Category: Commodities

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

Categories
Commodities Trading Ideas & Charts

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.

Categories
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.

Categories
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.

Categories
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.

Categories
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.

Categories
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.

Categories
Commodities Trading Ideas & Charts

Hess Corporation (NYSE: HES) Fair Value Up to $72 after Commodity Price Refresh

It is now assumed that oil (West Texas Intermediate) prices in 2021 and 2022 will average $57 per barrel and $67/bbl respectively (previously $55 and $57). That makes the stock look more or less fairly valued at the current price.

At the end of 2020, the company reported net proved reserves of 1.2 billion barrels of oil equivalent. Net production averaged 323 thousand barrels of oil equivalent per day in 2020, at a ratio of 70% oil and natural gas liquids and 30% natural gas.

The valuation of the firm’s Guyana assets continues to assume 10 total phases of development, consistent with management commentary. However, we risk the sixth and seventh phases at 75% and the final three at 50% in our base case. Likewise, 220 mb/d capacities for stages 4 and 5, with 180 mb/d peak output for developments 6-10. To give some indication of the upside if Hess and its partner Exxon can continue to execute and deliver the full 10 phases, we also model a scenario with no risk on the later-stage developments, and assume 220 mb/d capacities throughout. In that scenario fair value would be $89 per share.

Company Profile

Hess Corporation (NYSE: HES) is an independent oil and gas producer with key assets in the Bakken Shale, Guyana, the Gulf of Mexico, and Southeast Asia. Hess Corporation is a mining and exploration firm. The Company is involved in the exploration, development, production, transportation, procurement, and sale of crude oil, natural gas liquids (NGL), and natural gas, with operations in the United States, Guyana, the Malaysia/Thailand Joint Development Area, Malaysia, and Denmark. Exploration and Production and Midstream are the Company’s segments. It’s Exploration and Production sector searches for, develops, produces, buys, and sells crude oil, natural gas, and NGLs. The Midstream business provides fee-based services such as crude oil and natural gas gathering, natural gas processing and fractionation of NGLs, crude oil transportation by rail car, terminating and loading crude oil and NGLs.

(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

Duke Energy Corp’s (NYSE: DUK) Increase in FVE to $99 per share After 2nd Quarters Earnings

In North Carolina, Duke’s largest service territory, we view the regulatory framework as average and continue to expect Duke will receive support for its investments in the state. In early 2021, regulators approved Duke’s settlement agreement that resolves historical recovery of coal ash costs and provides clarity on future recovery.  Indiana remains constructive. Regulators approved a peer-average allowed return on equity. The subsidiary is allowed recovery for investments for renewable energy and recovery on and of investments for coal ash remediation, with a forward-looking test year. 

Management recently entered into an agreement to sell 19.9% of the entity at an attractive valuation. Duke’s $60 billion, five-year capital investment plan is focused on clean energy, as the company works toward net-zero carbon emissions by 2050 and net-zero methane emissions by 2030. Management notes growth opportunities beyond its five-year forecast, noting expectations for $65 billion to $75 billion of capital expenditures helping to support 7% annual rate base growth. Management is transitioning Duke away from coal generation. The company, which has among the largest coal fleets in the industry, aims to reduce its coal fleet by up to 70% and install up to 20 gig watts of renewable energy by 2030, depending on the outcome of its Carolina Integrated Resource Plan.

Financial Strength

Duke Energy Corp’s (NYSE: DUK) Increase in FVE to $99 per share after 2nd quarter earnings. We expect $60 billion of capital investment over the next five years. The company has manageable long-term debt maturities. Plans to sell a minority interest in Duke Energy Indiana helps reduce equity needs to fund this plan.  Duke has ample cash liquidity and borrowing capacity available under its master revolving credit facility. We believe Duke’s dividend is well covered with its regulated utilities’ earnings. Our expectations for 3.5% average annual dividend growth will represent a 70% payout based on our 2025 earnings estimate. Duke’s liquidity position and cash flow generation should give investors confidence that it can maintain and grow its dividend.

Bull Says

  • Duke’s regulated utilities provide a stable source of earnings. The company’s large capital expenditure plan should drive rate base and earnings growth for the next several years. We think management’s 5% to 7% earnings growth target from 2021 to 2025 is achievable. 
  • The company operates in mostly constructive regulatory jurisdictions, which account for most of the company’s revenue. 
  • Duke’s management team has focused on core regulated operations and growth investments.

Company Profile

Duke Energy Corp (NYSE: DUK) is one of the largest U.S. utilities, with regulated utilities in the Carolinas, Indiana, Florida, Ohio, and Kentucky that deliver electricity and gas to more than 7 million customers. Duke operates in three major segments: electric utilities and infrastructure; gas utilities and infrastructure; and commercial renewable.

