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Commodities Trading Ideas & Charts

APA Corp. Widened its Focus to Include Suriname

Business Strategy and Outlook

APA Corp. is an upstream oil and natural gas producer with assets in the U.S. and overseas. The vast majority of its domestic production is derived from the Permian Basin. This was a key growth engine for the company until 2020, when the coronavirus-related collapse in crude prices forced the company to dial back on drilling capital. After a hiatus, development operations have restarted, albeit at a slower pace–Permian volumes are likely to decline slightly during 2021. Drilling is currently focused on the same reservoirs that APA’s competitors are targeting (the Spraberry and Wolfcamp intervals in the Midland Basin and the Bone Spring and Wolfcamp formations in the Delaware). But in the past the firm also focused on its own discovery in the Permian region, the Alpine High play. Alpine High wells are characterized by very strong initial production rates but with a much higher gas and natural gas liquids content than it is probable elsewhere in the Permian. More recently, it has also been testing its East Texas Austin Chalk acreage. 

APA also holds a large acreage position in Egypt, where it has operated for nearly a quarter of a century. It is now harvesting cash flows there, and will probably keep volumes more or less flat in the next few years (drilling new wells to offset declines from older ones). But reported volumes could fluctuate as APA’s revenue and profits in Egypt are governed by production-sharing contracts (due to cost recovery provisions in these contracts, lower crude prices translate to higher volumes, creating a natural hedge, helping the company to cope with this very weak commodity environment). Meanwhile, it is awaited modest production declines from APA’s mature assets in the North Sea. 

Further, the company’s focus has now widened to include Suriname, following a string of exploration successes in Block 58 (which APA is appraising with its 50/50 partner, Total). The evidence to date suggests a very large petroleum system, which could be potentially transformative for the company. At this point, it is alleged that it is very likely that one or more of the discoveries will progress to the development stage, though none have been officially sanctioned yet.

Financial Strength

APA Corp has started to turn the corner after several years of above-average indebtedness. The firm has now strung together several quarters of substantial free cash flows, and while very high commodity prices have played a part, it is alleged the firm can maintain its current course at midcycle prices (reinvesting only a moderate portion of its operating cash while keeping production flat slightly growing). The deconsolidation of its Altus Midstream subsidiary won’t directly impact the firm’s financial health, though its leverage ratios will improve as reported debt will no longer include the Altus revolver, which has no recourse to APA. The Altus transaction will make it easier for APA to monetize that investment though, which potentially paves the way for further balance sheet strengthening. At the end of the last reporting period, consolidated debt was $7.4 billion. On an annualized basis net debt/EBITDA was 2.5 times, and debt/capital was over 100%. However, both metrics will improve after the deconsolidation. Anyway, there is little chance of a liquidity crisis anytime soon. The term structure of the firm’s debt is extremely spread out. Only about $500 million comes due before 2025, and only $3.2 billion matures in the five years after that. That means APA can forget about the principal on over half of its debt until at least 2030. Additionally, the firm has a liquidity reserve composed of $400 million cash and well over $3 billion in committed bank credit. The revolver does include a covenant ceiling of 60% for debt/capital, but capital is defined to exclude impairments since mid-2015. On that basis, APA is unlikely to come close.

 Bulls Say’s

  • APA’s international operations in Egypt and the North Sea generate high rates of free cash flow under midcycle conditions, given exposure to Brent crude pricing, low operating costs, and minimal maintenance capital requirements. 
  • APA has a long runway of drilling opportunities in the high-growth, low-cost Permian basin. 
  • The recent discovery in Suriname could open the door to large-scale developments there, and the partnership with Total means APA’s capital commitment will be greatly reduced.

Company Profile 

Based in Houston, APA Corp. is an independent exploration and production company. It operates primarily in the U.S., Egypt, the North Sea, and Suriname. At year-end 2020, proved reserves totaled 874 million barrels of oil equivalent, with net reported production of 440 mboe/d (66% of which was oil and natural gas liquids, with the remainder comprising natural gas).

