Buying Innergex – Texas Was Bad, But Not That Bad

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By Tom Konrad, Ph.D., CFA

Last week, I published this call to buy Innergex (INGXF, INE.TO) because investors had been overreacting to the losses from the February cold snap in Texas.  The stock is up since then, but still seems a decent value.

Fat top wind farm
Sunset for Innergex’s investments in Texas? Flat Top Wind Farm. Photo source: Innergex

Canadian Yieldco Innergex Renewable Energy (INGXF, INE.TO) took a big financial hit from the power disruptions in Texas in March. 

It’s complex, but their financial hedges on power prices for three of its wind farms ended up creating enormous liabilities – more, in fact, than two of their wind farms are worth.  Two of their facilities also had benefits from the high power prices, but not nearly as large as the losses on the financial hedges.

Innergex claimed “Force Majeure” at the affected sites – a contract clause that would allow them out of the financial obligations of the hedges.  The counterparties rejected the claims, and now two of the claims are in court, and one is subject to negotiation between the parties.

The two claims that are in court are there because Innergex now values those wind farms (Flat Top and Shannon) at less than the financial loss on the hedges.  The worst case scenario here is that the court will decide against Innergex and allow the counterparties to foreclose on the two wind farms.  There is no additional liability to Innergex beyond the value of its financial stakes in Shannon and Flat Top.

Shannon Wind Farm. Image Source: Innergex

The hearing in the Shannon and Flat Top cases was held on May 6th, and a ruling is expected at latest by May 20th.  I’ve been buying today (in the mid $15 US range) because I estimate the decline in the stock price has more than priced in the full loss of both wind farms, and the increased certainty of a ruling (even one against Innergex) should send the stock price back up.

I generally feel that investors overreact to this kind of uncertainty, so it’s often a good time to buy- especially when the financial impacts of the downside risk are limited, as they are with Innergex.

DISCLOSURE: Long INGXF

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

3 COMMENTS

  1. Dr. Konrad,

    Thank you for your analysis. I am late to the game here and the company sits in the upper $15 range.

    I weathered though the February storm here and was as surprised as any one else by the duration and depth of the cold.

    That said, I too am a private investor. I also own shares in several renewable energy firms. Inergx seems the weakest of several companies in the field compared to: TRSWF, AY, CWEN. We will leave out NEE as that is not a fair comparison in size. TransAlta and Atlantica Sustainable are however more in fair line for evaluation, Canadian, English and international (AY).

    How do you now seem INERGX? Has your thesis changed any?

    Thank you, hope to talk with you.

  2. Hello Sir,

    I am new to this web site – didn’t know it existed until today!

    I wrote this on an alternate renewable energy site today (08-14-2021) but am not sure you received it, it was an older link from May, 2021.

    I often blog on Seeking Alpha web site on renewable energy firms being a small and independently directed investor. I have a background in engineering and teaching.

    Please see below:

    Dr. Konrad,

    Thank you for your analysis. I am late to the game here and the company sits in the upper $15 range.

    I weathered though the February storm here and was as surprised as any one else by the duration and depth of the cold.

    That said, I too am a private investor. I also own shares in several renewable energy firms. Inergx seems the weakest financially of several companies in the field compared to: TRSWF, AY, CWEN. We will leave out NEE, NEP, BEPC, etc., as that is not a fair comparison in size. TransAlta and Atlantica Sustainable are however more in fair line for evaluation, Canadian, English and international (AY).

    How do you now seem INERGX presently? Has your thesis changed any? I noticed HydroQuébec took a huge position ($19.6M USD this past July) I also noticed Black Rock sold 63% of its holdings in April this year reducing exposure to only 3.6% ownership of float.

    Please feel free to contact me directly if you would like to discuss further, nsranch1@yahoo.com. I am considering a nibble here possibly.

    Thank you, hope to talk with you soon

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