The smartest investors always start with a macro view of the world and the long-term trends that are shaping the lives of eight billion people on our planet. They then figure out how to play those trends to juice their portfolio returns.
Trends like climate change, population growth, and the continuing and increasing global energy demand can be worrying, but can also provide investment opportunities.
Global energy demand continues to rise and fossil fuels will only go so far in meeting those needs. The extraction of oil and gas is getting harder, as the easy stuff has already been sucked out of the ground, and consumers are now demanding cleaner sources of energy to boot.
The stock and the play
Enter Northland Power (TSX:NPI), an energy infrastructure company dedicated to developing, building, owning, and operating clean and green power infrastructure assets in Canada, Europe, and other selected areas of the globe.
The company has an active development strategy focused on creating high-quality clean energy projects that provide stable and predictable cash flows.
Northland Power is worthy of any smart investor’s consideration, because it has proven to be a reliable returns generator for shareholders.
Annual revenue has more than doubled from 2015 to 2018 from about $725 million to $1,550 million, which has translated to significant operating cash flow growth in the same period from about $270 million to $820 million. These healthy numbers are a result of prudent organic growth coupled with strategic acquisitions along the way.
To that end, this is the first of a three-part mini-series on Northland Power, where I will examine its latest acquisition in Colombia.
In the second article in this mini-series, I will broadly examine the company’s growth in Latin America and its financials in a more holistic way.
The third article in this mini-series will be the grand finale where I will examine the company’s future prospects in the broader context of the Canadian clean energy space and see if it will be a leader or laggard.
So, let’s examine the company’s recent acquisition of Empresa de Energia de Boyaca (EBSA) in Colombia.
What exactly did Northland acquire and why?
EBSA is a Colombian distributor of power to approximately 500,000 customers in the region of Boyaca, situated 100 kilometres north of the capital Bogota.
EBSA is one of the very few energy companies in Colombia that has grandfathered rights that allow for participation in the full electricity supply chain, including electricity generation, transmission, and distribution.
This vertical integration is a significant strategic advantage as Northland Power can capture synergies and efficiencies from controlling the entire supply chain. It also allows the company to learn about the entire process.
This operating experience is critical to future development activity, where it can apply what it’s learned to create further efficiencies, and in that sense, EBSA represents an ideal platform that Northland Power can build upon.
Beyond these longer-term strategic benefits, there are immediate financial benefits in the form of an increased adjusted EBITDA of about $100 million per year starting in 2020, growing at a rate greater than inflation, which is a financial victory for shareholders.
The final verdict
Northland Power has traded sideways at around $25 for the better part of this year, as investors digested the news around the Colombian acquisition and broader global trade anxiety. Less-savvy investors see heightened risks in the company’s operating model as it goes into more far-flung locales outside Canada.
However, smart investors realize that these risks are calculated, and this latest acquisition in Colombia gives Northland Power the opportunity to develop clean energy infrastructure in a very stable member of the Pacific Alliance group of countries.
In the second article in this mini-series, I will examine the company’s growth in Latin America and its financials in a more holistic way. In the meantime, consider loading up on Northland Power shares now and reap the rewards as the company develops in Colombia and Latin America, giving it greater firepower to grow its cash flow and dividend growth.