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Diamondback’s Operation Remain Lean and Efficient, Despite Recent Expansions

Business Strategy and Outlook

Diamondback Energy was a modest-size oil and gas producer when it went public in 2012, but it has rapidly become one of the largest Permian-focused oil firms through a combination of organic growth and corporate acquisitions, most notably Energen in 2018 and QEP Resources in 2021. The firm consistently ranks among the lowest-cost independent producers in the entire industry, supporting a sustainable margin advantage. 

Keeping costs low is baked into the culture at Diamondback, and it is alleged, operations to remain lean and efficient, despite the recent expansions. From the outset, the company has enjoyed a competitive advantage that enables it to systematically undercut its upstream peers. This was initially based on the ideal location of its acreage in the core of the basin, and helped by the early adoption of innovations like high-intensity completions (resulting in more production for each dollar spent). More recently, the firm has started seeing significant economies of scale as well. 

Management has fiercely protected the balance sheet over the years and has been willing to tap equity markets when necessary, as it did several times during the 2015-16 downturn in global crude prices. But that’s ancient history now. Diamondback’s financial health is excellent, and the firm can maintain or grow its production while generating substantial free cash flows under a wide range of commodity scenarios. It is viewed little to no chance that the firm will choose to allocate more capital for new drilling than appropriate, which means production will probably stay flat or grow at low-single-digit rates for the foreseeable future. Excess cash will be used for debt reduction or returned to shareholders. To preserve flexibility for management, the firm has not committed to a specific reinvestment rate or vehicle for capital returns, like certain peers have, but it does intend to distribute at least half of its free cash somehow. 

Finally, it is emphasized that, the firm’s stake in its mineral rights subsidiary, Viper Energy Partners. This vehicle owns the mineral rights relating to some of Diamondback’s most attractive acreage, further juicing returns on drilling for the parent

Financial Strength

Diamondback has historically maintained excellent financial health, with one of the strongest balance sheets in the upstream coverage. The Energen acquisition pushed up its leverage ratios for a brief spell in 2019, COVID-19 kept them elevated in 2020, and the Guidon and QEP deals extended these period of above average leverage into 2021. But borrowing never reached an unsustainable level, even in these periods, and the firm’s leverage has already recovered. At the end of the last reporting period, debt to capital was 36% and annualized debt/EBITDA was 1.1 times. And as the firm is capable of generating substantial free cash under a wide range of commodity price scenarios, it could be held that, these ratios to continue improving. The firm has targeted debt reduction of at least $1.2 billion in 2021 using its free cash flows plus the over $800 million in asset sale proceeds from its sale of noncore assets. Consolidated liquidity stands at roughly $2 billion with no material debt maturities until 2023.

Bulls Say’s

  • Diamondback is one of the lowest-cost oil producers operating in the United States. 
  • Stacked pay in the Permian Basin multiplies the value of acreage, and further value can be unlocked as additional plays are proved up over time. 
  • Diamondback has been an early adopter of enhanced completion techniques and is expected to remain at the leading edge.

Company Profile 

Diamondback Energy is an independent oil and gas producer in the United States. The company operates exclusively in the Permian Basin. At the end of 2020, the company reported net proven reserves of 1.3 billion barrels of oil equivalent. Net production averaged about 300,000 barrels per day in 2020, at a ratio of 60% oil, 20% natural gas liquids,  20% natural gas. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

CSX Corp. Automotive and Intermodal Volumes Under Pressure

Business Strategy and Outlook

Railroad turnaround legend Hunter Harrison led Eastern Class I railroad CSX from early 2017 until his death in December that same year. Before joining CSX, he turned around three railroads. Most impressively, his leadership improved Canadian Pacific’s reported OR from 81.3% in 2011 to 58.6% in 2016. While his time was cut short at CSX, Harrison laid the foundation for rapid improvement. As his replacement, the rail installed James Foote, who is quite familiar with Harrison’s precision railroading model from years working at Canadian National. 

