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

Alumina Ltd’s (ASX: AWC) Commodity Price Change

Alumina is effectively a forwarding office for AWAC profits. Its profits stem from its equity share in AWAC, less local head office and interest expenses. While AWAC enjoys a low operating cost position relative to its competitors, the cost curve is relatively flat, and competitive pressures exist via supply from China. Alumina was the result of a demerger of WMC’s aluminum assets in 2003. AWAC has substantial global bauxite reserves and alumina refining operations, many of which are in the lowest quartile of the cost curve.

Key Investment Consideration

We expect aluminum Ltd’s (ASX: AWC) demand to grow considerably in the future, with global consumption benefiting from transport’s electrification. Supply in China that is managed by state-owned enterprises will prove sticky, with little capacity being cut even if aluminums prices decrease considerably. Alumina’s production has declined over the past five years as it closed capacity in a bid to reduce costs. With no major expansions planned, the company will continue to operate in maintenance mode.

Financial strength

At end 2020, AWAC (Alcoa World Alumina and Chemicals) had USD 361 million in net cash, marginally improved on 2019’s USD 340 million. And at end June 2021, Alumina had just position of USD 5.7 million in net debt, also marginally improved. Historically, AWAC reinvested heavily in its operations at the expense of dividend growth. We expect the company to remain largely in maintenance mode, with no major projects planned over the foreseeable future. Therefore, AWAC should pay out most if not all of its operating cash flows in the form of a dividend to Alumina Ltd. and Alcoa. This will help to maintain Alumina Ltd’s strong financial health. We expect AWAC to remain unleveraged and Alumina to remain modestly leveraged at worst.

Bull Says

  • Alumina is a beneficiary of continued global economic growth and increased demand for aluminum via electrification of transport.
  • AWAC is a low-cost alumina producer. It has improved its position on the cost curve relative to peers through expansion of low-cost refineries and closure of high cost operations.
  • The amended AWAC agreement ensures that Alumina will be able to maximize value for shareholders and makes it a more attractive acquisition target.

Company Profile

Alumina Ltd. (ASX: AWC) is a forwarding office for Alcoa World Alumina and Chemicals’ distributions. Its profit is a 40% equity share of AWAC profit, less head office and interest expenses. Its cash flow consists of AWAC distributions. AWAC investments include substantial global bauxite reserves and alumina refining operations. Declining capital and operating costs and a lack of supply discipline from China are likely to result in competitive pressures, but Alumina’s position in the lowest quartile of the industry cost curve is defensive.

 (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

Williams’ Deepwater Whale Project One of Several High-Return Growth Opportunities

 The 2018 consolidation of William Partners strengthened Williams’ financial position and lowered its cost of capital. With nearly half of its earnings and cash flow coming from rate-regulated gas pipelines, Williams increasingly looks more like a utility than an energy company. Williams delivered steady performance through turbulent energy markets the last two years, relying on its largely fee-based, long-term contracted revenue and strategically well-positioned assets.

Most of Williams’ growth investment will be directed toward Transco expansions and projects to reduce carbon emissions. Transco capacity will reach 20 bcf/d by 2023 from 10 bcf/d in 2014 and continue to grow as natural gas demand in the eastern U.S. grows. With more than 100 bcf/d in interconnects and regulatory hurdles for competing projects, Transco faces no major competitive threats.

Williams’ other businesses are demonstrating their favorable competitive positions with steady results through volatile energy markets. The Northeast gathering and processing business has a captive customer base in low-cost producing regions. The Northwest pipeline benefits from steady demand from utilities and supply from producers in the Western U.S. Williams is growing and improving the competitive position of its other assets through upstream partnerships.

Financial Strength

Williams has strengthened its balance sheet and dividend coverage in recent years. Its improved credit profile and long-term, fixed-fee contract structures gives Williams financial flexibility to pursue growth investment opportunities, grow the dividend, keep the balance sheet strong, and possibly repurchase shares starting in 2022. 

Williams has raised its dividend to $1.64 in 2021 from $1.20 in 2017 while strengthening its balance sheet. The 2018 consolidation of Williams Partners and elimination of incentive distribution rights resulted in a shadow dividend cut of about 17% for former Williams Partners unitholders.

The flip side was an improved credit profile, higher dividend coverage, and ability to invest in growth without issuing equity. Williams remains engaged in litigation with Energy Transfer over its $1.5 billion payment due to Energy Transfer for its alleged breach of the merger agreement. Williams is seeking damages from Energy Transfer as well and to date has not reserved anything for the $1.5 billion potential payment.

