Palantir Vertical Scaling in Energy: Hint of Future Growth?

There are four critical use cases for Palantir Foundry in the Energy Sector: regulator, utility, transporter, and producer.

Palantir Vertical Scaling in Energy: Hint of Future Growth?
Photo by Karsten Würth (➡️ @karsten.wuerth) / Unsplash

·       There are four critical use cases for Palantir Foundry in the Energy Sector: regulator, utility, transporter, and producer.

·       Palantir provides services for four entities that fit these use cases establishing potential network effects and templating a system other energy sector customers could adopt.

·       Energy costs will drive the need for greater efficiency and adoption of platforms like Foundry, as companies seek digital transformation to gain a competitive edge.

Introduction

Energy generation, transport, and utilization in the future will become critical as populations, and per capita energy requirements grow. Simultaneously with growth, governments and societies seek to reduce their carbon footprint. Achieving energy growth and decarbonization requires massive increases in energy creation and efficiency in consumption patterns. Under this paradigm, we examined Palantir's efforts in the energy sector to evaluate whether helping solve these problems could drive growth for the company. Our examination included evaluating four use cases in the energy sector and how Foundry could benefit the entities that use it. Those four use cases are regulator, utility, transporter, and producer. While there exists an overlap between these use cases, they help us delineate different problems needing effective and efficient solutions.

Regulator

In 2021, Palantir inked a contract with the Department of Energy's National Nuclear Security Administration. According to Bloomberg, "SAFER will help the NNSA in their mission to manage nuclear security by allowing it to best allocate its human and financial resources to prioritize safety." Palantir provides significant services to the U.S. government, so this contract is not surprising. It is, however, important because it establishes Foundry as a software solution in the energy regulator for the U.S. national government and sets a precedent for software standards in the energy space. As Palantir's products become normalized throughout the Department of Energy, we expect expansion, especially with the department's artificial intelligence initiatives.

Utility

PG&E, a west coast utility, employs Palantir's Foundry software to maintain situational awareness of its operations in real-time. This involves a digital twin of the entire electric grid and its constituent parts with the ability to overlay weather and other evergreen data. Users can run optimization and simulation models to aid executives in resource allocation and risk management. By making better and faster decisions, the utility saves time and money, ultimately increasing its margins and decreasing capital requirements. We believe that the value provided to PG&E by Palantir will be seen by other utilities, which will ultimately seek to use Foundry for their operations as well. Below is a quick video from Palantir discussing the utility use case. The user interface and user experience in the background appear impressive from our data science background, especially if it integrates the predictive maintenance model discussed in the voice-over.

Source: Youtube

Transporter

Kinder Morgan, a massive energy storage and transportation company, employs Foundry to achieve speed and safety in its operations. Moving natural gas and other stored energy over a significant distance is costly due to infrastructure maintenance requirements and the energy inputs to move the stored energy. Small increases to efficiency in moving and storing energy compounds over time. Additionally, digital twin systems that enable predictive maintenance and system stress testing build resiliency and ultimately more cost savings. The same tools, such as predictive maintenance models shown in the utility video, can be employed for energy storage facilities.

In 2020, Kinder Morgan earned $11 billion in revenue. The cost of revenue was approximately $5 billion with a $6 billion gross profit. As a thought experiment to illustrate the potential cost savings, let's say that Palantir Foundry enables Kinder Morgan to reduce its cost of revenue by 4%. In that case, Kinder Morgan would save $200 million. If the Palantir Foundry contract costs $5 million a year (which is a fair estimate given Palantir's Q3 earnings report below), Kinder Morgan would make 40x its investment in the software to power its operations. Compounded over a decade, the capital savings would be a game-changer for the company.

Source: Palantir

Producer

BP produces fossil fuel and renewable energy across the world. Since 2014, they have worked with Palantir to improve their business. In 2021 they signed a new contract with Palantir to power their green energy transition using Foundry. Palantir's press release specifically calls out the "concrete results in operations management, asset allocation, strategic planning, and procurement" obtained over the past seven years. Similar to Kinder Morgan, small efficiency increases across BP's entire energy system will compound over time and yield massive savings, especially for an organization in transition.

Network Effects

When evaluating all four of these contracts and companies, we see Palantir vertically scaling in energy. The vertical scaling is from energy extraction through energy use by the end customer. By implementing its data solutions across the length of the entire energy value chain, Palantir provides immense savings to its users. As Palantir continues to make technical improvements to its products, it will continue to expand horizontally to new commercial customers such as Hyundai Heavy Industries.

Risks and Challenges

1. In Q3 of 2021, Palantir closed 54 deals. Will it be able to maintain that momentum?

2. Making changes to large organizations like energy companies takes time and only occurs with significant deliberation. One rarely makes substantial changes to workflows overnight. How quickly will Palantir be able to scale its current contracts?

Positive Tailwinds

1. Energy security is national security. Companies will want the same software protection that federal governments receive and vice versa. Palantir has strong credentials with government contracts.

2. As mentioned in the introduction, future energy crises and growing requirements will drive the need for data-driven solutions to increase energy efficiency and decarbonization.

3. Palantir's current contracts provide a strong foothold in the sector. As executives look for wins to demonstrate their ability to provide "data-driven decisions" and maintain profits during decarbonization, they will increasingly look to software like Foundry that other companies use to gain an edge.

Conclusion

We are long the stock. We intend to continue to add as signs of horizontal growth across the energy and other sectors manifest over the next several years. You can check out our other work on Palantir here.

If you are bearish on the stock, you can always short it.

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I am not a financial advisor. This article is for educational purposes only. You should do your own independent research before making any investment decisions.

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