Category: Commodities

A commodity market is a physical or virtual marketplace for buying, selling, and trading raw or primary products. There are currently about 50 major commodity markets worldwide that facilitate trade in approximately 100 primary commodities. commodities can be invested in numerous ways. An investor can purchase stock in corporations whose business relies on commodities prices or purchase mutual funds, index funds, or exchange-traded funds (ETFs) that have a focus on commodities related companies.

Categories
Commodities Trading Ideas & Charts

Megaport Is Making Significant Strides Toward Profitability Without Sacrificing Sales Growth

Business Strategy & Outlook: 

Demand for software-defined networks, or SDNs, like Megaport offers should grow tremendously in coming years, as enterprises increasingly use cloud services, often with multiple cloud providers. Enterprises typically need to connect their private equipment to cloud partners, and data often needs to be transferred between cloud providers. Software-defined networks allow enterprises to quickly provision capacity through an online portal and flexibly adjust capacity to meet their current needs. Megaport’s growth has been driven both by adding new customers at high rate while also seeing customers use its services more. The firm has averaged more than 20% average annual customer growth the past three years while still seeing services per customer and revenue per service grow, despite the higher base. The trend is expected to continue as customers continue to increase their reliance on multiple cloud providers and become more aware of Megaport’s alternative to traditional connectivity options. Megaport enables firms to locate equipment in fewer data centers and connect remotely with an alternative to traditional telecom connections (which can be inflexible and expensive) and the public internet (which is less reliable and secure). 

Risk and Uncertainty: 

The biggest risk, is that numerous companies would eventually be able to provide similar services, leading to a lack of pricing power and inability to earn attractive returns. Currently, Megaport has a bigger footprint than its rivals. It has a global presence in more data centers than competitors, and it has a relationship with all the biggest cloud providers, which is thought to be key to attracting customers. Against that backdrop, Megaport has seen revenue grow rapidly and margins improve substantially over each of the five years since the company’s initial public offering. The firm’s current market valuation implies the trend will continue, but if competitors can close the gap and offer comparable connections to customers, Megaport might have to compete more on price. In addition to the threat from copycat firms, Megaport could be susceptible to traditional network providers that own infrastructure and have historically met enterprises’ network needs. With existing ownership of the same types of assets that Megaport must lease and existing relationships with many of the cloud providers, data centers, and enterprises that support Megaport’s business, they would be well positioned to enter the market if the opportunity is enticing. Megaport’s biggest ESG risk is that of a data or security breach, given the firm is entrusted with and handles such high volumes of sensitive data. The financial and reputational damage that could result from a severe security breach could be devastating.

Bulls Say:

  • The rise in data usage, the need to access data, and the use of cloud providers leaves many more firms needing network services. Megaport’s software-defined network is a better solution than the expensive and stodgy traditional networks. 
  • Partnerships with data center firms, telecom companies, and networking firms like Cisco and VMware support Megaport’s business and give it an advantage over other startup SDNs. 
  • Operating leverage is taking hold and puts Megaport on the cusp of becoming very profitable while it is maintaining high sales growth.

Company Description:

Megaport is a software-defined network service provider that allows enterprise customers to connect between data centers. At the end of fiscal-year 2021, Megaport was connected to 423 data centers in more than 130 cities throughout North America, Europe, Asia, and Australia. Most of the firm’s customer connections are to cloud service providers, like Amazon Web Services or Microsoft Azure, but Megaport also enables customers to connect between their own equipment in different locations and to internet exchanges. With a softwaredefined, rather than traditional, network, customers have flexibility to adjust connection needs almost instantaneously through a self-serve online portal without long-term commitments.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

John Brookes Outage Limits Fourth-Quarter Production for No-Moat Santos

Young female explaining new idea to her colleague in creative office.

Business Strategy & Outlook: 

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside Petroleum, ASX:WPL), with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Well-timed East Australian coal seam gas purchases and subsequent partial selldowns bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia’s largest coal seam gas producers and continues to prove additional reserves. It is the country’s largest domestic gas supplier. Coal seam gas purchases increased reserves, and partial sell-downs generated cash profits, putting Santos on solid ground to improve performance. Group proven and probable, or 2P, reserves doubled to 1,400 mmboe, primarily East Australian coal seam gas. Coal seam gas has grown to represent more than 40% of group 2P reserves, despite partial equity sell-downs. A degree of confidence can be drawn from project partners. U.S. energy supermajor ExxonMobil, the world’s largest publicly traded oil and gas company, is 42% owner and the operator of the PNG LNG project. The Gladstone LNG project was built and is operated by GLNG Operations, a joint venture of owners Santos (30%), Petronas (27.5%), Total (27.5%), and Kogas (15%). Petronas is Malaysia’s national oil and gas company and the world’s second-largest LNG exporter. French energy major Total is the world’s fifth-largest publicly traded oil and gas company, and Korea’s Kogas is the world’s largest buyer of LNG. Santos is in good company. Overall, a happier future for Santos is observed  now that excess debt levels are addressed, aided via improved margins and earnings driven by Gladstone and PNG LNG. The company increasingly enjoys export pricing on its gas. In addition to Santos’ Gladstone LNG, several other third-party east-coast LNG projects conspire to drive domestic gas prices higher. As the largest domestic gas supplier, Santos can expect significant bang for its buck, with limited additional capital or operating cost required to capture enhanced prices. The group production profile is simplified with increased certainty in project life. 