Bulls Say’s 

  • A large, well-positioned network allows Williams to invest in high-return growth projects with minimal regulatory hurdles.
  • After several years of structural and financial moves, Williams is positioned to maintain steady dividend growth for the foreseeable future.
  • Williams is leveraged to U.S. LNG exports via agreements with LNG terminals as a key supplier of gas.

Company Profile 

Williams is a midstream energy company that owns and operates the large Transco and Northwest pipeline systems and associated natural gas gathering, processing, and storage assets. In August 2018, the firm acquired the remaining 26% ownership of its limited partner, Williams Partners.

(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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NRG Energy Continues Its Move towards Consumer Services Business Model

The company remains on track to meet our full-year outlook, which includes an estimated $1 billion gross negative impact from winter storm Uri in mid-February, in line with management’s guidance. Our fair value estimate includes a $2 per share reduction to reflect storm losses partially offset by near-term cost-savings benefits and long-term benefits from changes in Texas energy markets that should favor NRG.

After closing the $3.625 billion Direct Energy deal in January and several moves to shrink its power generation fleet, NRG is on a path toward becoming primarily a retail energy services company rather than an independent power producer. It already ranks among the largest retail electricity and natural gas companies in the U.S. and plans to expand its customer base in areas outside its core Texas market. Although this strategic shift changes NRG’s fundamental value drivers, we still don’t think it can establish a long-term competitive advantage that would warrant an economic moat.

Management reaffirmed its $2.4 billion-$2.6 billion EBITDA guidance excluding storm impacts for 2021, in line with our estimate. Management has pulled back substantially on its debt reduction plan and now targets $255 million of debt reduction this year, down from its pre-storm plan to retire $1.05 billion of debt this year. share buybacks and dividend growth will become top capital allocation options in 2022 as NRG pushes back its timeline for achieving investmentgrade credit ratings.

Company Profile 

NRG Energy is one of the largest retail energy providers in the U.S., with 7 million customers, including its 2021 acquisition of Direct Energy. It also is one of the largest U.S. independent power producers, with 22 gigawatts of nuclear, coal, gas, and oil power generation capacity primarily in Texas. Since 2018, NRG has divested its 47% stake in NRG Yield, among other renewable energy and conventional generation investments. NRG exited Chapter 11 bankruptcy as a stand-alone entity in December 2003.

(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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Mineral Resources Ltd (ASX: MIN) Continue To Be Expensive, But There Are Still Pockets Of Value To Be Found.

 Revenue, profit, and market capitalization all grew significantly, but are expected to rely more heavily on lithium production going forward. Management has significantly improved disclosure, earnings streams have been materially diversified and the investment strategy has consistently generated high returns on invested capital. We expect a well-supplied lithium market in the longer term, coupled with weaker demand growth for steel, particularly from China, to drive lower prices and reduce the pool of available contracting work. Despite this, we think Mineral Resources can drive EPS growth on volume.

Key Investment Considerations

Management has significantly improved disclosure, earnings streams have been materially diversified and the investment strategy has consistently generated high returns on invested capital. We think the business model is demonstrably sustainable, centering on Mining Services around Australian bulk commodities. Mineral Resources will selectively own and develop its own mining operations, though with the aim of subsequent sell-down while retaining core processing and screening rights.

Financial Strength

Mineral Resources is in strong financial health. Albemarle’s acquisition of a 60% stake in Wodgina lithium instantly expunged net debt in first-half fiscal 2020.From a net debt position of AUD 872 million at end June 2019. Lithium project construction expenditure was at the core of the cash drain. The current circumstance is a return to the usual territory for Mineral Resources, which operated in a position of little to no net debt for at least the eight years to fiscal 2018; a sensible position for a company operating in the volatile mining services space. Mineral Resources had faced the key question of what it should do with its cash, with a shrinking pool of growth and investment opportunities in a lower iron ore price environment. 

Bull Says

  • Mineral Resources grew strongly since listing in 2006. The chairman and managing director have been with the business for over a decade and have meaningful shareholdings.
  • Australian iron ore is mainly purchased by Chinese steel producers, meaning Mineral Resources offers leveraged exposure to Chinese economic growth.
  • Mineral Resources has a recurring base of revenue and earnings from processing infrastructure.
  • Mineral Resources’ balance sheet is very strong with net cash. This has opened up the opportunity for lithium investments selling into highly receptive markets.

