Can Nuclear Energy Light Up Your Portfolio?

Can Nuclear Energy Light Up Your Portfolio?
Theodora Lee Joseph, CFA

over 1 year ago5 mins

  • Nuclear energy could prove a long-term viable solution to reducing Europe’s dependence on Russian gas.

  • Investing in nuclear energy isn’t as direct as it might seem: investing in uranium itself offers the clearest exposure to the theme.

  • European gas producers, LNG companies, and renewable energy providers are also likely beneficiaries of Europe’s drive for energy security.

Nuclear energy could prove a long-term viable solution to reducing Europe’s dependence on Russian gas.

Investing in nuclear energy isn’t as direct as it might seem: investing in uranium itself offers the clearest exposure to the theme.

European gas producers, LNG companies, and renewable energy providers are also likely beneficiaries of Europe’s drive for energy security.

Not long ago, it had near-pariah status around the world, but now nuclear energy is beginning to see something of a global resurgence. The timing of it makes sense: geopolitical tensions have countries around the world seeking out alternatives to Russian gas, and UN climate goals have them favoring low-carbon options. And nuclear fits the bill. Let’s take a look at how your portfolio could benefit from this power shift…

Is nuclear energy a good investment opportunity now?

Nuclear energy’s got a complicated history and something of a bad rap, especially after the Fukushima nuclear disaster in Japan in 2011. And while it may not be the fix for Europe’s gas crisis in the short term, it could prove to be a long-term solution that effectively reduces the bloc’s dependence on Russian gas, without leaving it dependent on higher-priced LNG imports. Already, Germany and Belgium have reversed decisions to mothball their nuclear capacity, and France, the UK, and the US have made plans to begin constructing new nuclear reactors.

And it’s not just energy independence: nuclear power is also important in helping countries meet United Nations greenhouse-gas emission targets. Nuclear energy is cleaner than natural gas because it produces no greenhouse emissions, even if it’s not as clean as renewable sources like wind, solar, and hydro energy (since it does still produce nuclear waste). And it has reliability on its side: renewable power sources tend to be weather dependent, which means the energy provided is intermittent and requires storage for the grid to function effectively. Nuclear energy, on the other hand, provides a steady base load of electricity supply like traditional carbon sources would, but with a smaller carbon footprint. That’s a lot of plusses, so it’s no wonder the recent US climate legislation set aside nearly $30 billion in tax credits for nuclear energy providers over the next decade.

But what are the risks?

Sure, before you get too excited about the benefits of nuclear power and start investing in it, it’s worth bearing in mind the potential downsides. One of the biggest known risks of nuclear energy is the possibility of an accident. While other energy site accidents tend to be relatively isolated, nuclear power accidents, like the ones in Chernobyl or Fukushima, can have far-ranging catastrophic effects. They can make an entire region unlivable and negatively impact the environment for decades.

Then, there is also the issue of radioactive waste produced in the running of nuclear reactors. Finding a sustainable solution to store and dispose of this waste has thwarted many countries’ plans to expand nuclear power production.

Lastly, constructing nuclear power plants is a complex endeavor. They generally take between five and 10 years to build, with massive upfront capital costs, and tend to run late and over budget – a tough combo for investors who finance them. What’s more, the huge capital costs involved in building these plants also mean that investors usually want a long-term guarantee of demand and prices high enough to provide a good return on their money.

What’s the best way to get in on this trend?

You might not be in a position to directly fund the construction of a nuclear power plant, but there are other ways to play this theme. Unfortunately, investing in nuclear energy isn’t as straightforward as you might think. For one, while the nuclear power supply chain is broad – encompassing uranium miners, power companies, engineering and construction companies, and companies making components for nuclear reactors – many of these companies make most of their money from non-nuclear businesses. In short, it’s hard to find a pure-play company with majority profit exposure to nuclear energy.

Nuclear energy ETFs like the VanEck Uranium+Nuclear Energy ETF (ticker: NLR; expense ratio: 0.6%) or Global X Uranium ETF (URA; 0.69%) are potential ways to invest, but you’ll find the holdings particularly skewed towards utility companies. Since it’s much easier to maintain and replace equipment for an existing reactor than to build one from scratch, it also means that uranium demand will benefit more quickly than the companies involved in constructing new nuclear power plants.

The next best way to invest is through the commodity uranium itself, or in uranium miners. Almost all current nuclear technology runs on uranium, and the two largest listed producers are Kazatoprom in Kazakhstan and Cameco in Canada. However, the difficulty of investing in miners, rather than the commodity itself, is that you take on additional operational and financial risks of the company. To invest in uranium itself, consider the Sprott Physical Uranium Trust.

What do you need to know to invest in uranium?

Like any other commodity, uranium sees its price move with supply and demand. However, uranium doesn’t trade on an open market like other commodities. Instead, buyers and sellers negotiate contracts privately. And since nuclear power plants are expensive to build, operators typically prefer that those contracts are long-term ones, to ensure supply. This means that real prices are often harder to track, and less volatile.

As this chart shows, uranium prices have been in structural decline since the Fukushima disaster in 2011, as countries moved to mothball their nuclear facilities. This year, that’s started to change, although the recent increase in price is still a third lower than levels seen a decade ago. Years of underinvestment in uranium output also means that there is some upside risk to prices, as governments have extended the operational life of their current nuclear power plants and are poised to require more of the fuel to run them.

Uranium price over time

Are there other opportunities here?

In the short term, natural gas demand is likely to pick up, as Europe looks for alternatives to Russian gas. You could consider investing in European gas producers like Equinor (EQNR), Royal Dutch Shell (SHEL), or BP (BP). LNG demand is also likely to see a strong boost, as long-term contracts to supply Europe are already being negotiated. Companies that stand to benefit from strong LNG demand include Chesapeake (CHK), EQT Corp. (EQT), Antero Resources (AR), Golar LNG (GLNG), and Cheniere Energy (LNG).

Lastly, over the longer term, higher gas prices also improve the relative economics of renewable energy and will speed the adoption of such technologies. You can gain exposure by investing in the iShares Global Clean Energy ETF (ICLN; 0.4%), or the iShares MSCI Europe Energy Sector UCITS ETF (ESIE; 0.18%) for specific European clean energy exposure.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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