Risk and Uncertainty: 

Material ESG exposures create additional risk for E&P investors. In this industry, the most significant exposures are greenhouse gas emissions (both from extraction operations and downstream consumption), and other emissions, effluents, and waste (primarily oil spills). In addition to the reputational threat, these issues could force climate-conscious consumers away from fossil fuels in greater numbers, resulting in long-term demand erosion. Climate concerns could also trigger regulatory interventions, such as fracking bans, drilling permit suspensions, and perhaps even direct taxes on carbon emissions, already in place in some jurisdictions. These ESG risks are based largely on industry risks that are already incorporated into base-case analysis. And natural gas is the predominant value driver for Australian E&Ps like Santos. Natural gas is less carbon-intensive than coal or oil, and stands to benefit from efforts to minimize emissions, at least in the medium term. This is because renewables like wind and solar, while growing rapidly, can’t hope to entirely meet global energy requirements for decades, if ever. Santos’ balance sheet is sound. Moderate leverage (ND/E) of 21% and maintenance of strong net operating cash flow is reassuring. Santos’ debt covenants have adequate headroom and are not under threat even at low oil prices. The weighted average term to maturity is around 5.5 years, with less than 23% due by 2023. Net debt/EBITDA at end June 2022 was 0.6. It is not expected the metric to deteriorate much, even including planned development project expenditure. On the investment side, Santos’ performance is rated as fair. The company let itself down on the capital-allocation side due to cost overruns associated with building the USD 18.5 billion Gladstone LNG project. Returns consequently worsened to low-single digits over the past eight years, well below its cost of capital. Some of this is due to Gladstone being built with expansion in mind, and any future growth will be somewhat more capital-efficient than for the current two LNG trains. Santos could probably expand to three trains, subject to securing natural gas feed and LNG offtake, with cost savings coming on the capital side from better utilization of existing tankage, wharfage, and surrounding infrastructure

Bulls Say:

  • Santos is a beneficiary of continued global economic growth and increased demand for energy. Aside from coal, gas has been the fastest-growing primary energy segment globally. The traded gas segment is still expanding faster.
  • Santos is in a strong position, with 1.7 billion barrels of oil equivalent proven and probable reserves, predominantly gas, conveniently located on the doorstep of key Asian markets. 
  • Gas has about half the carbon intensity of coal, and stands to gain market share in the generation segment and elsewhere as carbon taxes are rolled out. Bears Say Mark Taylor, Senior Equity Analyst, 19 Jan 2023 
  • Santos committed to substantial LNG capital expenditures, which will see the balance sheet geared in the medium term. 
  • Much of the company’s perceived value is in coal seam gas to LNG projects that are yet to reach full capacity. 
  • Landholder opposition to coal seam gas development could hinder production growth.

Company Description:

Santos was founded in 1954. The company’s name is an acronym for South Australia Northern Territory Oil Search. The first Cooper Basin gas discovery came in 1963, with initial supplies in 1969. Santos became a major enterprise, though over-reliance on the Cooper Basin, along with the Moomba field’s inexorable decline, saw it struggle to maintain relevance in the first decade of the 21st century. However, the stage was set for a renaissance via conversion of coal seam gas into LNG in Queensland and conventional gas to LNG in PNG

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

Hess’ track record for efficiently allocating capital and generating value has been steadily improving for several years

Business Strategy & Outlook

Hess’ track record for efficiently allocating capital and generating value has been steadily improving for several years. This had been a source of frustration for shareholders in the past. Before 2012, the firm was struggling with persistent budget overruns and costly exploration failures, and the eventual collapse in its share price led to a heated proxy fight with an activist investor (which it lost). Subsequently, the board was reshuffled and management began streamlining the company, selling midstream and downstream assets and rationalizing its upstream portfolio. The current portfolio is substantially more competitive, but the development cost requirements are heavily front-loading. Currently, Hess is one of the largest producers in the Bakken Shale. This includes a large portion in the highly productive area near the Mountrail-McKenzie county line in North Dakota.

