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.

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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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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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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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Commodities Trading Ideas & Charts

Raising U.S. upstream oil and gas fair values would drive Pioneer’s growth

Business Strategy and Outlook:

Pioneer Natural Resources is one of the largest Permian Basin oil and gas producers overall, and is the largest pure play. It has about 800,000 net acres in the play, all of which is located on the Midland Basin side where it believes it can get the best returns. The firm acquired the bulk of its acreage well before the shale revolution began, with an average acquisition cost of around $500 per acre. That’s a fraction of what most of its peers shelled out during the land grab at the beginning of the Permian boom, giving the firm a unique advantage. And the vast majority of this acreage is located in the core of the play, where well performance is typically strongest. That gives Pioneer an extensive runway of low-cost drilling opportunities primarily targeting the Wolfcamp A, Wolfcamp B, and Spraberry reservoirs.

Pioneer has expanded fairly rapidly, with annual production growth averaging 10%-15% over the last eight years. Management still has grand plans for future growth, although it has long since abandoned its earlier goal of increasing production to a million barrels of oil equivalent per day by 2026. The current plan calls for up to 5% growth while reinvesting much less than 100% of its operating cash flows (a remarkable achievement for a company in the oft-demonized shale industry, which historically relied on capital markets to support its profligacy and is commonly expected to keep destroying value). The remaining surplus will be used to preserve Pioneer’s very impressive balance sheet, and to return cash to shareholders via a part-variable dividend.

Financial Strength:

The fair value of the Pioneer is USD 239.00. The primary valuation tool is net asset value forecast. This bottom-up model projects cash flows from future drilling on a single-well basis and aggregates across the company’s inventory, discounting at the corporate weighted average cost of capital.

Pioneer’s leverage ratios have already recovered after rising slightly in the wake of two substantial acquisitions (Parsley and DoublePoint). The subsequent divestiture of the Delaware Basin assets that were bundled with these acquisitions improved the firm’s balance sheet even further, with proceeds exceeding $3 billion. After the last reporting period, net debt/EBITDA was around 0.8 times and debt/capital is 22%. These metrics should decline further because the firm is generating surplus cash, even after its generous variable dividend payout.

Bulls Say:

  • Pioneer’s low-cost Permian Basin activities are likely to generate substantial free cash flows in the years to come, assuming midcycle prices ($55/bbl for WTI). 
  • The firm intends to target a 10% total return for shareholders via its base dividend, a variable dividend with a payout of up to 75% of free cash flows, and 5% annual production growth. 
  • Pioneer has a rock-solid balance sheet and is able to generate free cash flows even during periods of very weak commodity prices.

Company Profile:

Headquartered in Irving, Texas, Pioneer Natural Resources is an independent oil and gas exploration and production company focusing on the Permian Basin in Texas. At year-end 2020, Pioneer’s proven reserves were 1.3 billion barrels of oil equivalent with net production for the year of 367 mboe per day. Oil and natural gas liquids represented 81% of production.

(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

Iron Ore price rise more than offsets Rio Tinto’s modest production weakness

Business Strategy and Outlook:

Rio Tinto’s fourth-quarter production was overall mildly softer than expected. The company’s share of iron ore Pilbara shipments, the key earnings driver, finished the year at 268 million tons. Shipments were down on 2020’s 273 million tonnes with headwinds from weather, delayed expansions and traditional owner relationships post the Juukan Gorge disaster. COVID-19 also reduced labour availability. The destruction of the caves sees the major Pilbara iron ore miners facing additional scrutiny around traditional owner relationships. This has slowed output and growth somewhat but has not materially impacted the value of Rio Tinto shares, given the supportive iron ore price has more than made up for the lower volumes.

Aluminium, alumina, and bauxite production was marginally below our full-year expectations. Copper output in 2021 was about 3% lower than expected and down 7% on 2020 levels. Weaker grades and COVID-19 restrictions on labour hindered output. On guidance for 2022, the main change is an approximate 2% reduction in expectation for Pilbara shipments, which reflects continued headwinds from COVID and traditional owner issues. Shipments are expected to be of 277 million tonnes in 2022, up by 3%.

Financial Strength:

The fair value estimate of Rio Tinto has been increased to AUD 91 per share. The increase reflects higher the stronger iron ore futures curve and the softer AUD/USD exchange rate, partly offset by weaker production forecasts. The iron ore price is expected to average USD 110 per tonne to 2024, versus our prior USD 100 per tonne assumption. Shares have rallied about 25% in the past two months and are again overvalued. 

The dividend yield generated by the company is a whopping 6.3% during the duration of the 2019 ad 2020.

