Stock Story: Snam

October 2022

In May, Snam paid US$350 million for Italy’s first floating regasification unit. Such vessels convert liquefied natural gas brought by ship into gas suitable for transporting within the 41,000 kilometres of pipelines that the Italian gas network operator owns and operates in its homeland, as well as in Austria, France, Greece and the UK.

In July, Snam purchased another floating unit for US$400 million. The object of the spending is to help gas-import-dependent Italy cut its reliance on the Russian gas that supplied about 40% of the country’s gas before the Ukraine War. Italy has already reduced its reliance on Russian gas to 25% of imports.

Such steps are tied to the energy crisis spurred by Russia’s invasion of its neighbour and Moscow’s subsequent moves to curtail gas deliveries in retaliation for sanctions. Snam, which earned 3.3 billion euros in revenue in fiscal 2021 (about 70% of which came from transporting gas and another 16% from storage), is poised to benefit from investment opportunities as it helps Italy turn to other countries to obtain gas.

The challenges for Snam posed by Europe’s energy crisis are formidable, especially as it has had to work to ensure adequate storage levels are reached in its facilities for the coming winter. However, the task is made easier by the way Snam, as a provider of an essential service, is regulated. As an economically regulated utility, Snam’s revenue is not expected to drop noticeably, as less than 1% of Snam’s revenue is linked to gas volumes. Earnings are instead tied to the level of investment by Snam into the network (which is known as the ‘regulated asset base’) and allowed return on capital the regulator sets on this spending. This framework provides predictability and stability to the company’s earnings outlook. Further, the invested capital is indexed to inflation over time, providing a protection of real earnings power for investors.

Snam’s opportunity is that the Italian government is driving the push to divert the source of the country’s energy supplies and this initiative requires investment. The company’s spending on the floating regasification plants, for instance, earns a decent and dependable return for investors. There are likely to be other such investments required to manage the changed pattern of gas flows across the country.

Longer term, Snam will benefit from the drive to renewables. The company is expected to have a role in the transportation and storage of green gases such as biomethane and hydrogen – both considered important planks in the energy transition in Europe for hard-to-abate sectors such as industrial and heating. While this is a long-term opportunity, Snam is already flagging that it expects to spend more than 8 billion euros on developing infrastructure for the green switch.

Biomethane is a sustainable natural gas made from waste biomass such as agricultural by-products, animal droppings, dedicated crops and food waste. Green hydrogen is touted as a key part of the drive to net-zero emissions because electrolysers that split water into its two elements of hydrogen and oxygen produce emissions-free energy. Snam’s gas infrastructure means the company is set for any transition to hydrogen.

In a world of energy crises and the shift to renewables, Snam’s dependable regulated returns and its ability to expand its regulated asset base means the company offers the regular income and growth potential that the MFG Asset Management infrastructure team demands of stocks included in its portfolio.

Snam comes with risks, of course. The main longer-term one is that renewably sourced electricity might reduce household and business demand for natural gas by more than expected. A shorter-term risk is Snam maintaining its standing in the community to ensure regulators don’t come under political pressure to lower Snam’s allowable return if the company is seen to be benefiting from the energy crisis.

Each new regasification unit that helps Italy battle through Europe’s energy crisis, however, boosts Snam’s public standing and, as that rate base expands, its standing among investors too.

Sources: Company filings.