Management believes this acreage still contains at least 2,000 incremental drilling opportunities and hopes to develop this asset with a four-rig program in the long run (giving it well over 10 years of potential drilling inventory). Four rigs would optimize the usage of its infrastructure and keep production flat at around 200 mboe/d. Hess also holds a 30% stake in the Exxon-operated Stabroek block in Guyana, which will be the firm’s core growth engine going forward and has been a game changer for the company, due to its large scale and exceptional economics. Current guidance indicates six development phases will come online by 2027, culminating in gross volumes of over 1 mmb/d. But with over 20 confirmed discoveries already, this feels very conservative. Four developments have been sanctioned to date, with a fifth expected shortly, and two of them are already producing at full capacity. Management has hinted at 10 phases in the ultimate development. Total gross recoverable resources in the region are a moving target, but the latest estimate is over 11 billion barrels of oil equivalent.

Financial Strengths

Hess’ Guyana assets are capital-intensive (it must pay 30% of the development costs, which run to $1 billion-$2 billion for each sanctioned phase of development; a total of six are currently planned and more than that are likely eventually). And these commitments are heavily front-loading. As a result, capital spending has significantly exceeded cash flows in the last few years. However, the firm has made the best of very strong commodity prices recently, while enjoying peer-leading revenue growth due to its ongoing expansion in Guyana. As a result, the firm’s leverage ratios are already below historical norms, and are likely to decline further given that all of Hess’ assets are now generating net cash flows. At the end of the last reporting period, debt/capital was 48%, while net debt/EBITDA was 0.9 times. In addition, the firm’s liquidity backstop is very strong. The firm has a $2.4 billion cash war chest, and there is more than $3 billion available on its credit facility as well. In addition, the term structure of the firm’s debt is fairly well spread out, and there are no maturities before 2024. The firm does have a covenant requiring it to keep debt/capital above 0.65, though it isn’t expected to get close to that level even in a downturn scenario, because in the associated debt agreement capital is defined to exclude impairments.

Bulls Say

  • The Stabroek block (Guyana), in which Hess has a 30% stake, is a huge resource, with at least 10 billion barrels of oil equivalent recoverable. 
  • The first phase of the Liza development is profitable at around $30/bbl (Brent), making it competitive with the best shale. Management expects similar economics from subsequent projects in Guyana. 
  • Hess’ activity in Guyana provides geographic diversification and insulates it from domestic issues (like anti fracking regulations).

Company Description

Hess is an independent oil and gas producer with key assets in the Bakken Shale, Guyana, the Gulf of Mexico, and Southeast Asia. At the end of 2021, the company reported net proved reserves of 1.3 billion barrels of oil equivalent. Net production averaged 315 thousand barrels of oil equivalent per day in 2021, at a ratio of 69% oil and natural gas liquids and 31% natural gas.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

Compass makes most of its SOP directly from salt brines at a lower cost

Business Strategy & Outlook

Compass Minerals holds an enviable portfolio of cost-advantaged assets. Its Goderich rock salt mine in Ontario benefits from unique geology, and with access to a deep-water port, it can deliver deicing salt to customers at a lower cost than competitors. Additionally, the company controls one of only three naturally occurring brine sources that produces the specialty fertilizer sulfate of potash, or SOP. These operations at the Great Salt Lake in Utah can produce SOP at a lower cost than marginal cost producers who convert standard potash. The majority of Compass’ salt sales are to highway deicing customers. Sales volumes are determined during the winter months and are strongly linked to the number of snow days per season. As such, weather has a big impact on Compass’ year-to-year results. The deicing salt business also exposes Compass to climate change risk. One effect of climate change is increased snowfall volatility from year to year, which affects Compass’ annual results. However, winter weather has shown mean reversion tendencies over longer periods of time.

Pricing for deicing salt is also linked to winter weather. However, prices have historically been relatively stable compared with other commodities. Deicing salt has a low value/weight ratio, creating regional markets, and transportation costs make up a significant portion of total costs to the customer. With mines close to waterways like the Great Lakes and the Mississippi River, Compass has a transportation cost advantage over its competitors. Compass also produces SOP, which is used for high-value crops that are sensitive to the chloride in standard potash (muriate of potash). While marginal producers use MOP and sulfuric acid to produce SOP, Compass makes most of its SOP directly from salt brines at a lower cost. Compass also plans to produce magnesium chloride, used for fire retardants to combat wildfires, and lithium as byproducts from the brine after extracting SOP. Compass will enter the fire-retardant market in the Western U.S. through its 45% equity investment in Fortress. Lithium demand will grow over 6 times during this decade due to higher electric vehicle adoption.