Company Profile:

Rio Tinto searches for and extracts a variety of minerals worldwide, with the heaviest concentrations in North America and Australia. Iron ore is the dominant commodity, with significantly lesser contributions from aluminium, copper, diamonds, gold, and industrial minerals. The 1995 merger of RTZ and CRA, via a dual-listed structure, created the present-day company. The two operate as a single business entity. Shareholders in each company have equivalent economic and voting rights.

(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

Regional refiner Lytton of Ampol Ltd. margins recover at long last

Business Strategy and Outlook:

Ampol says the Lytton refinery is expected to deliver the highest quarterly replacement cost EBIT result in more than four years. Regional refiner margins rose well above the five-year historical average as supply and demand fundamentals improved. Lytton refinery production was also strong for the period at 1.6 billion litres.  And given the strong refiner margin environment, the company does not anticipate receiving any Fuel Security Service Payment, or FSSP, in the fourth quarter.

The midcycle Lytton refiner margin assumption remains USD 10 per barrel in real terms, around 10% below the fourth-quarter 2021 actual. Material synergies can be expected from an Ampol/Z Energy tie-up. The Z board recommended scheme remains subject to New Zealand regulatory approval and a subsequent Z shareholder vote on the Scheme, expected early this year. The takeover of Z Energy seems logical. The companies have very similar business models, but Z shares have fallen from NZD 8.65 peaks due to intense retail fuel competition in New Zealand and COVID-19 disruption. Ampol can fund the Z transaction within its target 2.0-2.5 net debt/EBITDA framework while maintaining a 50%-70% dividend payout ratio. It will also consider capital returns when net debt/EBITDA is less than 2.0. Ampol’s healthy franking balance and moderate debt has long had investors marking it a favourite for capital initiatives.

Financial Strength:

The fair value of Ampol Ltd. has increased to AUD 32 and it reflects a combination of time value of money, with an increase in expected near-term refiner margins.

Ampol’s healthy franking balance and moderate debt has long had investors marking it a favourite for capital initiatives. The fair value estimate equates to a 2025 EV/EBITDA of 5.5, P/E of 12.2, and dividend yield of 4.9%. A five-year group EBITDA CAGR of 15.5% to AUD 1.4 billion by 2025, the CAGR flattered by the COVID-impacted start year. A nominal midcycle retail fuels margin of AUD 2.03 per litre versus first half 2021’s AUD 1.85 actual, but broadly in line with the three-year historical average. These estimates don’t yet include the Z transaction, but Ampol is targeting double-digit EPS accretion and 20% plus free cash flow accretion in 2023 versus pre-acquisition levels.

Company Profile:

Ampol (nee Caltex) is the largest and only Australian-listed petroleum refiner and distributor, with operations in all states and territories. It was a major international brand of Chevron’s until that 50% owner sold out in 2015. Caltex transitioned to Ampol branding due to Chevron terminating its licence to use the Caltex brand in Australia. Ampol has operated for more than 100 years. It owns and operates a refinery at Lytton in Brisbane, but closed Sydney’s Kurnell refinery to focus on the more profitable distribution/retail segment. It currently has NZD 2.0 billion bid on the table for New Zealand peer Z Energy. 

(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

Iron Ore Price Rise More than Offsets Rio Tinto’s Modest Production Weakness

Business Strategy and Outlook

Rio Tinto is one of the world’s biggest miners, along with BHP Billiton, Brazil’s Vale, and U.K.-based Anglo American. Most revenue comes from operations located in the relatively safe havens of Australia, North America, and Europe, though the company has operations spanning six continents.

Rio Tinto has a large portfolio of long-lived assets with low operating costs. The recent focus has been to run a strong balance sheet, tightly control investments, and return cash to shareholders. The company’s major expansion projects are Amrun bauxite, the Oyu Tolgoi underground mine, and the expansion of the Pilbara iron ore system’s capacity from 330 million tonnes in 2019 to 360 million tonnes. Those projects are expected to be completed in the next few years. Otherwise, the focus is on incremental expansions through productivity and debottlenecking initiatives. These will be small but capital-efficient and should modestly improve unit costs.

