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

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.

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Commodities Trading Ideas & Charts

Magellan Is Buying Back Units More Aggressively Than Most Midstream Player

Business Strategy and Outlook

Magellan’s refined product pipelines are high-quality assets that have contributed to earnings stability as well as steady increases in distributions over time. As both supply and demand are remarkably steady over time, Magellan has been able to extract modest inflation-linked price increases. However, investment opportunities have been more limited in the refined products segment. As a result, Magellan has invested more than $5 billion largely elsewhere since 2010 and has built up a respectable but ultimately more volatile and lower-quality crude oil pipeline, which now contributes about a third of operating margin.While the competitive intensity of the new businesses is higher than the core refined product pipelines.

Magellan’s current growth capital program is expected to wind down in 2021 with only $80 million in planned expenditures given the difficult environment. In 2022, Morningstar analyst focus remains on capital allocation. Growth spending is expected to be minimal. With a newly expanded $1.5 billion unit buyback in place, the partnership has already bought back $750 million in units in 2020 and 2021. Asset sales have contributed with $271 million completed in 2021, and another $435 million awaiting regulatory approvals and expected to be completed in 2022. 

Magellan Midstream Sees Stronger Volume Recovery in 2021, Expands Buyback Program

Magellan’s capital spending program remains quite muted, as it plans to spend $80 million in 2021 and $20 million in 2022 on growth projects presently, it has devoted much more capital toward buybacks recently. The partnership bought back $391 million in units during the quarter, wrapping up its $750 million program initiated in 2020. The board has added another $750 million in buybacks and extended the program to 2024. With the stock trading below our fair value estimate, Morningstar analyst view both the historical repurchases and future program as good capital allocation and supportive of our Exemplary capital allocation rating.

Financial Strength

Magellan remains among the most prudent managers of capital in our MLP coverage. Three factors support this partnership’s exceptional level of financial health. First, the lack of general partner sponsorship keeps Magellan’s cost of equity lower than peers. Second, conservative leverage (far below its maximum ratio of 4 times debt/EBITDA) has kept its cost of debt low and provided considerable flexibility in financing growth projects. Third, ample distribution coverage has allowed management to fully fund its growth initiatives through retained distributable cash flow without needing to tap equity markets.

Magellan was one of the first MLPs to buy out its general partner interests in 2010. Better aligning interest of its holders, the deal also lowered the partnership’s cost of equity capital. Its stable, largely contracted sources of revenue and low leverage relative to peers also support among the lowest cost of debt in the industry. Combined, this cost of capital advantage and low leverage allows Magellan to more opportunistically engage in growth initiatives. Magellan has about $1 billion in liquidity compared and no debt maturities until 2025. The firm has flexed capital spending as needed to address any financial issues.

Bulls Say

  • Magellan has been highly discerning with regards to capital allocation and invested in a number of attractive projects at excellent prices. 
  • Magellan supplies more than 40% of the refined products to 7 of the 15 states it serves. 
  • Magellan only undertakes profitable butane blending opportunities when spreads warrant it, meaning this is a low-risk endeavour.

Company Profile

While Magellan’s capital spending program remains quite muted, as it plans to spend $80 million in 2021 and $20 million in 2022 on growth projects presently, it has devoted much more capital toward buybacks recently. The partnership bought back $391 million in units during the quarter, wrapping up its $750 million program initiated in 2020. The board has added another $750 million in buybacks and extended the program to 2024. With the stock trading below our fair value estimate, we view both the historical repurchases and future program as good capital allocation and supportive of our Exemplary capital allocation rating.

(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 Shares

PG&E on path to test California wildfire insurance fund Income after Dixie fire report

Business Strategy and Outlook

PG&E will always face public and regulatory scrutiny as the largest utility in California. That scrutiny has escalated with the deadly wildfires and power outages. Legislative and regulatory changes during and since the bankruptcy have reduced PG&E’s financial risk, but the state’s inverse condemnation strict liability standard remains a concern. CEO Patti Poppe faces a tall task restoring PG&E’s reputation among customers, regulators, politicians, and investors. PG&E is well positioned to grow rapidly, given the investment needs to meet California’s aggressive energy and environmental policies. PG&E is set to invest $8 billion annually for the next five years, leading to 10% annual growth. After suspending its dividend in late 2017, PG&E should be positioned to reinstate it in 2024 based on the bankruptcy exit plan terms.