Financial Strengths

As of Sept. 30, Compass Minerals had roughly $900 million in net debt. A net debt/adjusted EBITDA ratio of 4.4, well above management’s long-term target of 2.5 times. The company’s leverage has been elevated since adding about $600 million in debt in 2016 to help fund the Produquimica acquisition that has since been divested. Leverage ratios have remained high even after Compass completed the divestiture of two noncore assets in order to pay down debt due to cost inflation weighing on salt profits. the company’s leverage ratio will decline in fiscal 2023 as salt prices increase and costs inflation stabilizes, restoring EBITDA and increasing free cash flow. This should allow the company pay down debt over the next couple of years. Additionally, management cut its annual dividend to $0.60 per share from $2.88, which should save the company an estimated $80 million a year. Much of the future savings will go toward paying down debt over the next several years. Finally, Compass raised $252 million in equity from Koch Industries. Of the proceeds, $200 million will be used to fund the majority of the initial phase of the company’s lithium project, while the remainder will be used to pay down debt. As Compass generates higher EBITDA and cash flows and pays down debt, Compass’ net leverage ratio will fall closer to management’s long-term target of 2.5 times over the next several years. While headline credit metrics will fluctuate in the coming years according to variations in winter weather and fertilizer prices, leverage is to remain, on average, at manageable but elevated levels.

Bulls Say

  • Compass holds a portfolio of cost-advantaged assets, including the Ontario rock salt mine and brine operations at the Great Salt Lake in Utah.
  • Highway deicing salt prices are relatively stable, and Compass’ average selling prices in this area have increased over time.
  • Compass’ plans to enter the lithium and fire-retardant markets will create long-term value as strong demand growth in these industries should lead to incremental profit growth.

Company Description

Compass Minerals currently produces two primary products: salt and specialty potash fertilizer. The company’s main assets include rock salt mines in Ontario, Louisiana, and the United Kingdom and a salt brine operation at the Great Salt Lake in Utah. Compass’ salt products are used for deicing and also by industrial and consumer end markets. The firm also sells sulfate of potash, which is used by growers of high-value crops that are sensitive to standard potash. Compass is expanding its portfolio and plans to enter the fire-retardant market, with its magnesium chloride-based product used to combat forest fires. The company also plans to enter the lithium market. Compass will produce magnesium chloride and lithium as byproducts from its sulfate of potash operation in Utah.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

AGL’s FY22 underlying NPAT declined -58% YoY primarily due to coal plant outages

Investment Thesis:

  • Energy margins bottom out and could potentially start to improve (higher customer and volume numbers).
  • Strong cash flow business which provided flexibility to deploy cash in growth opportunities and capital management. 
  • On-going focus on costs and digitalization should support margins. 
  • Potential capital management initiatives (e.g., buyback).
  • Demerger into AGL Australia and Accel may unlock shareholder value.
  • Potential favorable changes to the regulatory environment.
  • Potential M&A – AGL has already received a takeover bid at $7.50 per share which was rejected by the AGL Board. 

Key Risks:

  • Competitive pressures leading to margin erosion. 
  • Cost pressure and fuel supply issues lead to margin erosion. 
  • Increase in supply leading to depressed prices.
  • Regulatory risk (policy uncertainty), such recent regulation in electricity markets [ Victorian Default Offer (VDO) and Default Market Offer (DMO)].
  • Unscheduled shutdowns impacting earnings. 

Key Highlights:

  • Underlying EBITDA declined -27% YoY to $1.22bn and underlying NPAT declined -58% YoY to $225m, reflecting the expected step down in Trading and Origination Electricity earnings due to lower realized contracted and wholesale customer prices, increased costs of capacity to cover periods of peak electricity demand, absence of the Loy Yang Unit 2 insurance proceeds recognized in FY21, increased residential solar volumes and margin compression via customer switching.
  • Net cash from operations declined -2% YoY to $1.227bn with lower underlying EBITDA partially offset by a strong working capital outcome which saw cash conversion improve +27% YoY to 123%, however, management warned of a hit to cash conversion rate in FY23.
  • Capital management. Strong balance sheet with net debt declining -11.2% to $2,662m, reducing gearing by -590bps to 29.2%, giving company significant headroom to debt covenant of gearing <50%.
  • Board declared a final unfranked dividend of 10cps, equating to total FY22 dividends of 26cps, down -65% YoY and equating to a payout ratio of 75% vs 87% pcp.
  • Opex savings target exceeded. The Company saw opex (excluding D&A) decline -7.6% YoY as management delivered FY22 recurring savings of ~$158m (vs target of $150m), including initial benefits from structural review and reduction in corporate costs. However, management warned that it expects a small step up in operating costs for FY23, albeit being lower than CPI after adjusting for the non-recurring benefits in FY22.
  • Outlook. Management announced it will provide FY23 guidance in late-September in conjunction with the initial outcomes of the review of strategic direction, however, expects FY23 earnings to remain resilient amidst the current challenging in the energy industry and market conditions, underscored by the strength of AGL’s large and diversified customer base, low-cost baseload generation position supported by strong fuel supply arrangements, robust risk management, with prudent margin management ensuring retail strength and stability in a highly volatile market, with the Company largely hedged for FY23 and well positioned from FY24 to benefit from sustained higher wholesale electricity pricing (Refer to Figure 4 for forward pricing curve) as historical hedge positions progressively roll-off. 

