Richard McGlashan, Head of Capital Markets

Breaking up is hard to do, especially for individuals when it’s from ingrained behavior generated through extended classical conditioning. In a market context this related to a decade plus of supportive monetary policy and the almost hard-coded behaviors that has driven in participants. The cycle has been protracted and we’re now in a transitory period of unidentified duration towards more ‘normalised’ times – at least from a valuation stand-point.

This period has been characterised by multiple dynamics but almost all are symptomatic of the easy monetary conditions underlying the global system. The broad ‘zero rate’ level of policy rates coupled with an understandable and justified lurch to focus on ESG considerations with a greater weighting has driven excesses in asset markets, both in a broad sense but also to more extremes in narrow and specific pockets of asset markets. The current transition will continue to test the Pavlovian response of buying weakness in equity markets specifically and risk assets more broadly.

After a period where thematic investing has been prevalent, with only a secondary (if a factor at all) focus on hard revenue, profit, income and valuation metrics – fundamentals will again come into sharp focus. The rather orderly (hedged) pull backs we’ve seen thus far have been characterised by the compression in financial multiples. A manifestation of a partial cooling in investor sentiment. The second element is the downgrade cycle that’s underway, driven both by cost escalation and slowing growth. This cycle will take time; many quarters of downward revision are most likely before a new base level is achieved. During this process, asset markets will find it hard to perform broadly for anything other than brief episodes. Supply through IPO will at least temper, as will the support derived from M&A. The UK equity market – broadly trades on 13x earnings historically – it trades closer to 10x currently, on a prospective basis. The problem is this can’t be relied upon, given we know aggregate forecast and delivered numbers are in the process of falling.

Against the above backdrop and associated process of reassessment, by both investors and management teams, as valuation becomes key again and funding avenues for growth tighten, extractive industries should garner more interest. This should be the case across the investment community in all its forms but also from management teams in the sector. This area of the market is a broad church, from the scale example of Rio Tinto, exhibiting robust NAV support, delivering a discounted earnings stream (<6x prospective earnings) and a yield in excess of 10%, to many mining and oil small cap on fractions of reasonably reliable asset values. The patchy interest at the smaller end of the listed universe here has been driven by a wholesale change in the assessment and application of liquidity risk parameters, their cash consumptive nature and the additional caveats from an ESG perspective, both generically and company specifically. Interesting situations also present across the energy ecosystem in the shape of both service and capital equipment providers. Elements of these areas have been discounted as 2nd derivatives of the skepticism afforded to the listed and private companies they serve.

Gneiss Energy engages with corporates and investors across the Energy and Energy Transition spectrum, with specialist sector and corporate finance expertise. This footprint relates to both listed and private business and those in transition between the two. The ESG considerations are well understood by Acasta, our sister business. For management teams who would like to discuss any aspect of the capital markets landscape, avenues for organic and inorganic strategic progression and raising any associated funding, we are here to support your strategic imperatives through our dynamic vision and connected advice. 

KeyFacts Energy Industry Directory: Gneiss Energy