The shift in nuclear power from developed nations to third-world countries is an important trend for investors to understand because it is largely redefining the entire nuclear industry.
Even as nuclear firms in France find themselves in deep financial distress¸ new opportunities are emerging. One of China’s two national nuclear reactor builders (China National Nuclear Power Co. Ltd.) went public recently with an explosive IPO, while long-time nuclear powerhouse Babcock & Wilcox announced earlier this year that it would split in two. Babcock and Wilcox’s split creates a company that is ideal for investors looking at the future of nuclear power.
In particular, Babcock & Wilcox (trading under ticker BWC currently and under tickers BWXT and BW after the split), a nuclear supplier for reactors, is ideally positioned to build on a breakthrough deal announced by the U.S. and India earlier this year. In that announcement, U.S. President Obama and Indian Prime Minister Modi put forward a new deal that will enable India to buy reactor technology from the U.S. Related: New Silk Road Could Open Up Massive Investment Opportunities
BWX Technologies is the primary company that will benefit from that deal, and India is a critical market for the technology. BWXT is the only pure play nuclear reactor building stock in the U.S., and it stands to benefit from a new focus on nuclear power and the perception of high US quality products throughout much of the world. India is a reliable customer - the country needs a lot more power, it’s geographically stable compared to many other regions, and it is eager to cut carbon emissions going forward which could make nuclear energy a top contender for electricity generation in a nation with such limited available space.
The rationale behind Babcock & Wilcox’s split makes a lot of sense. The old BWC focused on two distinct nuclear businesses – building reactors for U.S. naval warships, and building reactors for power plants. The company always had to consider the U.S. government’s reaction in any decisions it made given the importance of the Navy as a customer. Related: Key Points For Investing In Global Mining Sector
As a result, part of the business was always run sub-optimally. For example, many corporations take advantage of various tax loopholes to lower their tax burden. B&W never did that, because even though the loopholes are legal, it could open the firm up to public criticism (justified or not) and possibly jeopardize the firm’s naval business in some small way.
With the two sides of B&W’s business now separating, those tax loopholes are back on the table for BW. This should help the company lower its effective tax rate from the 30-35% percent territory it has been at historically. Jim Ferland, the CEO of the new B&W (and CEO of the combined current company) emphasized the value of this tax benefit in a recent interview. Similarly, with B&W no longer primarily a government contractor, foreign firms may be more willing to do business with the company in ways they were not before.
China, India, Pakistan, and many other third-world countries are moving towards greater use of nuclear power as a key fuel source. India is paramount among these potential customers for both BWX Technologies and the new Babcock & Wilcox. Related: So What Exactly Have Fossil Fuels Done For Us?
Options here could include nuclear power (BWXT products), coal power (BW products), and possibly waste-to-energy plants (BW products).
India harbors ambitions about becoming a major force in the nuclear power industry. The country has a severely inadequate electrical infrastructure, and the new Prime Minister Modi is a big supporter of nuclear power. Modi visited France, Canada, and the U.S. earlier this year shopping for reactors and parts from firms like France’s Areva.
India plans to ramp up its nuclear power supply by a whopping 14 times over the next two decades. This is exactly the type of customer that the US industrial firms are courting and with the impending split and both sides of B&W have some interesting options ahead. Investors considering what to do with the spin-off after it is completed should keep this macro environment in mind.
By Michael McDonald of Oilprice.com
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