Company Description:

AGL Energy Limited (AGL) is one of Australia’s leading integrated energy companies and the largest ASX listed owner, operator and developer of renewable energy generation in Australia. The company sells and distributes gas and electricity. Further, it also retails and wholesales energy and fuel products to customers throughout Australia. The business operates four main segments: Energy Markets, Group Operations, New Energy and Investments.

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities

(AKE) reported positive FY22 results despite the ongoing impacts of Covid-19

Investment Thesis:

  • Strong and solid fundamentals with robust lithium demand and prices to persist. As expected, lithium demand growth to support pricing and be driven by: (1) long lead times for lithium mines and hence potential short-term supply constraints; and (2) growth in new electric vehicle and hybrid vehicle sales especially in China. 
  • High quality assets operated by a solid management team with appropriate expertise. 
  • Expansion of Olaroz is expected to significantly increase capacity of lithium carbonate, resulting in strong cash flow generation. 
  • Improving production and operational efficiency at Mt Cattlin in the short term should result in significant cash flow generation. 
  • Development of Sal de Vida, as the asset could add more than $3.40 per share to AKE’s value.
  • Development of the James Bay lithium pegmatite project in the long term.
  • Solid balance sheet. 

Key Risks:

  • Commodity price volatility. There is no formal market for lithium with the pricing of lithium products determined by private negotiation between producer and end user. 
  • AUD/USD movement. Prices for lithium products are denominated in US dollars, so earnings translation into Australian dollars can be affected by wide fluctuations US/A$ cross rate. 
  • Adverse weather impacts. The Company’s projects are located in areas that can be subjected to severe weather events such as snow falls, which may adversely impact the company’s operations and earnings. Lack of exploration success. Despite AKE already successfully identifying resources and reserves, geological complexities may arise that may inhibit the future inclusion of further resources and reserves.
  • Metal processing issues. Any issues with the metallurgical processing equipment may impact the company’s earnings.
  • Stability of government policy. Whilst the political climate where AKE assets are based are currently stable, to remain cognizant of any changes especially nationalization of assets and increased taxes. Moreover, the VAT refund received by AKE.
  • Execution risk/processing issues. Any issues with the pond’s system, processing or execution risks may impact the company’s earnings. 

Key Highlights:

  • Relative to the pcp and in US$: Despite the ongoing impacts of Covid-19, revenue of $769.8m was driven by record annual production volumes and operating profits at Mt Cattlin and Olaroz, improved and higher prices, strong cost control, and the merger with Galaxy Resources. Olaroz contributed $292.8m, whilst Mt Cattlin (in 10-months), added $451.9m in revenue.
  • Mt Cattlin saw record revenue from sales of 200,715 dry metric tons (dmt) of spodumene concentrate at an average price of $2,221/tone CIF2 for the period from 25 August 2021. Gross cash margin of 80%.
  • AKE achieved record revenue from Olaroz, up +341% to $293m on sales of 12,512 tons of lithium carbonate with average pricing increasing by 370% to $23,398/t FOB4. The gross profit margin was 82%.
  • EBITDAIX of $513.1m and consolidated NPAT of $337.2m (versus net loss of $89.5m in FY21). NPAT includes one off charges of $12.8m for Galaxy acquisition costs, an inventory uplift on purchase price allocation related to the merger of $12.4m, $13.4m related to amortization of customer contracts due to purchase price allocation, gains of $32.0m from financial instruments, and foreign exchange losses of $9.6m. Net finance costs were $13.8m.
  • Net assets increased to $3,081m as at FY22- end (vs $725m at FY21-end) including cash balances of $664m (vs $258m in FY21). The increase in net assets and cash of $2,356m and $406m was due to the Galaxy merger transaction.
  • Management highlighted strong cash generation and existing cash balance is expected to fully fund development projects. Total capex totalled $261.4m (vs $97.6m in FY21) and the Mizuho Stage 1 and Pre-export loan facilities were reduced by ~$33.7m.
  • Development Highlights. Olaroz Stage 2 reached over 91% completion and first production remains anticipated for late 2H CY22. Management stated, “successful completion of this project will deliver material new production from H2 FY23 onwards”.
  • Construction of the Naraha lithium hydroxide plant in Japan was completed, with first production expected in early 4Q CY22. Management expects that once product qualification is complete, this plant will provide AKE with exposure to the high value lithium hydroxide market. 
  • Construction at Sal de Vida began in January 2022, with first production expected by 2H CY23.
  • Feasibility Study and Maiden Ore Reserve for James Bay was released in December 2021. 