Iron Ore Price Rise More than Offsets Rio Tinto’s Modest Production Weakness

Rio Tinto’s fourth-quarter production was overall mildly softer than expected. The company’s share of iron ore Pilbara shipments, the key earnings driver, finished the year at 268 million tonnes, slightly below Morningstar analyst forecast. Shipments were down on 2020’s 273 million tonnes with headwinds from weather, delayed expansions and traditional owner relationships post the Juukan Gorge disaster. COVID-19 also reduced labour availability. The destruction of the caves sees the major Pilbara iron ore miners facing additional scrutiny around traditional owner relationships. This has slowed output and growth somewhat but has not materially impacted the value of Rio Tinto shares, given the supportive iron ore price has more than made up for the lower volumes. Morningstar analysts have raised its fair value estimate for no-moat Rio Tinto to AUD 91 from AUD 89 per share. The increase reflects higher the stronger iron ore futures curve and the softer AUD/USD exchange rate, partly offset by weaker production forecasts.

Financial Strength

Rio Tinto’s balance sheet is strong with net cash of $3.1bn. For FY 2020 the revenue stood at USD Million 44,611 and USD Million 44,661 estimated for FY 2021. The strong balance sheet may allow the company to make targeted investments or acquisitions through the downturn, important flexibility. But it appears management is favouring distributions to shareholders. The progressive dividend policy was canned in 2016, providing important flexibility to increase or reduce dividends as free cash flow allows.

Bulls Say 

  • Rio Tinto is one of the direct beneficiaries of China’s strong appetite for natural resources. 
  • The company’s operations are generally well run, large-scale, low-operating-cost assets. Mine life is generally long, and some assets, such as iron ore, have incremental expansion options. 
  • Capital allocation has improved following the missteps of the China boom with management generally preferring to return cash to shareholders than to make material expansions or acquisitions.

Company Profile

Rio Tinto searches for and extracts a variety of minerals worldwide, with the heaviest concentrations in North America and Australia. Iron ore is the dominant commodity, with significantly lesser contributions from aluminium, copper, diamonds, gold, and industrial minerals. The 1995 merger of RTZ and CRA, via a dual-listed structure, created the present-day company. The two operate as a single business entity. Shareholders in each company have equivalent economic and voting rights.

(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

IN CALIFORNIA BUDGET, NOTHING BUT GROWTH FOR  EDISON INTERNATIONAL

Business Strategy and Outlook

California will always present political, regulatory, and operating challenges for utilities like Edison International. But California’s aggressive clean energy goals also offer Edison more growth opportunities than most utilities. Policymakers know that meeting the state’s clean energy goals, notably a carbon emissions-free economy by 2045, will require financially healthy utilities. 

It is foreseen, Edison will invest at least $6 billion annually, resulting in 6% annual earnings growth at least through 2025. Edison has regulatory and policy support for most of these investments, but the timing of the investments could shift from year to year depending on regulatory delays, wildfire issues, and California energy policy changes. 

Growth opportunities at Southern California Edison address grid safety, renewable energy, electric vehicles, distributed generation, and energy storage. Wildfire safety investments alone could reach $4 billion during the next four years. 

It is alleged state policies will force regulators to support Edison’s investment plan and earnings growth. In August 2021, regulators approved nearly all of Edison’s 2021-23 investment plan. Regulatory proceedings in 2022 will address wildfire-specific investments and Edison’s $6 billion investment plan for 2024. 

Operating cost discipline will be critical to avoid large customer bill increases related to its investment plan. Edison faces regulatory scrutiny to prove its investments are producing customer benefits. It also must resolve the balance of what could end up being $7.5 billion of liabilities related to 2017-18 fires and mudslides. 

Large equity issuances in 2019 and 2020–in part to fund the company’s $2.4 billion contribution to the state wildfire insurance fund and a higher equity allowance for ratemaking–weighed on earnings the last two years. Edison now has most of its financing in place to execute its growth plan, and it is anticipated minimal new equity needs in the coming years. 

It is projected Edison to retain a small share of unregulated earnings, but those are more likely to come from low-risk customer-facing or energy management businesses wrapped into Edison Energy.

Financial Strength

Edison’s credit metrics are well within investment-grade range. California wildfire legislation and regulatory rulings in 2021 removed the overhang that threatened Edison’s investment-grade ratings in early 2019.Edison has kept its balance sheet strong with substantial equity issuances since 2019. It is not forestalled Edison will have any liquidity issues as it resolves 2017-18 fire and mudslide liabilities while funding its growth investments. Edison issued $2.4 billion of new equity in 2019 at prices in line with the fair value estimate. This financing supported both its growth investments and half of its $2.4 billion contribution to the California wildfire insurance fund. The new equity also allowed Southern California Edison to adjust its allowed capital structure to 52% equity from 48% equity for rate-making purposes, leading to higher revenue and partially offsetting the earnings dilution. Edison’s $800 million equity raise in May 2020 at $56 per share was well below the fair value estimate but was necessary to support its growth plan in 2020 and early 2021. In addition to Edison’s $1.25 billion preferred stock issuance in March 2021, it is projected it will need about $700 million of new equity in 2022-24 to support its investment plan. Edison will remain a regular new debt issuer but has few refinancing needs for the next few years. Beyond 2021, it is anticipated dividends to grow in line with SCE’s earnings. The board approved a $0.15 per share annualized increase, or 6%, for 2022, up from $0.10 per share annualized increases in 2020 and 2021. Management has long targeted a 45%-55% payout based on SCE’s earnings, but the board 