Company Profile

Mineral Resources Ltd. (ASX: MIN) listed on the ASX in 2006 following the merger of three mining services businesses. The subsidiary companies were previously owned by managing director Chris Ellison, who remains a large shareholder despite selling down. Operations include iron ore and lithium mining, iron ore crushing and screening services for third parties, and engineering and construction for mining companies. Mining and contracting activity is focused in Western Australia.

 (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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Energy Transfer LP (NYSE: ET) on Track for Blockbuster 2021, but Capital Allocation Is a Risk

Management reaffirmed its full-year $12.9 billion to $13.3 billion adjusted EBITDA guidance, and our estimate remains at the high end of that range. This includes the $2.4 billion EBITDA benefit from the mid-February winter storm. Energy Transfer’s limited partner unit’s trade at a 50% discount to our fair value estimate as of Aug. 3, making it one of the cheapest companies in the energy sector.

Earnings growth in the natural gas liquids and refined products segment continues to lead the way, making that segment the largest earnings contributor on a run-rate basis. This is in line with our expectations as volumes ramp up from favorable market conditions and new projects online. Second-quarter earnings in Energy Transfer’s other segments rebounded from last year when energy market shit a bottom at the height of the COVID pandemic. Capital allocation remains a key variable after Energy Transfer achieved investment-grade credit ratings with $5.2 billion of debt reduction this year. 

Company’s Future Outlook

We expect little growth in these segments going forward due to unfavorable reconstructing prices and lack of organic investment potential. Management reaffirmed their plan for $500 million to $700 million annual growth investment in 2022 and 2023, in line with our estimate. We think Energy Transfer is inclined to make more acquisitions like its $7 billion Enable deal that should close by year-end. Management has discussed midstream consolidation and downstream investments. We believe unit buybacks would be the most value-accretive use of capital. The board maintained its $0.61 annualized distribution, as we expected.

Company Profile

Energy Transfer LP (NYSE: ET)  owns a large platform of crude oil, natural gas, and natural gas liquid assets primarily in Texas and the U.S. midcontinent region. Its pipeline network transports about 22 trillion British thermal unit per day of natural gas and 4.3 million barrels per day of crude oil. It also has gathering and processing facilities, one of the largest fractionation facilities in the U.S., and fuel distribution. Energy Transfer also owns the Lake Charles gas liquefaction facility. It combined its publicly traded limited and general partnerships in October 2018.

(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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Santos and Oil Search Agree Merger Terms

Well-timed East Australian coal seam gas purchases and subsequent partial sell-downs bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia’s largest coal seam gas producers and continues to prove additional reserves. It is the country’s largest domestic gas supplier.

Coal seam gas purchases increased reserves, and partial sell-downs generated cash profits, putting Santos on solid ground to improve performance. Group proven and probable, or 2P, reserves doubled to 1,400 mmboe, primarily East Australian coal seam gas. Coal seam gas has grown to represent more than 40% of group 2P reserves, despite partial equity sell-downs. A degree of confidence can be drawn from project partners. U.S. energy supermajor ExxonMobil, the world’s largest publicly traded oil and gas company, is 42% owner and the operator of the PNG LNG project.

The Gladstone LNG project was built and is operated by GLNG Operations, a joint venture of owners Santos (30%), Petronas (27.5%), Total (27.5%), and Kogas (15%). Petronas is Malaysia’s national oil and gas company and the world’s second-largest LNG exporter. The company increasingly enjoys export pricing on its gas. In addition to Santos’ Gladstone LNG, several other third-party east-coast LNG projects conspire to drive domestic gas prices higher. As the largest domestic gas supplier, Santos can expect significant bang for its buck, with limited additional capital or operating cost required to capture enhanced prices.

Financial Strength

Santos has moderate leverage (ND/ND+E) of 28% and maintenance of strong net operating cash flow is reassuring. Santos’ debt covenants have adequate headroom and are not under threat at current oil prices. The weighted average term to maturity is around 5.5 years. Capital expenditure of USD 4.0 billion, beginning 2022 on the Dorado oil project and the Barossa to Darwin LNG upgrade. But this is excellent near-term bang-for-buck expenditure, increasing group production by 65% to 125mmboe by 2026. Capital efficient development and fast up-front cash flows from Dorado’s oil should combine to ensure Santos’ leverage ratios continue to decline from current levels despite outgoings.