This has been Foote’s first opportunity to lead a Class I railroad and, on top of that, CSX operates a complicated spiderweb network in a densely populated area. This differs from the railroads Harrison and Foote ran in Canada, which are mostly linear and run through remote locations. Even so, considering CSX’s impressive operating ratio improvement over the past four years, we think Foote has executed admirably carrying the precision railroading, or PSR, baton–the rail posted an impressive 58.4% OR in 2019 and kept it near 58.8% in 2020 despite lower volume for the year. Previously, CSX’s OR had been range-bound between 69.4% and 71.5% for seven years, even as other rails progressed. In fairness, CSX lost almost half of its highly profitable coal franchise during that time and still maintained a respectable OR. 

Foote has overseen the implementation of Harrison’s PSR playbook at CSX, particularly in terms of rightsizing all assets, including human resources, real estate, sorting yards, motive power, and rolling stock. Fewer assets and longer trains drive up network fluidity, resulting in labor productivity gains, better service levels, and higher potential incremental operating margins. Better service also creates greater intermodal opportunities. Intermodal saw first-half 2020 volume headwinds from COVID-19 disruption, but has since rebounded on robust retailer restocking and tight truckload market capacity (rising truck-to-rail conversions). CSX’s domestic intermodal volume may face congestion-related constraints lingering into early 2022, but we still see intermodal as a key long-term growth opportunity for CSX.

Financial Strength

CSX’s balance sheet is in good shape. The firm held more than $2.2 billion of cash and short-term investments compared with $16.3 billion of total debt at year-end 2021. Debt increased slightly in 2020 as the firm took measures to shore up liquidity amid the pandemic–as most transports did. Net debt/EBITDA was about 2.0 times and EBITDA/interest coverage stood at a comfortable 10 times in 2021. It is expected that net-debt/EBITDA to remain near 2 times in 2022. Overall, we consider these levels secure, given CSX’s reliable cash generation. CSX employs a straightforward capital structure composed of mostly long-term unsecured debt to fund its business, although it uses a small amount of secured debt to finance equipment.

Bulls Say’s

  • Thanks to PSR, CSX has posted impressive operating ratio gains in recent years despite losing half of its highly profitable coal business over the past eight years. 
  • Rooted in heavy service corridor investment over the past decade, CSX’s intermodal franchise has posted solid mid-single-digit container growth on average over the cycle. 
  • Compared with trucking, shipping by rail is less expensive for long distances, is 4 times more fuel efficient per ton-mile, and does not contribute to freeway congestion. These factors should support incremental intermodal growth over the long run.

Company Profile 

Operating in the Eastern United States, Class I railroad CSX generated revenue near $12.5 billion in 2021. On its more than 21,000 miles of track, CSX hauls shipments of coal (13% of consolidated revenue), chemicals (22%), intermodal containers (16%), automotive cargo (9%), and a diverse mix of other bulk and industrial merchandise

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

American Airlines Group Inc. : An 80%-90% recovery in business travel that consequently increases at GDP levels over the average term.

Business Strategy and Outlook

American Airlines is the largest U.S.-based carrier by capacity. Before the coronavirus pandemic, much of the company’s story was based on realizing cost efficiencies from its transformational 2013 merger with U.S. Airways and strengthening the firm’s hubs to expand margins. While we think that American Airlines has done a good job at limiting unit cost increases, we note that the firm lagged peers in unit costs over the previous aviation cycle. Management sees the pandemic crisis as an opportunity to structurally improve the firm’s cost position relative to peers.

In the leisure market, it is expected low-cost carriers to prevent American Airlines from increasing yields with inflation. American’s basic economy offering effectively serves the leisure market, it is not expected that the firm to thrive in this segment. A leisure-led recovery in commercial aviation is anticipated, reflecting customers being more willing to visit friends and family and vacation in a pandemic than they are to go on business travel.

American Airlines will participate in the recovery of business and international leisure travel after a vaccine for COVID-19 becomes available. It is suspected that a recovery in business travel will be critical for American, as the firm’s high-margin frequent-flier program is closely tied to business travel. Business travellers will often use miles from a co-branded credit card to upgrade flights when their company is unwilling to pay a premium price. Banks pay top dollar for frequent-flier miles, which gives American a high-margin income stream.