Financial Strength

PG&E has substantially the same capital structure as it did entering bankruptcy with many of the same bondholders after issuing $38 billion of new or reinstated debt. PG&E’s $7.5 billion securitized debt issuance would eliminate $6 billion of temporary debt at the utility and further fortify its balance sheet. The post-bankruptcy equity ownership mix is much different. PG&E raised $5.8 billion of new common stock and equity units in late June 2020, representing about 30% ownership. Another $3.25 billion of new equity came from a group of large investment firms. The fire victims trust owned 22% and legacy shareholders retained about 26% ownership at the bankruptcy exit. The fire victims’ trust plans to sell its stake over time but had not sold any shares as of late 2021.

Bankruptcy settlements with fire victims, insurance companies, and municipalities totaled $25.5 billion, of which about $19 billion was paid in cash upon exit. PG&E entered bankruptcy after a sharp stock price drop in late 2018 made new equity prohibitively expensive and the company was unable to maintain its 52% required equity capitalization. It is estimated that PG&E will invest up to $8 billion annually during the next few years. Tax benefits and regulatory asset recovery should eliminate any equity needs at least through 2023.

Bulls Say’s 

  • California’s core rate regulation is among the most constructive in the U.S. with usage-decoupled revenue, annual rate true-up adjustments, and forward-looking rate setting. 
  • Regulators continue to support the company’s investments in grid modernization, electric vehicles, and renewable energy to meet the state’s progressive energy policies. 
  • State legislation passed in August 2018 and mid-2019 should help limit shareholder losses if PG&E faces another round of wildfire liabilities

Company Profile 

PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.3 million electricity customers and 4.4 million gas customers in 47 of the state’s 58 counties. PG&E operated under bankruptcy court supervision between January 2019 and June 2020. In 2004, PG&E sold its unregulated assets as part of an earlier post-bankruptcy reorganization.

(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

NiSource Kicks Off 2022 Regulatory Year With Constructive Rulings in Kentucky, Pennsylvania

Business Strategy and Outlook

After decades of deriving most of its income from natural gas distribution and midstream businesses, NiSource has transitioned to a more diversified earnings mix. About 60% of NiSource’s operating income comes from its six natural gas distribution utilities and 40% from its electric utility in Indiana following the 2015 separation from Columbia Pipeline Group. NiSource’s utilities have constructive regulatory frameworks that allow it to collect a cash return of and a cash return on the bulk of its capital investments within 18 months. 

In October 2020, NiSource sold its Columbia Gas of Massachusetts utility and received $1.1 billion of proceeds that it used to strengthen the balance sheet and prepare for its planned infrastructure investments. The sale came nearly two years after a natural gas explosion on NiSource’s Massachusetts system killed one person north of Boston. Insurance covered roughly half of the almost $2 billion of claims, penalties, and other expenses. Earnings are set to rebound quickly from their low in 2020 when COVID-19 pandemic costs, lower energy use, the Massachusetts utility sale, and a large equity issuance weighed on earnings. We expect modest customer growth combined with NiSource’s infrastructure growth investments to support 8% annual earnings growth and 6% annual dividend growth from 2021 to 2025.

Financial Strength

NiSource has issued a substantial amount of equity in the past few years in part to fund its large infrastructure growth projects and in part to cover liabilities arising from the Massachusetts gas explosion. This dilution and the sale of Columbia Gas of Massachusetts has kept earnings mostly flat since 2018.NiSource’s debt/capital topped 67% at year-end 2017, but huge equity infusions have brought that down to more sustainable levels in the mid-50% range. NiSource issued over $1 billion of common stock and $880 million of preferred stock in 2018 and 2019. The Massachusetts utility sale in 2020 raised $1.1 billion, and NiSource issued $862.5 million of convertible preferred equity units in early 2021. 

