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

Santos Limited (ASX: STO)

  • Offers a number of core assets within its portfolio (no single asset risk).
  • On-going focus on cost reduction and positioning of the business for lower oil price environment.
  • Potential M&A activity – the Company has been the subject of several takeover offers.
  • Ramp up to GLNG.
  • Strong balance sheet position.
  • Strategic shareholders (potential corporate activity).

Key Risks

  • Supply and demand imbalance in global oil/gas markets.
  • Lower oil / LNG prices.
  • Not meeting cost-out targets (e.g. reducing breakeven oil cash price).
  • Production disruptions (not meeting GLNG ramp up targets).
  • Strategic investors sell down their stake or block any potential M& A activity.

1H21 Results Highlights

Relative to the pcp and in US$: Production of 47.3mmboe was up +23%. Sales volume of 53.8mmboe was up +15%. Product sales revenue of $2,040m was up +22%. EBITDAX of $1,231 was up +24%. Underlying profit of $317m is up +50%. STO achieved a net profit of $354m versus a loss of -$289m in FY20. Free cash flow of $572m was up +33%. The Board declared an interim dividend of 5.5cps (versus 2.1 in FY20) and equates to 20% of first half free cash flow, in-line with STO’s sustainable dividend policy which targets a range of 10% to 30% payout of free cash flow. Reported NPAT of $354m includes net gains on asset sales and is significantly higher than the PCP due to impairments included in the previous half-year result.

Company Description  

Santos Limited (STO) explores for and produces natural gas, liquefied natural gas, crude oil, condensate, naptha and liquid petroleum gas. STO conducts major onshore and offshore petroleum exploration and production activities in Australia, Papua New Guinea, Indonesia, and Vietnam. The company also transports crude oil by pipeline.  

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

Beach Energy Ltd (ASX: BPT) Updates

solar power panels in clean energy generating station
  • The share price has de-rated from a recent high by ~18% (which is valid), provides a buying opportunity in our view. 
  • The acquisition of Lattice Energy provides a stable mix of producing assets. 
  • The Company is currently on a 5-year capital expenditure program. The execution and delivery of this program could see upside risks to consensus estimates. 
  • Favorable industry conditions on the east coast gas market over the long-term –i.e. tight supply could lead to higher gas prices.
  • Strong balance sheet 
  • Potential M&A activity. 

Key Risks

  • Execution risk – Drilling and exploration risk. Unable to resolve the issue at Western Flank, leading to long-term downgrades to key estimates for the project.
  • Commodity price risk – movement in oil & gas price will impact unconstructed / re-contracting volumes. 
  • Regulatory risk – such as changes in tax regimes which adversely impact profitability. 
  • M&A risk – value destructive acquisition in order to add growth assets.
  • Financial risk – potentially deeply discounted equity rising to fund operating & exploration activities should debt markets tighten up due external macro factors. 
  • Currency risk 

FY21 Results Highlights

NPAT of $317m impacted by $117m non-cash, pre-tax impairment Underlying NPAT of $363m. Underlying EBITDAX of $1,010m and underlying EBITDA of $953m, underpinned by favourable arbitral outcome for the carbon liability associated with a Kupe GSA. BPT retained a strong balance sheet with net debt of $48m, net gearing of 1.5% and liquidity of $402m at 30 June 2021. Management highlighted BPT is in net cash position as of 13 August 2021. The Board declared a final dividend of 1.0 cps, fully franked

Company Description

Beach Energy Ltd (BPT) is an oil & natural gas exploration and production company. BPT has both onshore and offshore operations in five basins (Perth, Cooper, Victoria, and Tasmania & NZ) across Australia and New Zealand. The Company is a key supplier of gas into the Australian east coast gas market. The Company also owns strategic oil and gas infrastructure (Moomba processing facility & Otway Gas Plan

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

Air Product’s Fiscal Q3 Results & Unveils Updated Capital Deployment Plan

public industrial gas companies have consistently delivered lucrative returns because of their economic moats. Demand for industrial gases is strongly correlated to industrial production. As such, organic revenue growth will largely depend on global economic conditions. Since Seifi Ghasemi was appointed CEO in 2014, new management has launched several initiatives that drastically improved Air Products’ profitability, raising EBITDA margins by over 1,500 basis points.  Air Products is poised for rapid growth over the next few years due to its 10-year capital allocation plan. The industrial gas firm aims to deploy over $30 billion during the decade from fiscal 2018 through fiscal 2027 and has already either spent or committed roughly $18 billion of that amount.