The COVID-19 pandemic has presented airlines with the sharpest demand shock in history, and many of our projections are based on our assumptions around how illness and vaccinations affect society. We’re expecting a full recovery in capacity and an 80%-90% recovery in business travel that subsequently grows at GDP levels over the medium term.

Financial Strength

American is the most leveraged U.S.-based major airline due to its fleet renewal program and from the COVID-19 pandemic. As the pandemic has wreaked havoc on air travel demand and airlines’ business model, liquidity has become more important in 2020 than in recent years. American Airlines, more than peers, increased leverage, and diluted equity during the COVID-19 pandemic. We think American Airlines’ comparably higher financial leverage will make it difficult for the firm to maneuver going forward, and that management will have few capitals allocation options other than deleveraging post-pandemic. American Airlines came into the crisis with considerably more debt than peers, with gross debt to EBITDA sitting at roughly 4.5 times in 2019. American ended 2021 with $38.1 billion of debt and $13.4 billion of cash. It is expected that American Airlines will use incremental free cash flow to deleverage after the crisis. We anticipate EBITDA expansion and debt reductions will reduce gross debt/EBITDA to roughly two to three turns in the 2025-26 timeframe. The firm has $2.6 billion of debt coming due in 2022, and we expect that the firm will use cash on the balance sheet to pay the debt.

Bulls Say’s

  • American Airlines has the youngest fleet among U.S. major airlines, which should dampen fuel expense and maintenance going forward.
  • American Airlines has largely completed its fleet renewal, which should decrease capital expenditures going forward.
  • Leisure travellers are becoming more comfortable with flying during the COVID-19 pandemic

Company Profile

American Airlines is the world’s largest airline by scheduled revenue passenger miles. The firm’s major hubs are Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix, and Washington, D.C. After completing a major fleet renewal, the company has the youngest fleet of U.S. legacy carriers.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Technology Stocks

Revised Tax Expectations Nudge Cooper’s FVE Upward

Young woman trading stock market by touching.

Business Strategy and Outlook

As a cash-pay business with sticky customers and few competitors, the contact lens industry is an attractive market, in our opinion. Four players (Johnson & Johnson, Alcon, Cooper, and Bausch Health) dominate the global market, and industry regulation creates strong barriers to entry, keeping new entrants away. Cooper’s surgical segment has contributed approximately one fourth of total revenue since 2018, following the acquisition of Paragard, a nonhormonal copper intrauterine device.

Though Paragard sales dropped during the COVID-19 pandemic, its believe that the product is well positioned to benefit from secular trends toward increased adoption of IUDs in the U.S. IUD usage rate to mirror the rate in other developed countries, leading to market saturation and a slowdown in segment revenue growth. 

Financial Strength

Cooper is in solid financial strength. While the company took on $1.4 billion in debt in fiscal 2018 to acquire Teva’s Paragard IUD, its vision and surgical segments should generate enough cash to allow the company to pay down debt and continue investing in its businesses. Historically, Cooper had no trouble paying down debt, with debt/EBITDA down from 3.1 in fiscal 2014 to 1.9 times by the end of fiscal 2017. Even with the large acquisition and significant upticks in COVID-19-related costs, the firm ended 2020 with debt about 3 times EBITDA. 

The contact lens market is already very consolidated, especially after the Sauflon acquisition, so future large acquisitions seem unlikely for CooperVision, but the firm may seek additional capital to pursue bolt-on deals in its surgical division. CooperSurgical has acquired about 40 companies since 1990, and we project this trend to continue. Cooper has spent $1.1 billion and $1.9 billion on acquisitions over the past five and 10 years, respectively.

Bulls Say’s 

  • CooperVision will benefit as customers trade up from weekly or monthly contact lenses to more expensive daily lenses. 
  • Paragard is the only nonhormonal IUD approved in the U.S. and does not have any serious competition. 
  • MiSight has first-mover advantage in a fast-growing market with a multibillion-dollar market potential.

Company Profile 

Cooper Companies operates two units: CooperVision and CooperSurgical. Accounting for approximately 75% of total sales, CooperVision is the the second-largest player in the oligopolistic contact lens market. Over 50% of CooperVision’s sales are in international territories. The second unit, CooperSurgical, develops and manufactures diagnostic and surgical products for gynecologists and obstetricians, including the Paragard IUD, which Cooper acquired from Teva in 2017. 

