The role of hydrocarbons in the energy transition agenda

As the hydrocarbons sector shifts gears to enter a high-growth recovery phase, investments into related companies made with the long-term approach of value-creation are paying off.

“The things of nature do not really belong to us,” Oscar Wilde has been quoted as saying. “We should leave them to our children as we have received them.”

In contemporary capital markets, this concept applies to ensuring multi-generational sustainability by investing for broad economic growth and building shareholder value, instead of short-termism, or “quarterly capitalism”, the approach that focuses on dazzling shareholders from one three-month period to another.

One definition of this approach to investing is constructive activism, which deploys a thoughtfully crafted value-creation agenda based on thoroughly studying a company before investing, and following that up with effective dialogue and collaboration with management to achieve positive change. This strategy of investment, employed by the Goldilocks Fund managed by SHUAA Capital, has resulted in 158% net returns since inception in 2015 and 35% net returns through the end of the third quarter of 2021.

The forces of constructive activism and sustainability are shaping the future of many industries. One of the most important of these – especially to the Middle East – is the hydrocarbons sector, which has been under scrutiny to align with the global thought leadership policies and measures to achieve net-zero emissions. The way forward for the industry is to refine its role during the period of energy transition, while reinventing business models and portfolio strategies.

Energy is of paramount importance in keeping the wheels of the world turning, especially during the post-pandemic economic recovery. The ongoing energy crisis, which began in Europe and threatens to ripple across the world, has proven that the hydrocarbons sector could play a key role in the energy transition agenda. Among the hydrocarbons, natural gas is an effective ‘transition fuel’ due to its lower carbon footprint and can provide stable and reliable energy while reducing emissions compared to coal or diesel.

It is no surprise that one of the drivers of the Goldilocks Fund’s strong long-term performance is its investment in Dana Gas, with a total return of 59% (as of Q3 2021). The Fund invested in Dana Gas in the summer of 2017 when Dana Gas had a less than $800 million market cap and was undergoing challenges of its own, including an enforcement of arbitration award against the Kurdistan Regional Government (KRG) and a dispute with its sukuk holders. The Fund identified long-term value drivers such as stability of earnings and vast oil and gas reserves, strategic importance of natural gas production to Kurdistan’s power sector, and recoveries from arbitration against KRG and National Iranian Oil Company (NIOC).

Since then, Dana Gas has successfully repaid $700 million of sukuk and a further $400 million in dividend to shareholders. While doing so, the company has maintained its growth trajectory and aims to double its production in KRG in the next 4 to 5 years. The company recently received an arbitration award of $607 million for the first phase of arbitration against NIOC and expects to receive the second award in 2023. A decision not to sell off the Egyptian assets has paid off through improved recovery of receivables and overall value creation due to higher realized oil prices this year.

Overall, the investment remains one of the most successful outcomes for the Fund and is a testament to its long term constructive activist approach.

SHUAA’s oil and gas investments do not stop at Dana Gas. A strong belief in fundamentals and sustainable growth guided SHUAA’s acquisition of Dubai-based Stanford Marine Group (SMG) via an AED 1.13 billion (USD 308 million) debt buyout in December 2020. This helped save more than 1,800 jobs and annual exports of ‘made-in-UAE’ vessels. The restructuring programme effectively gave the company a new lease of life; already, in September 2021, one of SMG’s subsidiaries, Grandweld Shipyard, reported a solid order book until the end of 2022.

As the strategic imperatives of the hydrocarbons industry shift, the key to ensuring sustainable growth is to view the energy transition as an opportunity to develop a diversified portfolio while optimizing fundamentals and targeting direct investments in equities and other undervalued and mispriced opportunities.