appears to be comfortable going above that range based on the 2021 and 2022 dividends that implied near-60% payout ratios. As long as Edison continues to receive regulatory support, it is alleged the board will keep the dividend at the high end of its target payout range.

Bulls Say’s

  • With Edison’s nearly $6 billion of planned annual investment during the next four years, it is  projected 6% average annual average earnings growth in 2022-25.
  • Edison has raised its dividend from $1.35 annualized in 2013 to $2.80 in 2022, an 8% annualized growth rate. Management now appears comfortable maintaining a payout ratio above its 45%-55% target.
  • California’s focus on renewable energy, energy storage, and distributed generation should bolster Edison’s investment opportunities in transmission and distribution upgrades for many years.

Company Profile 

Edison International is the parent company of Southern California Edison, an electric utility that supplies power to 5 million customers in a 50,000-square-mile area of Southern California, excluding Los Angeles. Edison Energy owns interests in nonutility businesses that deal in energy-related products and services. In 2014, Edison International sold its wholesale generation subsidiary Edison Mission Energy out of bankruptcy to NRG Energy.

(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

Walgreens Raises Guidance After Strong First Fiscal Quarter Results; Increasing our FVE to $48

Business Strategy and Outlook

Founded in 1901, Walgreens Boots Alliance is a leading global retail pharmacy chain. In fiscal 2020, the company generated approximately $140 billion in revenue and dispensed over a billion prescriptions annually, representing just under a quarter of the U.S. drug market. The firm’s over 9,000 domestic stores are strategically located in high-traffic areas to generate over $13 million per store, which drives scale and remains a critical consideration in an increasingly competitive market that has witnessed rationalization. The core business is centred around the pharmacy, which accounts for about three fourths of revenue and is considered the main driver of traffic.

Despite Walgreens’ scale as a leading purchaser of prescription drugs and competitive advantage over smaller retail pharmacy chains, gross margins have come under pressure in recent years as a result of pharmacy benefit managers’ negotiation leverage and market power. These pressures have affected margins across the entire retail pharmacy industry, pushing the largest players (Walgreens, CVS, Walmart) to branch into other healthcare services. Walgreens has been focused on leveraging scale to foster strategic partnerships to increase traffic and cross-selling opportunities with a long-term focus to improve coordinated care. 

While Walgreens has expanded into omnichannel offerings, we think the company’s high-traffic brick-and-mortar locations and convenience-oriented approach is less susceptible to pressures from e-commerce and mass merchandisers, particularly in the health and wellness categories, than other retailers. Historically the company’s strategy was based on footprint expansion but having established a scalable infrastructure, the focus has evolved and the concentration has shifted to improving store utilization and strategically aligning with healthcare partners to address the macro trend of localized community healthcare. The company’s partnership with VillageMD to establish primary-care clinics in

select Walgreens locations further establishes the drugstore as a one-stop shop for care.

Financial Strength

As of fiscal first-quarter 2022, cash and equivalents were over $4.1 billion, offset by $13.8 billion in debt, with $2.0 billion due over the next three years. The company continues to focus on its core assets, and the recent divestiture of its international wholesale business should allow the company to pay down debt and fund strategic initiatives to improve its long-term positioning. We believe the firm will be able to rebuild its cash balance through the normal course of business. Free cash flow generation was over $4 billion in fiscal 2020 and is expected to normalize at these levels in the near term.

Bulls Say’s

  • As a leading retail pharmacy with around 9,000domestic locations, Walgreens is able to reach 80% of U.S. consumers.
  • Strategic partnerships focused on increasing store utilization through the addition of clinical partners to localize community healthcare should be a natural extension in providing coordinated care that will increase community engagement and offset reimbursement pressures. 
  • An increase in higher-margin health and beauty merchandise sales bolsters front-end store performance

Company Profile 

Walgreens Boots Alliance is a leading retail pharmacy chain, with over 13,000 stores in 50 states and 9 countries. Walgreens’ core strategy involves brick-and-mortar retail pharmacy locations in high-traffic areas, with nearly 80% of the U.S. population living within 5 miles of a store. Currently, the company has a leading market share of the domestic prescription drug market at about 20%. In 2021, the company sold off a majority of its Alliance Healthcare wholesale business to AmerisourceBergen for $6.5 billion, doubling down on its core pharmacy efforts and ventures in strategic growth areas in primary care (VillageMD) and digital offerings. The company also has equity stakes in AmerisourceBergen (29%) and Sinopharm Holding Guoda Drugstores (40%).

