Riverstone Energy bounces back following ‘dramatic improvement in commodity prices’ – Riverstone Energy (RSE) has posted its full-year results for the 12 months to 31 December 2021, during which time it delivered a 56% share price increase.
Meanwhile, RSE ended the year with a NAV of $12.41 (£9.19) per share, a 100.2% and 102.0 per cent increase in USD and GBP, respectively, compared to the 31 December 2020 NAV of $6.20 (£4.55) per share. The trust also ended the period with an aggregate gross cash balance of $105.8m.
Directors, Peter Barker and Patrick Firth, and chairman, Richard Hayden, will be reaching their ninth year on the board and so will be retiring in advance of the next AGM in 2023, but most likely sometime before then. The search for replacements has already started.
Chairman’s review
Committed to accelerating the transition in a pivotal year for climate
Without doubt, 2021 has been an important year for climate – one in which the world signed up to bigger and bolder emissions reduction targets in an effort to achieve net zero. In the run up to COP26 in Glasgow in November we saw a number of major commitments from governments around the world.
President Biden’s Leaders’ Summit on Climate in April brought together over 40 Heads of State to announce a series of new climate ambitions – notably China’s decision to begin phasing out coal use over the 2026-2030 period. The US, Japan, UK and Australia all announced new mid-term CO2 reduction targets and the IEA highlighted the need for radical action if the world is serious about tackling climate change in its new “Net Zero by 2050” scenario.
The focus for COP26 itself was on making enough progress in talks to keep open a credible path to limiting global rises in temperature to 1.5 degrees centigrade by the end of the century. Following the event, it is now estimated that 90 per cent. of the global economy is covered by a net zero target – with India among the most significant additions to the list. A commitment was also made to phase down the use of coal, reduce methane emissions, and tackle deforestation and land use. The establishment of the Glasgow Financial Alliance for Net Zero also saw banks, asset managers and owners with $130 trillion under management commit to align themselves with net zero over time.
Focusing on decarbonisation
Momentum on climate grew rapidly in 2021 and the new global consensus on net zero acts as a powerful tailwind to REL’s own investment strategy. Our Investment Manager has been working in the renewable energy sector for over 15 years. Back then, it was clear to Riverstone that the challenge posed by climate change meant the long-term future for the energy sector would be in renewables and, more recently, in the decarbonisation of other sectors. I am proud of the leading track record we have since built up in investing at an early stage in world-class businesses that play a meaningful role in tackling climate change. For instance, Enviva, a biomass industry pioneer which produces wood pellets as an alternative to coal and so helps reduce power producers’ GHG emissions by up to 85 per cent., while GoodLeap (formerly Loanpal) is now the leading U.S. lender for residential solar installations.
In July 2020, we took the decision to reorientate our portfolio to further lean into the opportunities offered by the energy transition. We decided to focus on the need to decarbonise not just energy, but also other key sectors including industrials, transportation, commercial and residential property, and agriculture.
Our research shows that the process of decarbonisation will require approximately $6 trillion in annual investment worldwide by 2030. As a result, we have identified five key areas of focus for our future investment: grid flexibility and resilience; electrification of transport; agriculture; next generation liquid fuels such as hydrogen; and next horizon resource use plays, for instance in smart building and the digitisation of global supply chains. Taken together, we expect these five areas to require over $3 trillion in annual investment by 2030 – a tripling of current spending levels.
This represents an enormous opportunity for investors and the start of what we believe will be a multi-decade trend that will impact every part of the economy. Reflecting our ability to identify and execute on attractive opportunities in a competitive market, we now have eight active investments in decarbonisation, with seven added in 2021.
GoodLeap is a technology-enabled sustainable home improvement loan originator and the leading point-of-sale platform for sustainable home solutions in America. FreeWire is the leading provider of battery-integrated DC fast chargers, while Hyzon is the industry-leading global supplier of zero-emission hydrogen fuel cell powered commercial vehicles. Finally, through Samsung Ventures we acquired two battery breakthrough platforms, Solid Power and Ionic Materials.
Following these investments 35 per cent. of the current portfolio’s gross unrealised value is now in decarbonisation investments, rising to 37 per cent. when we include the recent investments in T-REX Group, Tritium and the first closing of an electric motor company’s latest financing round (see Post-Year End Updates section of the Investment Manager’s Report for further details). This represents a demonstrable delivery in the year towards our stated strategy to move the Company’s focus progressively through a transition stage towards decarbonisation assets.
Improved commodity price outlook
While uncertainty remains about the future trajectory of COVID-19 – and the emergence of Omicron in Q4 reminds us of the ongoing risk of new variants – enormous progress was made during the year on vaccination delivery. This has meant, in advanced economies at least, that economic growth has bounced back.
The return to growth has, in turn, led to a dramatic improvement in commodity prices. Over full year 2021, the WTI price averaged £50.50 ($68.18) per barrel, an increase of 41 per cent. versus the full year 2020 average of £28.75 ($39.19). At the same time natural gas prices rose sharply in a number of regions, but especially in Europe.
These improvements in commodity prices have contributed to an improved performance in our legacy commodity-linked portfolio over the course of the year. This is testament to the hard work undertaken by our teams to reduce costs, preserve liquidity and allocate capital to the strategies that will maximise value for our shareholders. While we remain cautious on the outlook for commodity prices our portfolio is now better positioned both to capitalise on a world of $80 per barrel oil and weather one of $40 per barrel allowing us to maximise value in the Company’s transition to a decarbonisation asset base.
It is important, though, to recognise the strain these much higher prices – and in particular those we have seen for natural gas – can have on some of the poorest in our societies. It is a salutary reminder of what happens when too much focus is put on reducing supply without either providing alternative clean power production or improving energy efficiency to reduce demand. It is vital that the transition to a low carbon economy is a just and orderly one if we are to reach net zero while preserving peoples’ standard of living.
RSE : Riverstone Energy bounces back following ‘dramatic improvement in commodity prices’