EDF’s Energy Boost –
Exceptional conditions in global energy markets are having a wide impact on consumers, businesses and the wider economy. Oil prices stand at multi-year high, but the surge in prices for electricity, and especially for gas, to historical records is even more striking. European wholesale electricity prices have roughly doubled YTD and gas prices tripled. This situation reflects a combination of factors, including the strong rebound of economies across the world, and constrained gas supply into Europe, while LNG cargoes have been rerouted to Asia which offers better prices. In addition, there is higher gas demand to make up for the lower availability of renewables due to below average wind speeds. As a result, gas inventories are already depleted ahead of winter; gas prices have skyrocketed, and with gas being the marginal form of power generation, it drives up power prices.
This adds to cost inflation pressure for businesses, especially for energy-intensive industries, while several governments have already taken measures to limit the bill for consumers. One would expect the big power utilities, which often operate large power generation fleet, to materially benefit from these conditions, but the net impact is actually less obvious due to pre-existing hedging strategies and contract structures. In the European corporate hybrid universe, EDF is the most leveraged power play due to its nuclear and hydro power production, of which a substantial part is sold at spot prices (albeit not all of it). On the other hand, solar and wind power production is usually sold through long-term contracts, hence they do not benefit from the current higher prices. We already liked EDF’s hybrids, which provide an attractive yield given EDF’s strong fundamentals and its strategic importance for France as its energy champion. We are holders of the GBP 5.875% hybrid. It has a yield of 4.0% to its call date in 2029, which represents a very material pick up over the matching senior bond (spread 4x higher). The current environment will boost the company’s results, which makes the EDF hybrid story even more appealing.