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

Murphy Shares Starting to Look Expensive After Rally

Business Strategy and Outlook

Murphy Oil repositioned itself as a pure-play exploration and production company in 2013, spinning off its retail gas and refinery businesses.The firm is a top-five producer in the Gulf of Mexico, and the region accounts for almost half of its production. Murphy has a number of expansion projects lined up there that should offset legacy declines and enable it to hold production flat in the next few years. There is regulatory risk, though: after entering office, U.S. President Joe Biden has pledged to halt offshore oil and gas permitting activity (to demonstrate his climate credentials). Murphy already holds valid leases for its upcoming projects and is ahead of schedule on permitting but will eventually require further approvals if it wants to continue its development plans. Thus far, the Biden administration has taken little action, leaving Murphy unencumbered. But we would not rule out a more comprehensive ban.

The firm has made considerable progress cutting costs and boosting productivity since the post-2014 downturn. However, while the firm still has over 1,400 drillable locations in inventory.When this portion is exhausted, well performance, and thus returns, could deteriorate. And in Canada, the firm is currently prioritizing the Tupper Montney gas play while natural gas prices in the region are more stable after a period of steep discounts caused by takeaway constraints that have now cleared.

Murphy Shares Starting to Look Pricey After Rally

Morningstar analyst nudged fair value for Murphy Oil to $26 from $25, after incorporating the firm’s third-quarter financial and operating results. That’s about 25% higher than where shares were trading as recently as September, but since then the stock has surged higher along with near-term oil prices. Morningstar analyst think the market has gotten carried away and is mistakenly extrapolating spot prices and midcycle forecast is unchanged at $60 Brent.

Financial Strength 

The COVID-19-related collapse in crude prices during 2020 impacted the balance sheets of most upstream oil firms, and Murphy saw its leverage ratios tick higher as well. But management has engineered a rapid recovery, aided by strengthening commodity prices. At the end of the last reporting period, debt/capital was 39% and net debt / EBITDA was 1.4 times. That’s about average for the peer group.The firm currently holds about $2.6 billion of debt, and has roughly $2 billion in liquidity ($500 million cash and about $1.5 billion undrawn bank credit). The term structure of the firm’s debt is reasonably well spread out, and only about 20% of the outstanding notes come due before 2024 (the firm has maturities totaling $500 million in 2022). At strip prices, the firm should have no issues covering the 2022 notes with cash, but if the operating environment deteriorates, management could always refinance a portion of this obligation or lean on the revolver.

Bulls Say

  • The joint venture with Petrobras is accretive to Murphy’s production and generates cash flows that can be redeployed in the Eagle Ford and offshore. 
  • The Karnes County portion of Murphy’s Eagle Ford acreage offers economics that are as good as or better than any other U.S. shale. 
  • Murphy’s diversified portfolio gives it access to oil and natural gas markets in several regions, insulating it to a degree from commodity price fluctuations or regulatory risks.

Company Profile

Murphy Oil is an independent exploration and production company developing unconventional resources in the United States and Canada. At the end of 2020, the company reported net proven reserves of 715 million barrels of oil equivalent. Consolidated production averaged 174.5 thousand barrels of oil equivalent per day in 2020, at a ratio of 66% oil and natural gas liquids and 34% natural gas.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Long-Term Competition a Greater Concern for Five Below Than Near-term Supply Chain, Labor Costs

Business Strategy and Outlook

Five Below’s management team has generated consistent returns by leveraging a differentiated concept and prudent expansion strategy. The firm should be able to expand profitably, as its nimble supply and distribution network are well-suited to meeting the ever-changing demands of its customers (preteens, teenagers, and their money-wielding parents). Five Below offers a variety of items in a tailored store environment while giving parents a measure of cost-certainty, a concept that should remain attractive to shoppers under a range of economic scenarios. 

Still, online retailers’ cost leverage is rising, and as it is estimated that many of Five Below’s target households have access to an Amazon Prime membership, the digitization threat looms. Competitive pressure also comes from physical rivals, including mass merchants dedicating aisles to items priced at a given dollar amount or less. 

