New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Energy Sector<br>The Rubber Hits the Road&nbsp;— CCC Draft Report</h2>
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<p>The Climate Change Commission (CCC) has released its draft report, setting out its recommendations on how NZ can meet its 2050 climate change obligations. Overall, the winner is the electricity sector with the report highlighting the central role of electricity in decarbonising the economy. The move to replace thermal fuel in the home is an additional boost to electricity demand we had not foreseen. The oil &amp; gas sector is the loser. Whilst this is no surprise, the recommendation to ban fossil fuelled light vehicle imports in the early 2030s will have a modest negative impact on our view of Z Energy's (ZEL) long-term value. The short and medium-term implications to 2030 are relatively small.</p>
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<h3>CCC recommends acceleration of decarbonisation efforts in the wider energy sector</h3>
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<p>The report contains various recommendations across a wide range of sectors. It also contains a reference path of how to achieve a low carbon economy making&nbsp;certain assumptions that can be viewed as&nbsp;inferred recommendations. The 188 page report can be found here:&nbsp;<a href="https://www.climatecommission.govt.nz/get-involved/our-advice-and-evidence/" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://www.climatecommission.govt.nz/get-involved/our-advice-and-evidence/&amp;source=gmail&amp;ust=1612311164157000&amp;usg=AFQjCNGdcBgna_cCjJzkTS5fjM5BNyngog" rel="noopener">https://www.<wbr>climatecommission.govt.nz/get-<wbr>involved/our-advice-and-<wbr>evidence/</a></p>
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<h3>Electricity generators to benefit the most (with a minor exception or two)</h3>
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<p>The&nbsp;CCC's&nbsp;report highlights the important role electricity has&nbsp;in decarbonising the economy. It is the default energy of choice to replace fossil fuels. Relative to expectations, the CCC is advocating an early move away from household gas and LPG consumption, wanting a&nbsp;ban of new gas and LPG connections from 2025. The lift in electricity demand is positive for electricity generators as it helps support wholesale electricity prices. The CCC also advocates setting a 60%&nbsp;renewable energy goal, not a 100% renewable electricity goal.</p>
<p>Whilst&nbsp;positive for the sector, the report is not helpful for Genesis Energy's (GNE)&nbsp;Kupe&nbsp;sales process and will curtail its LPG growth strategy. Given&nbsp;GNE's&nbsp;renewable energy focus, closure of its thermal generation is already assumed and GNE will benefit from increased electricity demand. Vector (VCT) also faces an end to gas and LPG connection growth, although it also benefits from increased electricity demand. The bigger challenge for VCT (and the distribution sector) will be keeping up with the required&nbsp;capex&nbsp;due to&nbsp;increased peak electricity demand as households switch away from gas and LPG to electricity for space heating and hot water.</p>
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<h3>Oil &amp; gas sector most challenged</h3>
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<p>It is of little surprise that the report promotes&nbsp;EVs&nbsp;and that&nbsp;banning fossil fuel light vehicle imports from as early as 2030 is the headline recommendation. This is more aggressive than our current ZEL EV assumptions, with CCC looking at 40% of the light vehicle fleet being electric in 2035, vs. our current assumption of 20%. Whilst we are not convinced the current EV technology improvements will deliver the required price points to enable the banning of fossil fuel cars without political backlash, initial analysis suggests our ZEL DCF declines ~-15% to ~NZ$4.20 (and vs. our target price of NZ$4.30) if an import ban was implemented.&nbsp; The value implications are limited due to the fact earnings implications are still several years away. In addition, the proposed mandating of&nbsp;biofuels&nbsp;should benefit ZEL as it currently has&nbsp;NZ's&nbsp;only manufacturing plant. We do not see a material impact on Refining NZ (NZR) from the CCC recommendations, as it is likely to be an import terminal, with jet fuel delivered into Auckland the mainstay of its business by 2030.</p>
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<h3>A draft report with political ramifications</h3>
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<p>The report findings and recommendations are open to consultation, with the last date for submissions 14 March 2021. The CCC will provide a final report by 31 May 2021. The government then has the task of implementing the recommended policies, which is where the politics will come in. Initial comments from the government indicate there is support for the report and a desire to implement the recommendations. However, with many recommendations likely to have an unpopular element (e.g. banning petrol/diesel imports, banning new gas/LPG connections), it is not a foregone conclusion every element of the report will be implemented.</p>
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<div><strong>Andrew Harvey-Green</strong></div>
<div><a href="mailto:andrew.harvey-green@forsythbarr.co.nz" target="_blank" rel="noopener">andrew.harvey-green@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 8185</div>
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<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
</div>
</div>