NiSource has grown its dividend nearly 40% since the 2015 Columbia Pipeline Group spin-off, but the growth has not been consistent. The company increased its dividend in mid-2016 by 6.5% and again by 6.1% in the first quarter of 2017, then by 11.4% in 2018. But the 2019 dividend increase was only 2.6% following the Boston gas explosion. NiSource is past the peak of its five-year capital spending plan and its equity needs shrink. 

Bulls Say’s 

  • The dividend to grow near 5% annually during the next few years before accelerating to keep pace with earnings in 2024 and beyond. 
  • NiSource should benefit from Indiana policymakers’ desire to cut the state’s carbon emissions by replacing coal generation with renewable energy, energy storage, and possibly hydrogen. 
  • New legislation has improved the regulatory framework in Indiana for NiSource’s electric and natural gas distribution utilities.

Company Profile 

NiSource is one of the nation’s largest natural gas distribution companies with approximately 3.5 million customers in Indiana, Kentucky, Maryland, Ohio, Pennsylvania, and Virginia. NiSource’s electric utility transmits and distributes electricity in northern Indiana to about 500,000 customers. The regulated electric utility also owns more than 3,000 megawatts of generation capacity, most of which is now coal-fired but is being replaced by natural gas and renewables.

(Source: Morningstar)

General Advice Warning

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

Categories
Commodities Trading Ideas & Charts

Total Energies Does Not Plan Quick Retreat From Oil and Gas Despite Planned Renewables Growth

Business Strategy and Outlook

Total Energies’ strategic plan aims to achieve net zero emissions by 2050 while delivering near-term financial performance in the event of a lower-oil-price environment. 

 Total has already started to move away from oil products with the conversion of its La Mede refinery to a renewable diesel producer. Conversion of the Grandpuits refinery to produce renewable diesel and bioplastics is set to follow. Together with coprocessing facilities at other refineries in Europe, the U.S., and Asia, Total expects to produce 100 thousand barrels a day of renewable diesel by 2030. Gross renewable generation capacity is expected to grow from about 10 gigawatts today to 35 GW by 2025 as Total invests a minimum of $3 billion per year or just over 20% of total spending from 2021. Current and planned capacity is primarily in solar, but Total is pushing further into floating offshore wind comprising 40% of planned growth, which should drive growth beyond 2025 and where it can leverage offshore capabilities from its oil and gas operations.

Financial Strength

Total remains one of the least leveraged global integrated firms with net debt to capital of 17.7% at the end of third-quarter 2021. Management aims to keep gearing below 20% and maintain an A credit rating. In 2021, Total expects net investments, including acquisitions and divestitures, close to $13 billion. Total committed to increasing the dividend by 5%-6% per year and repurchasing an incremental $5 billion worth of shares, but after suspending repurchases in 2020, abandoned any specific capital return targets. Instead, management has committed to supporting the dividend with oil prices as low as $40/bbl and will repurchase shares at higher oil prices when gearing is below 20%. As it is at that level now, management has resumed share repurchases starting in the fourth quarter of 2021. Going forward, Total plans to return up to 40% of additional cash flow if prices are above $60/bbl.

Bull Says

  • Despite reducing capital spending, Total expects to increase production 2% per year on average through 2025, led by growth in LNG projects. 
  • Already about 50% of Total’s production in 2020 and expected to grow, long-plateau production projects like LNG reduce decline rates and reinvestment necessary to maintain production levels.
  • Management has committed to supporting the dividend at $40/bbl. Combined with relatively low leverage, Total’s payout is one of the safer in the sector despite one of the highest yields.

Company Profile

TotalEnergies is an integrated oil and gas company that explores for, produces, and refines oil around the world. In 2020, it produced 1.5 million barrels of liquids and 7.2 billion cubic feet of natural gas per day. At year-end 2020, reserves stood at 12.3 billion barrels of oil equivalent, 43% of which are liquids. The company operates refineries with capacity of nearly 2.0 million barrels a day, primarily in Europe, distributes refined products in 65 countries, and manufactures commodity and specialty chemicals. It also holds a 19% interest in Russian oil company Novatek.

 (Source: Morningstar)

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