certain stocks in the energy sector if the German government opts for a u-turn on nuclear plants – Photo: Getty

Germany is weighing up its nuclear plant future and whether to extend the operation of its remaining three stations in order to help plug the Russian natural gas gap.

Turning to the US for liquified natural gas (LNG) is one option being explored by Germany but it heavily relies on Moscow's commodities and needs all the resources it can find to help consumers heat their homes this winter.

US natural gas price chart

As a result, the German government is carrying out an energy supply stress test that will determine whether or not the nuclear plants should be retired at the end of 2022.

The three remaining nuclear operating companies in Germany are E.ON (EOAN), RWE AG (RWE), and EnBW Energie Baden Wuerttemberg AG (EBK) - and they too want clarity on whether there will be a decommissioning u-turn.

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Nuclear plant stocks to watch

So what impact would it have on the share price of the companies involved in Germany’s nuclear power sector if the government does not opt to draw the line? commodities analyst Piero Cingari and the chief executive of C6 Capital Holdings, Mark Rossano, shared their thoughts on it – as did E.ON and EnBW.

RWE AG (RWE) price chart

Shares in RWE, which used to rely heavily on nuclear power and coal, were down 2.2% at €40.09 at the time of writing on Tuesday. The energy firm, however, is now more focused on renewable energies like wind farms, solar power and battery storage facilities and has seen its stock grow in value 20.30% year-to-date.

Looking at how much its nuclear sector has driven profit, in November 2021, the group reported that core profit at its nuclear and coal division nearly doubled in the first nine months of the year, boosted by higher wholesale margins for lignite generation - essentially coal.

The public stance of the company, however, has been to close nuclear operations and accelerate the shift to renewables, suggesting the group has little financial concern about moving away from its nuclear arm.

EnBW Energie Baden Wuerttemberg AG (EBK) price chart

A reversal or postponement of the nuclear plant exit plan would mean utilities company EnBW would also have to change its decommissioning schedule. The group confirmed to, however, that the results of the government’s stress test on energy supplies in the country was not yet available but they would be open to discussing any changes.

“The legal framework clearly rules out electricity production in the German nuclear power plants that are currently still in operation beyond December 31, 2022. In view of the possible effects of the war in Ukraine, the federal government had examined extending the terms and decided at the beginning of March not to make any changes to this legal framework.

“The Federal Government has not changed this position since then – also with a view to further developments in the energy industry. The result and evaluation of the 'stress test' of the German energy supply, which the Federal Ministry of Economics says it wants to carry out, are also not available. If desired by the federal government, EnBW will of course continue to be available for discussions,” Lutz Schildmann, from the EnBW press office, told on Tuesday.

Shares in EnBW – which generates electricity from nuclear power, hydropower, solar power, geothermal energy and wind power – were down 5.93% on the previous session to €92 on Tuesday.

On 12 August 2022, EnBW said reduced Russian gas flows dealt a €545m hit to its first-half core profit, as it was forced to buy gas at much higher prices from alternative sources. EnBW reported a 3.7% decline in first-half adjusted pre-tax earnings (EBITDA) to €1.42bn. Despite the heightened uncertainty, EnBW has left its group-level earnings guidance for the full year 2022 unchanged. 

“Adjusted EBITDA for the 2022 financial year is expected to be in a range between €3.03bn and €3.18bn, corresponding to a year-on-year increase of 2% to 7%,” a company press statement said.

The company has also signed a long-term deal to purchase liquefied natural gas from a US exporter, in a bid to curb imports from Russia, demonstrating a vast array of future investment plans, with little focus on nuclear.

E.ON (EOAN) price chart

Utilities giant E.ON has also said it is open to keeping nuclear plants open past 2022.

When the group was asked by what impact it may have on the company and its stock if plans change, a group spokesperson was reluctant to discuss the issue.

“We do not speculate on this, this is a political decision and we are waiting for it,” he said.

At the time of writing on 30 August, shares in E.ON were up 0.40% to €8.61.

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On 9 August 2022, the group released its half year results with group adjusted EBITDA  just under €4.1bn – around €700m below the prior-year figure. It also said adjusted net income was just over €1.4bn, 20% below the prior-year amount. However, E.ON said it expects to meet its 2022 forecast and anticipates adjusted EBITDA of €7.6 to €7.8bn and adjusted net income of €2.3 to €2.5bn.