Financial Strength 

Management has indicated that maintaining an investment-grade credit rating is a priority. The company has used proceeds from its divestments of noncore operations (including the spin-off of its electronic materials division as Versum Materials in 2016 and the sale of its specialty additives business to Evonik in 2017) to reduce debt and fuel investment.The company held roughly $8 billion of gross debt as of Dec. 31, 2020, compared with $6.2 billion in cash and short-term investments. Liquidity includes an undrawn $2.5 billion multicurrency revolving credit facility, which is also used to support a commercial paper program. 

Narrow-moat rated Air Products reported mixed fiscal third quarter results, as its sales of $2,605 million beat the FactSet consensus estimate of $2,498 million, but adjusted EPS of $2.31 fell $0.05 short of expectations. The industrial gas firm also lowered the top end of its full-year fiscal 2021 adjusted EPS guidance range by a nickel, from $8.95-$9.10 to $8.95-$9.05. Fiscal third-quarter sales increased 26% year over year and 4% sequentially, driven by a continued recovery in the firm’s end markets.

Air Products unveiled its updated capital deployment plan and aims to deploy over $30 billion during the decade from fiscal 2018 through fiscal 2027. The company has already either spent or committed roughly $17.8 billion of that amount. Management said on the earnings call that of the remaining $12.2 billion, it expects to invest roughly $5 billion to support the existing business and the remainder in large growth projects, focusing on opportunities in gasification, green hydrogen, and carbon capture.

Bulls Say’s 

  • Air Products is poised for rapid growth due to business opportunities that drive its ambitious $30 billion capital allocation plan.
  • After acquiring Shell’s and GE’s gasification businesses in 2018, Air Products is the global leader in this segment and is poised to benefit from growing coal gasification in China and India.
  • The company’s focus on on-site investments will result in a derisked portfolio with more stable cash flows.

Company Profile 

Since its founding in 1940, Air Products has become one of the leading industrial gas suppliers globally, with operations in 50 countries and 19,000 employees. The company is the largest supplier of hydrogen and helium in the world. It has a unique portfolio serving customers in a number of industries, including chemicals, energy, healthcare, metals, and electronics. Air Products generated $8.9 billion in revenue in fiscal 2020.

(Source: Morningstar)

General Advice Warning

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

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Commodities Trading Ideas & Charts

Investors Overlooking Occidental’s long term Cash Generation Potential

fair value is estimated to $37 per share, from $32. The increase primarily reflects a reduced cost of capital assumption. Given how quickly the firm is deleveraging it is appropriate to penalize the firm with an above average cost of debt.

The preoccupation with near-term capital returns has driven investors away from Occidental. The firm is still coping with uncomfortable leverage ratios following the ill-timed 2019 acquisition of Anadarko Petroleum, making debt reduction the only prudent use of its excess cash. The market is overlooking the firm’s relatively modest base decline. 

Oxy has a diversified portfolio, with oil and gas contributions from non-shale assets in the Middle East and the Gulf of Mexico to complement its unconventional operations in the Permian Basin and the DJ Basin. So it can more easily sustain its production than shale pure plays that must continually invest in new drilling to offset steep declines from existing wells.

Company’s performance

The firm’s enhanced oil recovery operations further reduces the base decline. The firm also generates stable cash flows from its extensive midstream and chemical segments. As a result, the firm can hold its volumes flat with a long term reinvestment rate of about 35%. And when the firm reaches its target debt level, which it can realistically do in 6 months from now, given how quickly it is generating excess cash, then that very low reinvestment rate should leave plenty of free cash to distribute. The three firms we highlighted earlier–Pioneer, Devon, and EOG–have 2025 discretionary cash flow yields of about 10% at current prices. 

Company’s Future Outlook

That means the market is baking in long-term dividend yields of around 5%, assuming these firms plan to return half of their surplus cash. In contrast, Oxy’s discretionary cash flow yields in 2025, after accounting for all capital spending and preferred dividends, is over 20% at the current price. This underscores our view that shares are undervalued.