Company Description:

Allkem Ltd (AKE), was formed following the merger of ASX-listed lithium AKE operates as a specialty lithium chemicals company with lithium brine and borax operations in Argentina, a hard-rock lithium operation in Australia and a lithium hydroxide conversion facility in Japan. 

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

Dominion has accelerated its capital expenditure growth program

investment stockbroker risk analysis using multiple devices. Financial analysis using phone app and laptop. Market trading profit.

Business Strategy & Outlook

After exiting its oil and gas exploration and production business, selling and retiring its no-moat merchant generation, and selling its Questar assets, Dominion’s investors are left with a predominantly regulated utility, which has been in the best interests of investors. Like its peers, Dominion has accelerated its capital expenditure growth program. Over the next five years, management plans to invest $37 billion of growth capital, with nearly 90% focused on decarbonization. Favorable regulatory mechanisms mean that over 75% of Dominion’s investments are eligible for timely cost recovery from customers, reducing regulatory lag and improving free cash flow. In Virginia, the company’s most important jurisdiction, over 90% of its planned investments are eligible for rate riders at higher allowed returns on equity. 

Over the next 15 years, Dominion forecasts $73 billion of capital investment opportunities, including up to $21 billion for offshore wind farms in the U.S. Unlike other offshore wind projects, Dominion’s will be rate-regulated, mitigating investor risk for a project with greater execution risk than onshore renewable energy development. Investors must carefully watch for cost increases at its offshore project. While costs will rise for the project, there remains significant headroom for the $125 per megawatt hour allowed regulated cost cap. Costs over the cap would require regulatory approval. A recent settlement with key counterparties should help resolve a proposed capacity factor guarantee, if approved. Roughly 90% of earnings will be from regulated electric and gas utilities with constructive state regulation in Virginia, Utah, Ohio, and the Carolinas. The balance of earnings will come from contracted assets with long-term agreements with mostly investment-grade counterparties that provide steady, regulated-like returns. In November, management unexpectedly announced a strategic review of the company’s current business mix and capital allocation. Management did not indicate a potential outcome or direction of the review, creating what is unnecessary investor uncertainty.

Financial Strengths

Even with its large capital expenditure program, Dominion maintains a strong balance sheet and an investment grade credit rating. Dominion is to maintain a capital structure in line with regulatory requirements at its utility subsidiaries. Total debt/capital was 58% at year-end 2021, and it expects to remain below 60%. With $37 billion in expected growth capital expenditures over the next five years, Dominion will be a frequent debt issuer. Exclude $3 billion of growth capital from the estimate as management will look to mitigate customer bill impacts while potentially lengthening the trajectory of its capital investment program. Dominion’s debt maturity schedule is manageable, and Dominion will be able to refinance its debt as it comes due. Dominion surprised investors with a 33% dividend cut in late 2020 after the company abandoned the Atlantic Coast Pipeline and decided to exit its gas pipeline business. Its current 65% payout ratio is in line with peers, and 6% dividend is to grow. 

Bulls Say

  • Dominion’s dividend yield and earnings growth could deliver high-single-digit total annual returns for conservative investors for the foreseeable future. 
  • Growth capital investments focused on renewable energy and carbon reduction are estimated to be $73 billion over the next 15 years and should provide solid earnings and dividend growth for the foreseeable future. 
  • Public support for renewable energy and Virginia legislation has resulted in Dominion planning to build the largest wind farm in the U.S.

Company Description

Based in Richmond, Virginia, Dominion Energy is an integrated energy company with over 30 gigawatts of electric generation capacity and more than 90,000 miles of electric transmission and distribution lines. Dominion owns a liquefied natural gas export facility in Maryland and is constructing a 5.2 GW wind farm off the Virginia Beach coast.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

ConocoPhillips stands to benefit from Concho’s expertise in the Permian while deriving $1 billion in synergies

Business Strategy & Outlook

Differentiating itself from peers big and small, ConocoPhillips has laid out a 10-year plan for restrained investment, steady growth, improving returns, and, importantly, returning cash to shareholders. Its strategy makes Conoco a compelling option in the energy sector, given its commitment to capital restraint and clear policy on return of cash to shareholders. Its low-cost portfolio gives it high return investment options to grow in a rising price environment while its strong financial position keeps the dividend safe in a downcycle. Central to its plan is a commitment to maintain capital spending at $8 billion on average annually while returning 30% of operating cash flow to shareholders per year through a three-tier capital return program consisting of buybacks, an ordinary annual dividend, and a variable component. Through high-grading and cost improvements, the company has reduced the oil price necessary to earn a 10% return on produced resources in its plan to $28/ barrel.

