UBS infrastructure outlook says U.S. red states are greener than you’d think
By: Investable Universe
Tags: Climate Change, Congress, Biden, Infrastructure, Renewable Energy

A new report from UBS Asset Management’s London-based Real Estate and Private Markets team is upbeat on the 2021 outlook for listed infrastructure companies. In a report released on Monday, UBS noted that overall revenue estimates for listed infrastructure have declined by only six percent in 2020, with all sectors — even the beleaguered airport and oil subgroups — expected to show some improvement in 2021. This will come from policy tailwinds in the U.S. and Europe, and the positive economic effects of widespread vaccine rollouts.

In his campaign, U.S. President Elect Joe Biden unveiled a $2 trillion climate plan, which include significant investments in sustainable transportation, electricity and building infrastructure. UBS observes that while Biden will face pushback — perhaps putting it mildly — from a highly polarized Senate under Republican control, not all green investment will be a casualty of Washington gridlock.

A silver lining, you say?

“The silver lining is that there has historically been more bipartisan support for clean energy than what the political headlines suggest,” UBS writes, noting that Red (Republican-leaning) states like Texas and Oklahoma are home to the highest amount of wind capacity in the U.S., while Texas along with mostly-Red state Florida will site most new U.S. solar energy capacity over the next five years. Investment in these emerging renewable energy forms will directly benefit those states. There’s also the economic boost from more broadly-focused infrastructure projects.

“Ultimately, infrastructure spending is the tried-and-true way to alleviate unemployment and kick-start stagnant economies, and there is more urgency now to reach political consensus,” UBS writes.

Some sub-sectors will still face a tough recovery slog in 2021. Even with an optimistic timeline for vaccines, UBS maintains a negative outlook for airports. They observe that domestic, cargo and short-haul air travel have been more resilient (and bounced back quicker) than long-haul and passenger flights, and that this factor of differentiation will likely continue in the 2021 recovery. Despite (like airports) being positively correlated to GDP, all modes of freight transportation, including air cargo, freight rail, and — especially — marine ports — have performed well in 2020, with volumes at some U.S. and E.U. ports even rebounding from early year weakness to outperform 2019 levels

“Permanent reset” for oil and gas?

Following this year’s market collapse, oil and gas will face a slow recovery in 2021, they note. Oil and gas took a sector-wide hit in 2020, due to virus-related lockdowns and price volatility after Saudi Arabia and Russia’s epic OPEC showdown in April. Crude prices never regained pre-pandemic levels, with lower demand from passenger transportation continuing to put downward pressure on prices.

UBS notes that April’s spectacular price weakness in oil “further suggests that the potential volatility of the sector is greater than originally anticipated.” Even in the event that the global economy recovers and a reliable vaccine becomes widely available, borrowing costs for the oil and gas sector may be “permanently reset higher.” This in turn will have significant ramifications for investment in U.S. oil and gas infrastructure, which typically represent 20–30 percent of yearly private infrastructure investments nationwide.

Midstream infrastructure, which is used move and store shale oil in areas like the Texas Permian Basin have been the sector’s primary growth driver, and that sector was hard hit by the year’s price volatility (they note that the rig count in the Permian Basin, a historically reliable proxy for drilling activity in the region, is down almost 70 percent since late 2019).

Bright spots are few and far between in this mostly dark assessment for the sector: but glimmers, nonetheless. A decline in U.S. shale oil production — which also creates, as a by-product, the cheap gas that has flooded the market in recent years — could actually benefit the midstream pipelines used at pure-play shale gas basins like the Marcellus, which will likely fill the supply gap.

Additionally, while tighter emissions regulations — which supporters and critics alike expect the Biden Administration to put forward — are commonly viewed as bad news for oil and gas, UBS notes that regulation puts upward price pressure on commodities and raises barriers to entry, separating good from bad assets, effective from ineffective operators, productive and non-productive geologies and the like — and that “reveal” presents useful opportunities for investors.

Post-covid, the ongoing energy transition will also have lasting implications for power and utilities companies, which will benefit not just from policy support in the U.S. and Europe, but also emerging technologies like wind, battery storage, and hydrogen — a carbon-free and widely-touted alternative fuel that features prominently in the EU Green Deal as well as the Biden climate change plan.

This will come as no surprise…

Finally, there’s one infrastructure sector that UBS says is poised to outperform in 2021, and that’s telecom and fiber infrastructure, a sector that has rallied on the great remote-living shift of 2021. With large segments of the population still working from home, and the Biden plan including commitments to affordable broadband for low-income and other underserved communities, investment is likely to continue apace, with some existing owners selling non-core assets to take advantage of attractive valuations.

”As the next phase of opportunities emerge around 5G and managed data services, investors should continue to question the level of technology risk inherent in these investments and their appropriateness in core infrastructure portfolios,” they write.