Bull’s Say

  • Santos is a beneficiary of continued global economic growth and increased demand for energy. Aside from coal, gas has been the fastest-growing primary energy segment globally. The traded gas segment is expanding faster still.
  • Santos is in a strong position, with 0.9 billion barrels of oil equivalent proven and probable reserves, predominantly gas, conveniently located on the doorstep of key Asian markets.
  • Gas has about half the carbon intensity of coal, and stands to gain market share in the generation segment and elsewhere as carbon taxes are rolled out.

Company Profile

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

(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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TC Energy’s U.S. FVE Declines Modestly Due to Exchange Rates & Canadian FVE Remains Unchanged

with several years of project backlog, despite Enbridge largely focusing on oil assets, while TC’s focus is natural gas. However, we also anticipate that any major new pipeline project for either firm will face substantial stakeholder challenges from a legal, regulatory, or community perspective, raising the risks and costs.

The most critical differences between Enbridge and TC Energy arise from their approaches toward energy transition. Canadian carbon emissions taxes are expected to increase to CAD 170 a ton by 2030 from CAD 40 today, meaning it is critical that TC Energy, with its natural gas exposure, follow Enbridge’s approach to rapidly reduce its carbon emission profile and continue to pursue projects like the Alberta Carbon Grid, which will be able to transport more than 20 million tons of carbon dioxide.

In addition, Enbridge’s backlog is more diversified across its businesses already, and it already has a more material Renewables business, including hydrogen, renewable natural gas, and wind efforts. This shift is especially the case as a CAD 170 per ton carbon tax in Canada opens the door for potentially sizable investments to reduce carbon emissions.

Financial Strength

TC Energy carries significantly higher leverage than the typical U.S. midstream firm, with current debt/EBITDA well over 5 times. Its long-term target is in the high 4s, again materially higher than peers which are generally targeting leverage of 3 to 4 times. Lower capital spending would move this date forward materially. Midstream peers are largely transitioning to generating free cash flow after distributions or dividends, and in some cases, we consider the shift to be permanent.TC Energy has outlined plans to spend about CAD 5 billion annually on a sustainable basis. About CAD 1.5 billion to CAD 2 billion in maintenance spending on its pipelines and 85% of this is recoverable due to being invested in the rate base. Then, Bruce Power, the U.S. natural gas, and the Canadian natural gas pipelines will consume about CAD 1 billion each annually. TC’s dividend growth remains prized by its investors, and 5%-7% growth going forward is easily supportable under the firm’s 60/40 framework.

Bull Says

  • TC Energy has strong growth opportunities in Mexican natural gas, as well as LNG.
  • The company offers virtually identical growth prospects and a protected earnings profile to Enbridge but allows investors to bet more heavily on natural gas.
  • The Canadian regulatory structure allows for greater recovery of costs due to project cancelations or producers failing compared with the United States.

Company Profile

TC Energy operates natural gas, oil, and power generation assets in Canada and the United States. The firm operates more than 60,000 miles of oil and gas pipelines, more than 650 billion cubic feet of natural gas storage, and about 4,200 megawatts of electric power.

 (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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Range: A Natural Gas company has Ample Free Cash Flows to Devote to Debt Reduction

The downward trajectory of natural gas prices in the last few years has forced Range to focus on cost-cutting. It has been fairly successful at reducing costs over the last few years, and the firm also boasts best-in-class drilling and completion costs. It has not historically been able to generate free cash flow, but this should change in 2021 with higher oil and gas prices and Range shifting its stance to operating in maintenance mode. It has not been as explicit as peers with regards to capital allocation and production targets such as only spending 75% of operating cash flow in any given year.

Financial Strength

Range’s balance sheet is a cause for concern. At the end of the last reporting period the firm had just over $3 billion in long-term debt, resulting in lofty leverage ratios. Debt/capital was 67%. We expect leverage to decline in 2021 with free cash flow generation, but Range needs to do more (asset sales, partnerships) to ensure its balance sheet remains in a prudent position on a more sustainable basis. We expect leverage to fall to below 1.5 times in late 2022 given expected free cash flows. We expect Range to generate free cash flow in 2021 with the recent increase in oil and gas prices. This should allow it to make progress on debt reduction. The firm also has about $1.9 billion available on its revolving credit facility for additional flexibility, so there is a reasonable liquidity buffer. But it would be unwise to heavily utilize this revolver, as it would leave the firm with nothing in reserve. Besides, the capacity of this revolver is subject to periodic redetermination and could come down if lenders get worried about the firm’s ability to service its obligations

Bull Says

  • As an early entrant into the Marcellus, Range has a big, blocky acreage position that allows for longer lateral drilling, decreasing capital costs per unit of production.
  • Range’s capacity on the Mariner East 2 pipeline gives it access to international NGL markets, supporting realized prices.
  • The firm enjoys peer-leading drilling and completion costs per thousand lateral feet.