Financial Strength

Debt-free with ample cash generation, Five Below’s financial health is strong. Shifting its assortment to include more cleaning and essential products kept the stores open even as infection rates soared in late-2020. Store growth should remain a capital priority (albeit with a continued reliance on leased locations) during our 10-year explicit forecast, with our estimates suggesting Five Below will exceed its 2,500-unit nationwide target toward the end of that time frame. Five Below’s cash generation should lead to share repurchases, escalating as its distribution center build-out is completed. It is estimated that the firm eventually uses roughly 65% of its annual cash flow from operations to buy back equity. Alternatively, it could pursue acquisitions of regional chains to accelerate its growth, though we do not incorporate such purchases into our forecasts because of their uncertain timing and nature.

Bulls Say’s 

  • Five Below’s differentiated concept gives its core customers access to a wide range of items while providing parents cost certainty, a combination enabled by its efficiency and flexible merchandising. 
  • One of the few sizable retailers we cover with significant room for expansion, Five Below should build cost leverage as it grows, helping to protect margins from competitive erosion. 
  • Strategically entering new markets with several stores opened concurrently, Five Below has rapidly gained an ability to spread distribution, supply chain, and advertising costs over a large local sales base.

Company Profile 

Five Below is a value-oriented retailer that operated 1,020 stores in the United States as of the end of fiscal 2020. Catering to teen and preteen consumers, stores feature a wide variety of merchandise, the vast majority of which is priced below $6. The assortment focuses on discretionary items in several categories, particularly leisure (such as sporting goods, toys, and electronics; 47% of fiscal 2020 sales), fashion and home (for example, beauty products and accessories, home goods, and storage solutions; 36% of fiscal 2020 sales), and party and snack (including seasonal goods, candy, and beverages; 17% of fiscal 2020 sales). The chain had stores in 38 states as of the end of fiscal 2020.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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ETFs ETFs

BetaShares Australian Sustainability Leaders ETF: Australian equities exposure with a tangible approach to ESG

ETF - Exchange traded fund financial and trading tool. Business and investment concept.

Approach

FAIR tracks the Nasdaq Future Australian Sustainable Leaders Index, a benchmark Nasdaq co-developed with BetaShares in 2017. As per the guidelines laid out by the Responsible Investment Committee, Sustainability Leaders are defined as companies generating more than 20% revenue from select sustainable business or having a certain grade (B or better) from sanctioned ethical consumer reports or being a certified B corporation. There is a maximum 10 stocks per sector and a limit of 4% exposure at an individual stock level.  

Portfolio

As at 30 November 2021, FAIR has a large-cap-dominated portfolio comprising 86 stocks. Stocks must have a market cap of more than USD 100 million and three-month trading volume of over USD 750,000. The index differs largely from the category index S&P/ASX 200, as there is a significant overweight in healthcare, real estate, technology, and communication services. On the other hand, the portfolio is underweight in financial services and materials with nil exposure to energy stocks.

People

The three-person responsible investment committee may remove index inclusions at any time based solely on qualitative considerations of whether a company still meets ESG considerations. The committee comprises Betashares co-founder David Nathanson and Adam Verwey, a managing director of large investor Future Super.

Performance

In early 2020, the fund dropped significantly owing to the frantic sell-off triggered by the global coronavirus pandemic. Despite this, the fund managed to close on a positive return of 2.23% for the year 2020. The uptrend continued into 2021, and it ended the calendar year with 17.99% returns, closely matching the category.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Woodside’s Fourth-Quarter Revenue Swells on High LNG Prices

Business Strategy and Outlook:

The BHP Petroleum merger will result in a highly strategic lock-up of gas resources and infrastructure around the North West Shelf, with flexibility to mix and match gas with infrastructure to maximise returns. This includes construction completion of the Pluto to Karratha Gas Plant interconnector pipeline with commissioning underway. Woodside completed the sale of a 49% non-operating participation interest in Pluto Train 2 just after quarter’s close. This was as expected and the first LNG cargo from Pluto Train 2 remains targeted for 2026. 