Company Profile

Occidental Petroleum Corporation (NYSE: OXY) is an independent exploration and production company with operations in the United States, Latin America, and the Middle East. At the end of 2020, the company reported net proved reserves of 2.9 billion barrels of oil equivalent. Net production averaged 1,306 thousand barrels of oil equivalent per day in 2020 at a ratio of 74% oil and natural gas liquids and 26% 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

AGL’s Earnings Falling as Expected but Light at the End of the Tunnel

in line with our expectations and in the middle of the guidance range. Earnings are expected to fall again in fiscal 2022 as management has been flagging for some time. Guidance is for underlying NPAT of AUD 220 million to AUD 340 million, with the midpoint down 48% in 2021. AGL’s cheap coal supply underpins its competitive advantage.

Competitors with shorter dated coal supply contracts should start to be hurt by high coal prices in coming years, potentially forcing them out of the market and pushing electricity prices higher. EBITDA fell 21% to AUD 1.6 billion in fiscal 2021 on lower electricity prices and higher gas supply costs. Headwinds from low electricity prices continue into fiscal 2022, and management is focused on reducing operating costs and maintenance capital expenditure through efficiency initiatives.

EBITDA rose 16% to AUD 337 million on cost savings and higher retail gas prices. The retail business has made a few interesting acquisitions recently to expand its geographic footprint to the West Coast, widen its service offering to include telecommunications and solar installations, and benefit from economies of scale. This should generate good returns.

Company’s Future Outlook

It is estimated that NPAT bottoms in fiscal 2023 at AUD 231 million before recovering back to AUD 442 million by 2026. The stock materially undervalued on a long-term view. Based on the current share price, it is forecasted to have a PE ratio of about 10 by 2026. Far more important is the expected recovery in electricity prices, given AGL is a huge producer of electricity through its three coal-fired power stations. It is expected that AGL’s financial position is sound; though there is modest risk given, banks are making life difficult by trying to reduce lending to coal power stations.

Company Profile

AGL Energy Ltd (ASX: AGL) is one of Australia’s largest retailers of electricity and gas. It services 3.7 million retail electricity and gas accounts in the eastern and southern Australian states, or about one third of the market. Profit is dominated by energy generation, underpinned by its low-cost coal-fired generation fleet. Founded in 1837, it is the oldest company on the ASX. Generation capacity comprises a portfolio of peaking, intermediate, and base-load electricity generation plants, with a combined capacity of 10,500 megawatts.

(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

EOG May Need Fewer Rigs to Avoid Excess Growth Due to Capital Efficiency, Lowering FVE

 It derives almost all of its production from shale fields in the U.S., with a small incremental contribution from Trinidad. The firm differentiates itself by attempting to identify prospective areas before most peers catch on, enabling it to secure leaseholds at attractive rates (rather than overpaying for land after the market overheats). It has only one large-scale M&A deal under its belt, related to its 2016 entry to the Permian Basin.

Nevertheless, the firm is also active in most other name-brand shale plays, including the Bakken and Eagle Ford. Additionally, the focus now includes the Powder River Basin (Wyoming) and a new natural gas play in southern Texas that the firm has christened “Dorado.”

Due to the combination of its size and focus, EOG has significantly more shale wells under its belt than most peers. This has enabled it to advance more quickly up the learning curve in each play. As a result, initial production rates from new wells are usually well above industry averages. The firm’s acreage contains over 10,000 potential drilling locations that management designates as “premium.” However, management is now prioritizing a sizable subset, 5,700+ locations, designated “double premium.” 

Financial Strength

Overall, EOG’s financial health is excellent compared with peers, giving it the ability to tolerate prolonged periods of weak commodity prices, if necessary. The firm holds about $5.1 billion of debt, resulting in below-average leverage ratios. At the end of the most recent reporting period, debt/capital was 20% and net debt/EBITDA was 0.2 times. These metrics are likely to trend even lower over time, as the firm is capable of generating more cash than it needs to fund its operations and its growing dividend under a wide range of commodity scenarios. Furthermore, the firm also has a comfortable liquidity stockpile, with $3 billion cash and another $2 billion available on its undrawn revolver.

