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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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This Merger Could Signal Big Changes In Nuclear Energy

France has long been at the forefront of nuclear power as one of the biggest users around the world. But the recent announcement that French nuclear giant Areva would merge its reactor business with fellow French giant EDF is a sign of changing times in the industry.

Both EDF and Areva are more than 80% owned by the French government, so essentially both companies are largely beholden to the will of the state. That reality was reflected by the fact that the French President’s office actually made the merger announcement. Related: Busting The “Canadian Bakken” Myth

French state-owned companies are not widely regarded as being paragons of efficiency and the involvement of the state certainly complicates the typical profit motive of these firms. Areva is no exception to that rule as the company lost a total of $5.6 billion in 2014, an amount that is larger than the company’s market capitalization.

But the problems are bigger than Areva. The nuclear industry faces exorbitant plant costs, waves of protests, and constant construction delays whenever a new reactor breaks ground. The US and France have historically been the leaders in nuclear power with the largest fleets in the West. But even in France and the US, the time, cost, and difficulty of building new nuclear plants resulted in limited construction in recent decades. Add that to the fact that electric power demand is stagnant, and it becomes clear that the industry is decaying in the West.

Instead most of the growth in the nuclear power industry is occurring in two countries with some of the worst environmental and safety records in the world; China and India. Both countries have enormous plans in the works for an expansion of nuclear power in part as a mechanism to curb the use of coal that leads to horrific air pollution. Still with quality concerns regarding the necessary high tech safety equipment, the two nations will need to be very diligent given the risks associated with nuclear power plant operations. Related: Time To Move Capital Into Next Bull Market – Part I

Chinese nuclear firms had expressed considerable interest in making investments in Areva, likely to both gain access to that firm’s technology, and to leverage the brand to export Chinese-made goods and technology. But the EDF/Areva merger is likely to end any serious investment talks for now.

It was also highly questionable whether the French government ever would have allowed a buyout of Areva by the Chinese (or whether foreign countries would have any interest in Chinese made nuclear technology given quality and industrial espionage concerns). Areva was, and is, a critical French “champion” and operates across the entire nuclear space from manufacturing of nuclear fuel to designing and constructing reactors to reprocessing nuclear waste. Given this, the French government is understandably sensitive about the company’s fate.

The broader point though, is that the nuclear power industry is truly wandering in the wasteland as production costs and difficulties continue to mount around the world. The merger highlights the fact that the former nuclear titans are now facing an uncertain future. In the West, nuclear power is not a growth business. France built an economy that generated three-quarters of its electricity from nuclear power, and exported the technology around the globe. Now it is struggling to stay alive.

In the US, for investors that believe that the industry will eventually emerge stronger than before, there are a few more investment options available, however risky they may be. Related: Midweek Sector Update: G7 Plans To End Fossil Fuel Era This Century

Exelon (EXC) is a well-run utility company with a long list of nuclear assets and a strong balance sheet, and may be worth considering. Utility company Scana (SCG) also fits the bill with several nuclear power plants in the firm’s arsenal of assets. For those looking upstream, Chicago Bridge and Iron’s (CBI) purchase of Shaw brought a sizeable nuclear building unit to CBI. CBI has been hamstrung by the oil price collapse, but the company shows long-term promise. McDermott International’s spin-off of Babcock & Wilcox (BWC) a few years ago provided investors with an opportunity to invest in a diversified power plant equipment maker with a strong presence in the nuclear utilities field.

By Michael McDonald of Oilprice.com

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