Its growth plan rests largely on its unconventional assets, specifically its Permian position, which became the company’s largest position with the acquisition of Concho Resources. Permian resources constitute over half of the planned produced resources in the 10-year plan. ConocoPhillips stands to benefit from Concho’s expertise in the Permian while deriving $1 billion in synergies. Conoco further tilted its portfolio to U.S. unconventional by acquiring Shell’s Permian shale assets in a highly accretive deal. While the company holds acreage in the Bakken and Eagle Ford, production growth in both these regions will likely be limited. Outside of the U.S. unconventional portfolio, volumes will remain flat with growth in Alaska and Canada offsetting declines internationally. Growth in Canada will come from the Montney, where Conoco plans to leverage its unconventional experience. New volumes in Alaska will come from the Willow project, dependent on a clarified regulatory environment.

Financial Strengths

During the last year, debt has fallen from the peak levels realized after the oil price decline in 2020 and the Concho acquisition. Total debt amounted to $17.0 billion in the third quarter of 2022, implying a net debt/capital ratio of 26%. Management will likely continue to reduce gross debt during the next five years and may refinance high-coupon debt as part of debt restructuring, depending on cost, as it aims to maintain an A rated balance sheet. The debt/EBITDA is to remain at or below 1.0 throughout the remainder of the forecast. ConocoPhillips maintains its plans to differentiate itself by focusing on shareholder returns. While it still aims to return 30% of operating cash flow to shareholders, management instated a three-tier capital return program to preserve flexibility in anticipation of oil price volatility. The first tier consists of an ordinary dividend that Conoco plans to increase annually in line with the broader market. The second tier is share repurchases, while the third tier is a variable dividend that is staggered, resulting in eight cash distributions per year when declared. In, 2022, Conoco expects to return $15 billion to shareholders. Capital spending in 2022 is expected to be $8.1 billion. Guidance is for capital spending to remain at about $8 billion through 2024 and over $8 billion by 2031.

Bulls Say

  • Large positions in the Permian, Eagle Ford, and Bakken offer low-cost liquids growth with wider margins, lower risk, and higher returns than international operations. 
  • ConocoPhillips has reduced its capital requirements so it can maintain its production and pay its dividend at less than $40/barrel oil. U
  •  Over the long term, management does not plan to increase activity with oil prices, instead directing excess cash flow toward repurchases with a payout target of 30% of cash flow.

Company Description

ConocoPhillips is a U.S.-based independent exploration and production firm. In 2021, it produced 1.0 million barrels per day of oil and natural gas liquids and 3.2 billion cubic feet per day of natural gas, primarily from Alaska and the Lower 48 in the United States and Norway in Europe and several countries in Asia-Pacific and the Middle East. Proven reserves at year-end 2021 were 6.1 billion barrels of oil equivalent.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

ConocoPhillips stands to benefit from Concho’s expertise in the Permian while deriving $1 billion in synergies

Business Strategy & Outlook

Differentiating itself from peers big and small, ConocoPhillips has laid out a 10-year plan for restrained investment, steady growth, improving returns, and, importantly, returning cash to shareholders. Its strategy makes Conoco a compelling option in the energy sector, given its commitment to capital restraint and clear policy on return of cash to shareholders. Its low-cost portfolio gives it high return investment options to grow in a rising price environment while its strong financial position keeps the dividend safe in a downcycle. Central to its plan is a commitment to maintain capital spending at $8 billion on average annually while returning 30% of operating cash flow to shareholders per year through a three-tier capital return program consisting of buybacks, an ordinary annual dividend, and a variable component. Through high-grading and cost improvements, the company has reduced the oil price necessary to earn a 10% return on produced resources in its plan to $28/ barrel.

Its growth plan rests largely on its unconventional assets, specifically its Permian position, which became the company’s largest position with the acquisition of Concho Resources. Permian resources constitute over half of the planned produced resources in the 10-year plan. ConocoPhillips stands to benefit from Concho’s expertise in the Permian while deriving $1 billion in synergies. Conoco further tilted its portfolio to U.S. unconventional by acquiring Shell’s Permian shale assets in a highly accretive deal. While the company holds acreage in the Bakken and Eagle Ford, production growth in both these regions will likely be limited. Outside of the U.S. unconventional portfolio, volumes will remain flat with growth in Alaska and Canada offsetting declines internationally. Growth in Canada will come from the Montney, where Conoco plans to leverage its unconventional experience. New volumes in Alaska will come from the Willow project, dependent on a clarified regulatory environment.