Final investment decisions have already been taken on the Scarborough and Pluto Train 2 developments, including new domestic gas facilities and modifications to Pluto Train 1. The project signoff essentially unlocks 11.1 trillion cubic feet, or Tcf, (100% basis) of the world-class Scarborough gas resource. To put that into perspective, one Tcf of gas is equivalent to 20 million tonnes of LNG, and 11.1Tcf will underpin two standard 4.8Mtpa-5.0Mtpa LNG trains for over 20 years.

Financial Strength:

The fair value of Woodside is AUD 40 which equates to a 2030 EV/EBITDA of 7.6, excluding the USD 3.7 billion lump sum we credit for undeveloped prospects.

Woodside has a healthy balance sheet with which to fund development of Scarborough and Pluto T2. We estimate stand-alone net debt stands at just USD 2.6 billion, leverage (ND/(ND+E)) of just 17% and net debt/EBITDA just 0.6. And BHP Petroleum’s assets will be coming unencumbered, which will effectively halve these already favourably low debt metrics.

Company Profile:

Incorporated in 1954 and named after the small Victorian town of Woodside, Woodside’s early exploration focus moved from Victoria’s Gippsland Basin to Western Australia’s Carnarvon Basin. First LNG production from the North West Shelf came in 1984. BHP Billiton and Shell each had 40% shareholdings before BHP sold out in 1994 and Shell sold down to 34%. In 2010, Shell further decreased its shareholding to 24%. Woodside has the potential to become the most LNG-leveraged company globally.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

2022 Summer Will Be a Major Test for United’s International Travel Business

Business Strategy and Outlook:

United Airlines is the most internationally focused U.S.-based carrier by operating revenue, with almost 40% of 2019 revenue coming from international activities. Before the COVID-19 pandemic, much of the company’s story focused on realizing cost efficiencies to expand margins. It is anticipated that United’s international routes will not be as pressured, but that international flights will be difficult to fill until a COVID-19 vaccine is developed and distributed. A recovery in business travel is believed to be critical for United to maintain the attractive economics of the frequent flier program. Business travellers will often use miles from a cobranded credit card to upgrade flights when their company is unwilling to pay a premium price. Banks are willing to pay top dollar for these frequent flier miles, which provides a high-margin income stream to United.

The COVID-19 pandemic has presented airlines with the sharpest demand shock in history, and most of our projections are based on our assumptions around how illness and vaccinations affect society. A full recovery in capacity and an 80%-90% recovery in business travel is expected that subsequently grows at GDP levels over the medium term.

Financial Strength:

United has a roughly average debt burden relative to peer U.S. carriers, but an average airline balance sheet is not strong in absolute terms. United carries a large amount of debt, comparatively thin margins, and substantial revenue uncertainty. As the pandemic has wreaked havoc on air travel demand and airlines’ business models, liquidity has become more important than in recent years. The primary risks to airline investors are increased leverage and equity dilution as airlines look to bolster solvency while demand is in the doldrums.

United’s priority after the pandemic will be deleveraging the balance sheet, but it is expected that this will take several years due to the firm’s thin margins. United came into the pandemic with a reasonable amount of debt, with the gross debt/EBITDA ratio sitting at roughly 4.5 times in 2019. United, like all airlines, has materially increased its leverage since February 2020 and has issued debt and received support from the government to survive a previously unfathomable decline in air traffic. As of the fourth quarter of 2021, United has $33.4 billion of debt and $18.3 billion of cash on the balance sheet.

Bulls Say:

  • United has renewed its frequent flier partnership with Chase, potentially creating room for long-term margin expansion. 
  • An increasing focus on capacity restraint across the industry, combined with structurally lower fuel prices, should boost airlines’ financial performance over the medium term. 
  • Leisure travellers have more comfortable with flying during the COVID-19 pandemic.

Company Profile:

United Airlines is a major U.S. network carrier. United’s hubs include San Francisco, Chicago, Houston, Denver, Los Angeles, New York/Newark, and Washington, D.C. United operates a hub-and-spoke system that is more focused on international travel than legacy peers.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.