 (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

Raising Targa Resources (NYSE: TRGP) FVE for Targa after increasing our G&P volumes to reflect the recovery in 2021

The firm managed through a very difficult 2020 via sharply reduced capital spending, a nearly 90% dividend reduction, and expense cuts. So far in 2021, it has done a good job, reducing debt by nearly $800 million. Targa is by no means particularly conservative on capital spending plans–its initial 2021 growth spending plans were twice our original expectations, as the rest of the midstream space hunkers down. The firm has also hinted that it may spend virtually all its excess cash on rebuying assets from its Stonepeak joint venture in early 2022 at a cost of nearly $1 billion.

LPG exports are largely contracted out to 2022 and sent mainly to Asian and Latin American markets. The Grand Prix NGL pipeline will be a highly attractive asset tha takes advantage of Targa’s position in the Permian Basin to move over 350,000 barrels per day of NGLs by our estimates in 2021 (expandable to 550,000 b/d) to Mont Belvieu, and links Targa assets at both ends of the pipe, giving it more control over the molecule and ability to earn multiple fees. The Grand Prix pipeline will reduce Targa’s costs for NGLs, as it will no longer pay third-party tariffs to transport its NGLs to market.

Financial Strength

After updating our model to reflect Targa’s higher guidance, our fair value estimate increases to $38 per share. Targa’s second-quarter results benefited from higher Permian gas volumes, thanks primarily to higher activity by private operators. As a result, Targa increased its 2021 EBITDA guidance to a midpoint of $1.95 billion from its prior midpoint guidance of $1.85 billion last quarter. The incremental cash is being applied smartly toward debt reduction for the time being, as Targa’s 2021 leverage target falls to 3.5 times from 4 times last quarter. 

Total consolidated debt fell to $7 billion from $7.4 billion sequentially. Year-to-date debt reduction totals $780 million, which is impressive. Targa also announced a new 250-million-cubic-feet-per-day plant in the Permian to be on line in early 2022 while holding 2021 expected capital spending flat. 

Peers tend to be around 75%-85% investment-grade or letter of credit-backed.Total liquidity at the end of the second quarter was $2.9 billion with no major maturities until 2026. Targa is now targeting leverage of 3-4 times as well as an investment-grade rating, which is a marked shift from prior commentary.

 Leverage now stands at 3.8 times at the end of the second quarter, and Targa expects it to be around 3.5 times by the end of the year, which our current model supports.However, it’s not clear whether Targa can achieve both its new leverage goals and execute its expected repurchase of the joint venture assets from Stonepeak (included in its May presentation), which could take place as early as the first quarter of 2022.

Bulls Say’s 

  • Targa is leveraged to the high-growth Permian, and its Grand Prix pipeline is expected to increase volumes 25% in 2021.
  • Targa has substantial excess cash after its dividends and capital spending plans in 2021 to allocate toward reducing leverage.
  • Targa is a significant fractionation player at the attractive Mont Belvieu hub.

Company Profile

Targa Resources is a midstream firm that primarily operates gathering and processing assets with substantial positions in the Permian, Stack, Scoop, and Bakken plays. It has 813,000 barrels a day of gross fractionation capacity at Mont Belvieu and operates a liquefied petroleum gas export terminal. The Grand Prix natural gas liquids pipeline recently entered full service.

(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

Viper Energy Partners (NASDAQ: VNOM) Acquires Attractive Acreage for $500 Million from Swallowtail

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

The deal is a $500 million cash and stock (55% stock, 45% cash) purchase of 2,302 net royalty acres in the Midland basin from Swallowtail Royalties, a private mineral rights firm where its acreage deals are financed by Blackstone funds. The price on a per acre basis is at over $200,000 per acre, roughly 80% higher than historical pricing and 40% higher than its last significant deal activity in May 2020.

Despite the high per-acre price, Viper has advantages, as 65% of the acres are operated by Diamondback with a net royalty rate of 3.6%. The value of the deal is demonstrated by the fact that Viper was able to offer a clear long-term growth trajectory for its Diamondback acres, substantially reducing uncertainty around future cash flows, but it wasn’t able to do the same for its non-Diamondback acres. 

The Diamondback development plan is essentially minimal production today to 1,000 barrels of oil per day (bo/d) in 2022 to over 5000 bo/d by 2024. We expect this path to generate a solid amount of value for Viper. 

Company’s Future Outlook

 At first glance, it is expected some modest upside to our fair value estimate, while maintaining our narrow moat rating. The deal is expected to be completed by the early fourth quarter, and expected post-deal leverage will be about 2 times, which we consider reasonable. Based on Diamondback’s current development plan, average net oil production in 2022 is expected to be over 1000 bo/d and Production is expected to approach 5000 bo/d by 2024.

Company Profile

Viper Energy Partners (NASDAQ: VNOM) was formed by Diamondback Energy in 2014 to own mineral royalty interests in the Permian Basin. At the end of 2020, Viper owns 24,350 net royalty acres that produced 26,551 boe/d. Proved reserves are mostly oil, and at the end of 2019 stand at 99,392 mboe. Viper’s mineral and royalty interests give it significant exposure to perpetual ownership of high margin, primarily undeveloped assets with no capital requirements to generate its long-term free cash flow. Viper is a variable distribution partnership that is taxed like a corporation in the United States.

(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.