Financial Strengths

During the last year, debt has fallen from the peak levels realized after the oil price decline in 2020 and the Concho acquisition. Total debt amounted to $17.0 billion in the third quarter of 2022, implying a net debt/capital ratio of 26%. Management will likely continue to reduce gross debt during the next five years and may refinance high-coupon debt as part of debt restructuring, depending on cost, as it aims to maintain an A rated balance sheet. The debt/EBITDA is to remain at or below 1.0 throughout the remainder of the forecast. ConocoPhillips maintains its plans to differentiate itself by focusing on shareholder returns. While it still aims to return 30% of operating cash flow to shareholders, management instated a three-tier capital return program to preserve flexibility in anticipation of oil price volatility. The first tier consists of an ordinary dividend that Conoco plans to increase annually in line with the broader market. The second tier is share repurchases, while the third tier is a variable dividend that is staggered, resulting in eight cash distributions per year when declared. In, 2022, Conoco expects to return $15 billion to shareholders. Capital spending in 2022 is expected to be $8.1 billion. Guidance is for capital spending to remain at about $8 billion through 2024 and over $8 billion by 2031.

Bulls Say

  • Large positions in the Permian, Eagle Ford, and Bakken offer low-cost liquids growth with wider margins, lower risk, and higher returns than international operations. 
  • ConocoPhillips has reduced its capital requirements so it can maintain its production and pay its dividend at less than $40/barrel oil. U
  •  Over the long term, management does not plan to increase activity with oil prices, instead directing excess cash flow toward repurchases with a payout target of 30% of cash flow.

Company Description

ConocoPhillips is a U.S.-based independent exploration and production firm. In 2021, it produced 1.0 million barrels per day of oil and natural gas liquids and 3.2 billion cubic feet per day of natural gas, primarily from Alaska and the Lower 48 in the United States and Norway in Europe and several countries in Asia-Pacific and the Middle East. Proven reserves at year-end 2021 were 6.1 billion barrels of oil equivalent.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

Northern Star Resources reported solid 1H22 results – the first reported results since NST’s merger with Saracen

Investment Thesis

  • On track to achieve FY22 production and operational guidance. 
  • Commodities price (Gold) surprises on the upside especially due to geopolitical tensions.
  • Leveraged to changes in the USD. 
  • Solid assets with reserve/resource. 
  • New acquisitions provide upside (resource and operational improvement). 
  • Strong management team with significant mining expertise. 
  • Strong balance sheet. 
  • Company has a good track record of shareholder return.

Key Risks

  • Further deterioration in global macroeconomic conditions. 
  • Deterioration in global gold supply & demand equation. 
  • Deterioration in gold prices. 
  • Production issues, delay or unscheduled mine shutdown. 
  • Adverse movements in AUD/USD.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Revenue of A$1,807m was up +63%, mainly driven by higher gold volumes, with gold sales 289,786 ounces higher. Reported NPAT of A$261m, was up +43% (or Underlying NPAT of A$108m, excluding significant items of A$153m) was driven by higher production. 
  • Underlying EBITDA of A$699m, was up +47%, on a margin of 39%. Cost of sales were higher than the pcp due to increased activity with the inclusion of the Saracen Minerals Holdings’ merger assets in the current half (107% increase period on period), higher average cash costs per ounce (H1 2022: A$1,256/oz vs H1 2021: A$1,196/oz) and the increase in D&A unit costs (increase of A$291/sold oz), due to the required non-cash uplift to fair value of the merger assets, compared to the historic cash cost of those same assets. 
  • NST saw cash earnings of A$430m. 
  • NST retained a strong balance sheet with cash and bullion of A$588m; net cash of A$288m. 
  • The Board declared fully franked interim dividend of 10cps, up +5%. 
  • NST remains on track with its key growth projects progressing as expected to become a 2Mozpa producer by FY26, including KCGM open pit development (Kalgoorlie) and Thunderbox mill expansion (Yandal). 
  • In 1H22, NST made net repayment of A$361m of corporate bank debt, completed its acquisition of Newmont’s power business for A$130m and made a A$170m investment in a Convertible Debenture with Osisko Mining Inc. NST also sold Kundana Assets realising A$402m (and contributing a pre-tax gain of A$242m). 
  • Relative valuation. Relative to Australian peer group (NCM, RRL, SBM, EVN) average, NST is currently trading on a 2-yr forward EV / EBITDA multiple of 5.1x (vs peer avg 5.0x) and yield of 3.2% (vs peer avg 2.6%). On 2-yr forward PE-multiple, NST is currently trading on a multiple of 19.8x vs peer group average 14.8x.

Company Description

Northern Star Resources Limited (Northern Star) is a gold production and exploration company with a Mineral Resource base of 10.2 million ounces and Ore Reserves of 3.5 million ounces, located in highly prospective regions of Western Australia and the Northern Territory. NST is the third largest gold producer in Australia. The Company also recently acquired a gold mine in Alaska.

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate. Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.