Alex Gates of Clayton Partners presented his investment thesis on Talen Energy (US: TLNE) at Best Ideas 2024.

Thesis summary:

Talen Energy is one of the largest independent power producers in the US, with a strong free-cash-flow profile and a crown jewel asset.

TLNE will benefit from strong growth tailwinds in AI computing and the energy transition, which are driving the need for zero-carbon electricity. Power generation is now a growth story, and the company’s assets will be in strong demand for years to come.

Talen emerged from bankruptcy last year with a new management team and upgraded balance sheet.

Alex expects TLNE to appreciate in the near term as they monetize non-core assets, return capital, and gain investor awareness. It is a pattern Alex has seen play out in Clayton’s other successful post re-org investments, such as Denbury (DEN) and California Resources (CRC). In fact, the previous CEO of CRC is now running Talen and executing on a very similar playbook.

Talen’s largest asset is the Susquehanna nuclear power plant, which is one of the most efficient and profitable plants in the US. Nuclear plants in the US have become highly valuable due to new federal incentives, which created a government-guaranteed floor price for their electricity generation. Susquehanna is a crown jewel asset for Talen and could be worth upwards of $5 billion alone.

Talen’s normalized FCF yield is around 10% and could be 20+% in strong pricing environments similar to early 2023. Near-term catalysts include uplisting to the Nasdaq, the potential sale of their ERCOT assets, and a possible JV announcement for their data center business. Ultimately, Alex sees fair value close to $80 per share, based on the current FCF yield, and could be upwards of $100 per share if the entire company is sold, which Alex views as the most likely outcome in the long term.

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About the instructor:

Alex Gates is a Partner, Co-Portfolio Manager of CPDS and Chief Compliance Officer at Clayton Partners LLC. Founded in 2003, Clayton Partners is an opportunistic value investment firm.

Clayton manages a private investment partnership and individual separate accounts. The firm takes a private equity approach to investing in the public markets and looks to align itself with shareholder friendly management teams that focus on long-term value creation.

Alex leads the firm’s effort to find compelling public and private investment opportunities in sustainable businesses that have a positive impact on climate change. The current focus is on investments in renewable energy, utilities, bio-fuels, and recycling.

Alex holds a Masters Degree in Business Economics from the University of California at Santa Barbara. Prior to his graduate education, he completed a dual major BS in Economics and Statistics from Cal Poly State University. At both institutions, Alex concentrated in finance and economic modeling. He earned the Chartered Financial Analyst designation in 2015.