Prospex Energy PLC (LON: PXEN) is one of the companies – they can be our exemplar if we like – benefitting from the current energy crisis afflicting Europe. This is not just about the one company though, it offers us a trading strategy for the market as a whole has changed.
Prospex itself has announced that the current high energy prices have enabled its Spanish JV to prepay a loan – effectively, a capital repayment ahead of time. This is clearly a reflection of the high margins available. It’s also good for the prospects of the Prospex shares.
Which is interesting, but what’s fascinating is how we should be viewing the market as a whole in the light of this. For the energy business used to be a very boring place. Both the generation side and retail were the homes of utilities, widows and orphans stocks. Something safe and boring held for the dividend income.
Given that apparently half of the British retail sector has now gone bust (that might be an exaggeration, but not much of one) clearly this has changed. But if there are some folks who get killed off by the new marketplace there must also be others who are coining it. That’s just the way markets do work. We would obviously like to be long those making the money which requires working out who they are.
The new energy market depends, as we know, on lots more renewables – both wind and solar – than the old system did. Leave aside whether this is all sensible or necessary, we trade the world as it is. But renewables are inherently volatile in output. In order to have a consistent supply of electricity, there has to be another variable supply that can step in in the periods when the wind doesn’t blow – as happened a couple of weeks back. Coal’s difficult to use as we don’t really have coal plants any more. Nuclear is difficult to dialup and down.
It’s really only gas plants that can step into the breach. Which is exactly what Prospex has, that share in a Spanish gas plant. Which, when the wind isn’t blowing, it’s winter and solar isn’t all that effective, needs to step in. Now true, gas prices are high currently. But electricity prices are higher, higher than gas prices. So margins for those backup gas plants have soared.
The effects on Prospex are as in their announcement. For us as a trading strategy though the game is to find those other companies which also own such backup gas plant. And whose prices have not already moved in order to compensate for this blowout in margins. This does require that research – those shares that this is already known about will already have moved. It’s tracking down the ones that haven’t made the announcements that will uncover the significant trading opportunities.
Prospex Energy shares are traded on the London stock exchange's AIM market (the alternative investment market), which is the submarket specifically for smaller companies. AIM stocks are attractive to investors as they have tax advantages and smaller companies have the potential to benefit from rapid growth. But are Prospex Energy shares the best buy? Our stock market analysts regularly review the market and share their picks for high growth companies
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Tim Worstall is a freelance writer specialising in economics and the financial markets.