Company Profile

Fort Worth-based Range Resources is an independent exploration and Production Company with that focuses entirely on its operations in the Marcellus Shale in Pennsylvania. At year-end 2020, Range’s proved reserves totaled 17.2 trillion cubic feet equivalent, with net production of 2.2 billion cubic feet equivalent per day. Natural gas accounted for 70% of production.

 (Source: Morningstar)

General Advice Warning

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

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Soggy Outlook from Origin

Despite considerably higher power forward prices, operating earnings (EBITDA) are expected to drop -36-56 percent in FY22, according to the projection.

Credit Suisse believes the energy market downgrade cycle will be complete if consensus converges on the company’s FY23 guidance range, albeit it retains its lower-end predictions.

For the first time, guidance for FY22 and FY23 energy markets was issued alongside the June quarter report. FY22 EBITDA is expected to be $450-600 million, while FY23 is expected to be $600-850 million.

According to Goldman Sachs, FY22 was always going to be a low point for energy markets, but the outlook was worse than projected. While margins may be constrained in FY22, they should rebound in the following years.

The APLNG joint venture, which continues to succeed, was the only bright spot in the update for brokers. APLNG production in the June quarter was 173 PJ, bringing the year total to 701 PJ. The payout to Origin Energy for FY21 is $709 million, which is broadly in line with forecasts, but, as Macquarie points out, this is where the announcement’s good elements end.

Morgan feels that the downgrade to energy markets is more than offset by the higher projected prices obtained by APLNG in the short term, and so raises its oil price assumptions, resulting in an upgrade to integrated gas profits forecasts.

Retail prices and wholesale purchase costs have largely been determined, according to the broker, thus there is limited possibility for energy market earnings to rise in FY22. Higher market prices and volatility are expected to pass through to higher consumer pricing in FY23. Overall, Morgan feels the market undervalues the combination of electricity and LNG risk.

(Source: Fact Set)

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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Vale’s Performance Has Been Boosted By Rising Iron Ore Prices Despite of Poor Operating Performance

Iron ore fines and pellets production surpassed the previous quarter by 11% to 84 million tones, supporting sales volumes to a total of 75 million tons, up 14% from the previous quarter. Elevated prices for Vale’s most important commodity more than offset a hit to cash costs from higher maintenance, equipment, and transportation costs. At our unchanged fair value estimate of USD 19, Vale’s shares trade at a 10% premium with the elevated iron ore price more than compensating for any residual concerns about their tailings dam disasters.

This quarter, Vale realized a sky-high average iron ore fines price of USD 183 per ton, up from USD 89 per ton at the same time last year. Vale is poised to ramp iron ore output in the second half with dry season and full capacity signaled from Serra Leste and Fábrica mines supporting the group’s unchanged full year target. Currently, production capacity is at 330 million tones and this is on track to increase to 400 million tons by the end of 2022, and to 450 million tones thereafter. This will ensure reliable supply is available, providing a buffer to unexpected operational challenges and swing capacity to meet strong demand.

Advancements have also been made in Vale’s base metals business. The Reid Brook deposit as part of the Voisey’s Bay Mine Expansion project has started production. The project represents a small step in the portfolio towards electrification and decarburization, but the investment is dwarfed by the importance of iron ore to Vale.

Company’s Future Outlook

We expect strong profitability to continue into the second half, principally a function of the still-lofty iron ore price. Nickel and copper suffered from the Sudbury labor disruptions causing stoppage expenses and softer production. Vale has put their nickel and copper guidance for the full year under review and we’ve reduced our full year group volume forecasts by 10% to 15%. However, with Returns and earnings from iron ore currently so strong, we View the impact as negligible.  The second part of the project, Eastern Deeps mine, is expected to start up in the second half of 2022. By 2025, the two mines are anticipated to contribute to an additional annual production of 40,000 tons of nickel, 20,000 tons of copper and 2,600 tons of cobalt as by-products

Company Profile

Vale is the world’s largest iron ore mine and one of the largest diversified miners, along with BHP and Rio Tinto. Earnings are dominated by the bulk materials division, primarily iron ore and iron ore pellets, with minor contributions from iron ore proxies, including manganese and coal. The base metals division is much smaller, primarily consisting of nickel mines and smelters with a small contribution from copper.

(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.