Bull Says

  • EOG is among the most technically proficient operators in the business. Initial production rates from its shale wells consistently exceed industry averages.
  • EOG’s vast inventory of premium drilling locations provides a long runway of low-cost resources.
  • EOG often adds new premium drilling opportunities to its queue via exploration or by using improved knowhow and technology to “upgrade” opportunities that did not previously qualify.

Company Profile

EOG Resources Inc (NYSE: EOG) is an oil and gas producer with acreage in several U.S. shale plays, including the Permian Basin, the Eagle Ford, and the Bakken. At the end of 2020, it reported net proved reserves of 3.2 billion barrels of oil equivalent. Net production averaged 754 thousand barrels of oil equivalent per day in 2020 at a ratio of 72% oil and natural gas liquids and 28% 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

Ameren’s Renewable Energy Transition and Improving Regulation Support Long-Term Growth

With improving regulatory environments come significant investment opportunities, as seen with the company’s most recent $17.1 billion five-year plan. Ameren has its sights set on $23 billion of opportunities during the next decade, providing a long runway of growth for the company. Management is to be applauded for attaining constructive utility legislation in Missouri. Its patient yet persistent years-long efforts resulted in increased investment opportunities across the territory, a stark change from the past. Numerous trackers are in place for fuel adjustments, pension, and tax positions.

With an improved regulatory framework in Missouri, management is keeping its promise to invest in jurisdictions that support investment. Ameren is allocating $8.5 billion of its investment plan to Missouri. Projects will focus on renewable energy, upgrading aging and underperforming assets, and employing smart grids and connected grid services. Ameren has build-to-transfer agreements for 700 megawatts of wind generation in Missouri. The $1.2 billion investment complies with Missouri’s renewable energy standard. Ameren is also looking to install 100 MW of solar by 2027. Ameren will close roughly 3 gigawatts of coal generation by 2036 and expects to have no coal generation by 2045. Regulation for Ameren in Illinois is constructive. Allowed returns on equity are 580 basis points above the average 30-year U.S. Treasury yield. Ameren continues to advocate for the Illinois Downstate Clean Energy Affordability Act, which would improve allowed returns and extend performance ratemaking.

Ameren’s Future Outlook 

We assume Ameren will have $17.1 billion of capital expenditures between 2021 and 2025. We expect the company to issue debt in line with its current capital structure and refinance its debt as it comes due. Ameren’s dividend is up 10% from the year-ago period. We expect future dividend growth to be more in line with earnings growth. Ameren has tended to be at the lower end of its 55%-70% dividend payout target. We view Ameren’s current financial health as sound. The firm’s 56% debt/capitalization ratio is in line with its utility peers. Interest coverage is a healthy 6.0 times, and current debt/EBITDA is near 5.0.

Bulls Say’s 

  • Ameren’s regulated utilities provide a stable source of earnings. The company’s large capital expenditure plan should drive above-average rate base and earnings growth for the next several years.
  • Ameren’s regulatory relationships have improved significantly in Missouri.
  • Ameren’s management team has proved to be bestin- class operators, having diligently worked to improve regulatory relationships and execute on substantial growth projects.

Company Profile 

Ameren owns rate-regulated generation, transmission, and distribution networks that deliver electricity and natural gas in Missouri and Illinois. It serves nearly 2.5 million electricity customers and roughly 1.0 million natural gas customers.

(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 Prioritizing Balance Sheet Strengthening While Commodity Prices Are Support

which was 10% higher sequentially and 1% higher year over year. Net production, excluding non controlling interest volumes from the firm’s Gulf of Mexico assets, was 171 mboe/d. This exceeded the high end of the guidance range of 160-168 mboe/d. Management attributed the outperformance to its Eagle Ford and Tupper Montney assets, which contributed 3.7 mboe/d and 2 mboe/ d, respectively, of upside relative to guidance.

The firm’s outlook for full-year volumes was nudged up by 0.5 mboe/ d, and the budget range was tightened, but the midpoint was unchanged. The firm’s financial results were similarly strong, with adjusted EBITDA and adjusted EPS coming in at $391 million and $0.59, respectively. 