Nuclear changes irrelevant to E.ON, RWE and EnBW stock?

“Germany and Europe are facing a serious energy crisis as a result of Russia’s significant reduction in natural gas supplies. Currently, Germany receives approximately 20% of the average gas supplies from Russia and this has led TTF prices to skyrocket,” commodities analyst, Piero Cingari, said.

“Electricity costs are already at an all-time high due to this crisis, and there is a chance that things could get even worse over the winter. Despite Germany’s gas reserves being 80% full a month before peak, a cold winter could deplete them between March and April. Keeping three nuclear power plants active won’t change the big picture.”

Cingari also noted that nuclear power has steadily lost its share in recent decades, in terms of electricity generation, from 26% to the current 10%, owing to purely economic and strategic factors.

“Nuclear power is not cost-competitive when there is access to low-cost fossil fuels. Over the past decades, Germany has had access to cheap fossil fuels (Russian natural gas) and renewable energy sources (wind, solar) have begun to gain traction. The initial investment required to build new nuclear plants is significantly higher than that required for gas-fired plants, and nuclear power plants also have high overnight costs.

“Clearly, if costs associated with nuclear power generation are compared to the price of natural gas today, they are quite competitive. However, who could have predicted that Germany would no longer have access to low-cost gas? Whether or not three nuclear power plants are kept operational in Germany is irrelevant to the future  of E.ON, RWE, and EnBW, because these stocks are currently driven by other factors,” he added.

Therefore, In the short term, Cingari said, the main sources of risk for E.ON, which serves over 50 million customers in Germany, are regulations (tariff deferrals or tariff caps) and rising default risks among customers who are unable to pay exorbitant bills.

“However, in the medium- to long-term, E.ON can benefit from increased investments towards renewables, electric vehicles, and building electrification. Since the outbreak of the Ukrainian war, E.ON has lost approximately 20% of its value and now trades on a single digit price-to-earnings ratio for 2023 (9.5x). This means that the stock already embeds some risks in the price.

“RWE and EnBW are primarily renewable energy providers. The need to speed up electrification to improve energy security should also accelerate renewable energy development. The REPowerEU strategy in Europe aims to invest more than one trillion euros in renewable energy sources by 2030. Both stock prices have risen since the start of the Ukraine war, outperforming the rest of the market. RWE and EnBW stock valuations are indeed more expensive, with P/E ratios for 2023E at 19.8 and 23.4, respectively,” Cingari concluded.


Near-term boost for stock prices?

Mark Rossano, founder and chief executive of C6 Capital Holdings, thinks Germany has no choice but to extend the life of its nuclear plants to help cap soaring energy prices – which he said will also be a near-term boost for the stock prices of the companies involved.

“The Producer Price Index has re-accelerated and helps to capture the underlying costs at the industry level. It is also a key leading indicator for the consumer that will see prices move higher and send CPI to new highs. This is hitting all corners of the economy that will drive up cost and push down utilisation rates and underlying economic activity. We have already seen companies shuttering production or reducing activity to compensate for the spike in electricity prices. Between the consumer and industrial sector, Germany has no choice but to leave these assets operating to help cap power prices that have already hit historic highs. 

Rossano also noted that the owners of the plants are fairly diversified both by geographical exposure and power generation type so said a closure of the three nuclear plants wouldn't be a huge hit to earnings.

“The market has already priced in the plants shutting for good so any prolonged life would likely boost sentiment and near-term earnings. The German Economy Minister Habeck looks like he will be able to pave the way for their extension into at least 2023, which will be a near-term boost to stock prices,” Rossano said.

Nord Stream 1 impact on natural gas prices

The remaining three nuclear plants in Germany - Emsland, Isar and Neckarwestheim - supply 6% of the country’s electricity. It is not a huge amount. However, the current energy crisis means governments are in need of all possible options to stabilise supply.

Moreover, Russia’s energy giant Gazprom halted natural gas flows to Germany via the Nord Stream 1 pipeline on Wednesday to carry out maintenance work for three days. Berlin said again that the move is Moscow’s way of weaponising energy supplies.

Gas futures edged slightly higher in response, with the benchmark Dutch Title Transfer Facility (TTF) futures for October up about 5.6% to €280 per megawatt-hour.

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