Energy Sector The Rubber Hits the Road&nbsp;— CCC Draft Report


The Climate Change Commission (CCC) has released its draft report, setting out its recommendations on how NZ can meet its 2050 climate change obligations. Overall, the winner is the electricity sector with the report highlighting the central role of electricity in decarbonising the economy. The move to replace thermal fuel in the home is an additional boost to electricity demand we had not foreseen. The oil &amp; gas sector is the loser. Whilst this is no surprise, the recommendation to ban fossil fuelled light vehicle imports in the early 2030s will have a modest negative impact on our view of Z Energy's (ZEL) long-term value. The short and medium-term implications to 2030 are relatively small.


CCC recommends acceleration of decarbonisation efforts in the wider energy sector


The report contains various recommendations across a wide range of sectors. It also contains a reference path of how to achieve a low carbon economy making&nbsp;certain assumptions that can be viewed as&nbsp;inferred recommendations. The 188 page report can be found here:&nbsp;https://www.climatecommission.govt.nz/get-involved/our-advice-and-evidence/


Electricity generators to benefit the most (with a minor exception or two)


The&nbsp;CCC's&nbsp;report highlights the important role electricity has&nbsp;in decarbonising the economy. It is the default energy of choice to replace fossil fuels. Relative to expectations, the CCC is advocating an early move away from household gas and LPG consumption, wanting a&nbsp;ban of new gas and LPG connections from 2025. The lift in electricity demand is positive for electricity generators as it helps support wholesale electricity prices. The CCC also advocates setting a 60%&nbsp;renewable energy goal, not a 100% renewable electricity goal.
Whilst&nbsp;positive for the sector, the report is not helpful for Genesis Energy's (GNE)&nbsp;Kupe&nbsp;sales process and will curtail its LPG growth strategy. Given&nbsp;GNE's&nbsp;renewable energy focus, closure of its thermal generation is already assumed and GNE will benefit from increased electricity demand. Vector (VCT) also faces an end to gas and LPG connection growth, although it also benefits from increased electricity demand. The bigger challenge for VCT (and the distribution sector) will be keeping up with the required&nbsp;capex&nbsp;due to&nbsp;increased peak electricity demand as households switch away from gas and LPG to electricity for space heating and hot water.


Oil &amp; gas sector most challenged


It is of little surprise that the report promotes&nbsp;EVs&nbsp;and that&nbsp;banning fossil fuel light vehicle imports from as early as 2030 is the headline recommendation. This is more aggressive than our current ZEL EV assumptions, with CCC looking at 40% of the light vehicle fleet being electric in 2035, vs. our current assumption of 20%. Whilst we are not convinced the current EV technology improvements will deliver the required price points to enable the banning of fossil fuel cars without political backlash, initial analysis suggests our ZEL DCF declines ~-15% to ~NZ$4.20 (and vs. our target price of NZ$4.30) if an import ban was implemented.&nbsp; The value implications are limited due to the fact earnings implications are still several years away. In addition, the proposed mandating of&nbsp;biofuels&nbsp;should benefit ZEL as it currently has&nbsp;NZ's&nbsp;only manufacturing plant. We do not see a material impact on Refining NZ (NZR) from the CCC recommendations, as it is likely to be an import terminal, with jet fuel delivered into Auckland the mainstay of its business by 2030.


A draft report with political ramifications


The report findings and recommendations are open to consultation, with the last date for submissions 14 March 2021. The CCC will provide a final report by 31 May 2021. The government then has the task of implementing the recommended policies, which is where the politics will come in. Initial comments from the government indicate there is support for the report and a desire to implement the recommendations. However, with many recommendations likely to have an unpopular element (e.g. banning petrol/diesel imports, banning new gas/LPG connections), it is not a foregone conclusion every element of the report will be implemented.



Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Energy Sector: The Rubber Hits the Road — CCC Draft Report

Z Energy Ltd

Energy Sector: The Rubber Hits the Road — CCC Draft Report