Company’s Future Outlook

The estimates were $321 million and $0.17. Like many of its peers, Murphy is using the windfall from currently high commodity prices to strengthen its balance sheet. The firm has repaid its revolver in full and is now aiming for a further $200 million in net debt reduction by the end of the year. It is planned to incorporate these operating and financial results in our model shortly, but after this first look, our fair value estimate and no-moat rating remain unchanged.

Company Profile

Murphy Oil Corporation (NYSE: MUR) 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

Boosting Our Oneok Fair Value Estimate to $49 Following Second-Quarter Results

our fair value estimate to $49 per share. Oneok’s second quarter clearly shows the firm benefiting from a recovery in volumes across its footprint after the COVID-19- driven decline last year as well as numerous new assets placed in service.

Given the strong results, Oneok boosted its 2021 EBITDA guidance to above its earlier midpoint of $3.2 billion, and toward our current forecast of $3.3 billion. Second-quarter EBITDA was $802 million, a 50% increase from last year’s levels. The largest contributor to its earnings improvement is a recovery in Rockies volumes, as well as higher realized commodity pricing on its gathering contracts with a percentage of proceeds component. Rockies volumes across its footprint have recovered over 85% since the second quarter of 2020 to nearly 300,000 barrels per day, or bpd, and Oneok still has 440,000 bpd of capacity, expandable to 540,000 bpd with minimal capital spending.

Every 25,000 bpd of Rockies volumes is worth another $100 million in Oneok EBITDA. Oneok remains well positioned to capture new opportunities in the Williston basin. The gas/oil ratio has improved 80% over the last year in the Williston basin, leading to a substantial recovery in gas production. Oneok’s second-quarter gas processing volumes were about 1.25 billion cubic feet per day, and the firm expects to connect more than 300 wells to its footprint this year.

The increased connections point to incremental upside of about 150 million cubic feet per day of processing volumes. Reducing flaring to zero across Oneok’s footprint adds another 100 million cubic feet per day. Beyond that, simply holding the current oil rig count flat in the Williston basin suggests another 1 billion cubic feet per day of upside in overall gas volumes over the next decade per Oneok estimates.

Company Profile 

ONEOK, Inc. is an energy midstream service provider in the United States. The Company owns and operates natural gas liquids (NGL) systems, and is engaged in the gathering, processing, storage and transportation of natural gas. THe Company’s operations include a 38,000-mile integrated network of NGL and natural gas pipelines, processing plants, fractionators and storage facilities in the Mid-Continent, Williston, Permian and Rocky Mountain regions. The Company operates through three business segments. The Natural Gas Gathering and Processing segment provides midstream services to contracted producers in North Dakota, Montana, Wyoming, Kansas and Oklahoma.

(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

Consolidated Edison Reports Weak Q2 Due to Adverse Weather Events but Reaffirms Earnings Guidance

Adjusted EPS in the recently ended quarter were $0.53 versus $0.60 in the same period last year. Earnings in the second quarter were negatively impacted by several heat waves in June. Con Ed mobilizes crews in anticipation of weather events, resulting in significant extra costs even when the weather events end up not being as serious as anticipated.

Our 2021 adjusted EPS estimate of $4.25 is unchanged and at the midpoint of management’s $4.15-$4.35 EPS guidance range. Management increased its 2023 rate base guidance by $135 million due to the approval of a new transmission line. The increase in projected rate base would result in about a $0.01 increase in our 2023 EPS estimate but would not have a material impact on our fair value estimate.

Con Ed’s regulatory allowed returns are lower than industry average, but the overall regulatory rate structures in New York remain constructive. Multi-year rate cases provide forward-looking estimates of capital expenditures and rate base, swallowing Consolidated Edison Company of New York, Con Ed’s largest subsidiary, to consistently earn near or above its 8.8% allowed return on equity.

Company Profile 

Con Ed is a holding company for Consolidated Edison Company of New York, or CECONY, and Orange & Rockland, or O&R. These utilities provide steam, natural gas, and electricity to customers in southeastern New York–including New York City–and small parts of New Jersey. The two utilities generate roughly 90% of Con Ed’s earnings. The other 10% of earnings comes from investments in renewable energy projects and gas and electric transmission. These investments have resulted in Con Ed becoming the second-largest owner of utility-scale PV solar capacity in the U.S.

(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.