(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

CMS plans net-zero carbon emissions by 2040

Business Strategy and Outlook

CMS Energy’s transformation during the past decade into a mostly regulated utility has set it up for a long runway of growth during the next decade. In addition, CMS’ work with Michigan regulators and politicians has turned the state into one of the most constructive areas for utility investment. These constructive relationships will be critical as CMS pursues an aggressive clean energy growth plan. 

With regulatory and political backing, CMS plans more than $13 billion of investment the next five years and potentially as much as $25 billion during the next 10 years. Its goal to reach net-zero carbon emissions by 2040 is a key part of its growth plan, supporting 6%-8% annual earnings growth for many years. 

Michigan’s 2008 energy legislation and additional reforms in the state’s 2016 Energy Law transformed the state’s utility regulation. As a result of those changes, CMS Energy has achieved a series of constructive regulatory decisions. 

CMS has secured regulatory approval for almost all its near-term capital investment as part of the state’s 10-year integrated resource plan framework. We expect regulators to support CMS’ updated 10-year plan filed in mid-2021. If CMS can keep rate increases modest by controlling operating costs, it is expected to continue to get regulatory support and could even add as much as $1 billion of investment on top of its current plan. 

CMS’ growth strategy focuses on investment in electric and gas distribution and renewable energy, which aligns with Michigan’s clean energy policies and is likely to earn regulatory support. CMS plans to retire the Palisades nuclear plant and all its coal fleet by 2025, keeping it on track to cut carbon emissions 60% by 2025 and reach net-zero carbon emissions by 2040. Proceeds from its EnerBank sale in 2021 will help finance growth investment. 

CMS carries an unusually large amount of parent debt, which has helped boost consolidated returns on equity, but investors should consider the refinancing risk if credit markets tighten.

Financial Strength

Although CMS has trimmed its balance sheet substantially, its consolidated 70% debt/capital ratio remains high primarily because of $4 billion of parent debt. Accordingly, the company’s EBITDA/interest coverage ratio is lower than peers, near 5 times. CMS has reduced its near-term financing risk with opportunistic refinancing. It is projected CMS to maintain its current level of parent debt and take advantage of lower interest rates as it refinances. This should enhance returns for shareholders. Management appears committed to maintaining the current balance sheet and improving its credit metrics through earnings growth. We expect CMS’ consolidated returns on equity to top 13% for the foreseeable future, among the best in the industry due to this extra leverage. CMS has taken advantage of favourable bond markets to extend its debt maturities, including issuing three series of 60-year notes in 2018 and 2019. CMS now has $1.1 billion of parent notes due in 2078-79 at a weighted-average interest rate near 5.8%. CMS also has been able to issue 40- and 50-year debt at the utility subsidiary. Regulators thus far have not imputed CMS’ parent debt to the utilities, but that’s a risk that ultimately could end up reducing CMS’ allowed returns, customer rates and earnings. We don’t expect the company to issue large amounts of equity after pricing a $250 million forward sale at an average $51 per share in 2019 and issuing $230 million of preferred stock in 2021 at a 4.2% yield. We expect the $930 million aftertax cash proceeds from the EnerBank sale will offset new equity needs through 2024. With constructive regulation, we expect CMS will be able to use its cash flow to fund most of its investment plan during the next five years.

Bulls Say’s

  • Regulation in Michigan has improved since landmark reforms in 2008 and 2016. Support from policymakers and regulators is critical to realizing earnings and dividend growth. 
  • CMS’ back-to-basics strategy has focused on investment in regulated businesses, leading to a healthier balance sheet and more reliable cash flow. 
  • CMS’ board has more than doubled the dividend since 2011. We expect 7% annual dividend increases going forward even if the pay out ratio remains above management’s 60% target.

Company Profile 

CMS Energy is an energy holding company with three principal businesses. Its regulated utility, Consumers Energy, provides regulated natural gas service to 1.8 million customers and electric service to 1.8 million customers in Michigan. CMS Enterprises is engaged in wholesale power generation, including contracted renewable energy. CMS sold EnerBank in October 2021.

(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.