Category: Commodities

The facility has long-term off take contracts for 100% of energy produced from investment-grade counterparties. The company’s infrastructure investment now comprises eight projects totaling more than 1.5 gig watts of generation.

The transaction is a continuation of WEC Energy’s plan to build out its renewable energy infrastructure portfolio, advantageously using its strong balance sheet to lock in returns higher than its regulated business. Management has targeted 8% unleveraged internal rates of return, which we view as attainable.

We continue to think the infrastructure investments, which have higher returns than in WEC’s regulated business with regulated utility type risks, are a positive for investors. The company has set aside $1.5 billion in its five-year capital investment program for renewable energy investments, nearly doubling the company’s current $2.2 billion portfolio. Capital investments drive our 6.5% earnings growth expectations, the upper end of management’s 5% to 7% guidance range. The company’s total capital investment plan is $16.1 billion over the next five years.

Management has previously increased its allocation to renewable energy infrastructure projects, and we wouldn’t be surprised if the company allocates additional resources to infrastructure investments. The Sapphire Sky Wind Energy investment represents nearly 30% of WEC’s five-year commitment to renewable energy infrastructure.

Company Profile

WEC Energy Group’s electric and gas utility businesses serve electric and gas customers in its Illinois, Michigan, Minnesota, and Wisconsin service territories. The company also owns a 60% stake in American Transmission Co. WEC’s asset mix is approximately 51% electric generation and distribution, 34% gas distribution, 13% electric transmission, and 2% unregulated renewable generation.

 (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.

Woodside is unique among Australian energy companies in that it has successfully managed the development of LNG projects for more than 25 years–unparalleled domestic experience at a complicated and expensive task. Adding to Woodside’s competitive advantages are the long-term 20-year off-take agreements with the who’s who of Asia’s blue chip energy utilities, such as Tokyo Electric, Kansai Electric, Chubu Electric, and Osaka Gas. These help ensure sufficient project financing during development and should bring stability to Woodside’s cash flows once projects are complete. Woodside also enjoys first-mover advantages. The NWS/JV has invested more than AUD 27 billion since the 1980s, building infrastructure at a fraction of the cost of today’s developments.

Woodside’s development pipeline is deep, enabling it to leverage the tried and trusted project-delivery platform as a template for other world-class gas accumulations off the north-west coast of Australia. Woodside is well suited to the development challenge. With extensive experience, it remains a stand-out energy investment at the right price. Gas is the fastest growing primary energy market behind coal, and the seaborne-traded LNG portion of that gas market grows faster still. China is building several import terminals, and so demand is likely to pick up, helping to move LNG pricing toward oil parity on an energy-equivalent basis.

Financial Strength

Balance sheet strength remains a key appeal of Woodside. The company’s net debt/EBITDA of just 0.9 affords it the luxury of seriously pursuing growth counter cyclically, where others necessarily focus on survival alone. Woodside’s net debt increased 60% to USD 2.6 billion at December 2020 versus one year prior, though for still modest 17% leverage (ND/ND+E). And despite expansionary capital expenditure programs, strong cash flows and a healthy balance sheet should regardless support ongoing dividend payments. We project peak net debt of around USD 9.7 billion in 2026, but net debt/EBITDA of just 1.8, and falling to sub-1.0 by 2030. This includes a sustained 80% payout ratio and a five-year average dividend of AUD 1.40 per share or 5.5% fully franked yield at the current share price. Expansionary expenditure on the Scarborough/Pluto T2 project, and potentially later on the Browse project, could see first expanded production in 2025. We model Woodside’s share of the combined capital cost at circa USD 14.0 billion, relatively the most capital-onerous of all four E&P companies, but driving a 25% increase in equity production to 125 mmboe, by 2026, and these are long-life additions.

Bull Says

• Woodside is a beneficiary of continued increase in demand for energy. Behind coal, gas has been the fastest-growing primary energy segment globally. Woodside is favorably located on Asia’s doorstep.

• Woodside’s cash flow base is comparatively diversified, with LNG making it less susceptible to the vagaries of pure oil producers. Gas is a primary component of Asian base-load power generation.

• Gas has around half the carbon intensity of coal and it stands to gain market share in the generation segment and elsewhere if carbon taxes are instituted, as some predict.

Company Profile

Incorporated in 1954 and named after the small Victorian town of Woodside, Woodside’s early exploration focus moved from Victoria’s Gippsland Basin to Western Australia’s Carnarvon Basin. First LNG production from the North West Shelf came in 1984. BHP Billiton and Shell each had 40% shareholdings before BHP sold out in 1994 and Shell sold down to 34%. In 2010, Shell further decreased its shareholding to 24%. Woodside has the potential to become the most LNG-leveraged company globally.

(Source: Factset)

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.

We expect high-single-digit growth in utility earnings over the next five years, driven in large part by grid investment at DTE Electric and replacing aging infrastructure at DTE Gas. DTE Electric is also investing heavily in gas power generation and renewable energy to replace its aging coal fleet. We estimate DTE will invest $18.5 billion at its utilities during the next five years in a Michigan regulatory framework that is constructive for investors.

We are less bullish about the earnings contribution from the power and industrial segment as reduced emissions fuel, or REF, earnings decline from the expiration of tax credits. However, we believe new industrial cogeneration projects and renewable natural gas from landfill projects should, for the most part, offset the REF decline. We estimate flat earnings will reduce the segment’s contribution to consolidated earnings from almost 13% in 2021, following the separation of DTM, to less than 10% by 2025.

Financial Strength

DTE’s book debt/capital ratio rose to 61% at 2020 year-end, a significant increase from five years ago when it averaged in the low-50% range. A stable interest coverage ratio during the next five years is expected, with EBITDA/ interest expense over 4 times. On June 24, DTE declared a $0.825 per-share quarterly dividend ($3.30 per-share annualized) on its common stock payable on Oct. 15, 2021, for shareholders of record at the close on Sept. 20, 2021. DTE management has indicated that the DTE dividend plus the DT Midstream dividend will total $4.70-$4.80 per-share annualized starting in the third quarter of 2021. The midpoint of this guidance would represent a 9.4% increase over the previous DTE dividend before the separation of DTM. The current    annual DTE dividend of $3.30 per share represents a payout ratio of approximately 60% on our 2021 EPS estimate of $5.51

Bull Says

• Shareholders will receive a dividend increase when the DTE Energy and DT Midstream dividend are combined. It is estimated a 9.4% combined dividend increase, followed by 6% annual increases for DTE from 2022 to 2025.

• Michigan’s aging utility infrastructure needs investment, which will mean regulated growth opportunities for DTE.

• Over the past 10 years, Michigan regulation has been constructive for shareholders and is expected to remain favorable.

Company Profile

DTE Energy owns two regulated utilities in Michigan. DTE Electric serves approximately 2.2 million customers in southeastern Michigan including Detroit. DTE Gas serves 1.3 million customers throughout the state. In addition, DTE has nonutility businesses and investments including energy marketing and trading, renewable natural gas facilities, and on-site industrial energy projects.

(Source: Factset)

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.

Even with the rally year to date, we have energy as fairly valued, with the median stock trading at a price/fair value ratio of 1. Opportunities exist across all segments, particularly services and integrated, which trade at a 29% and 10% discount to intrinsic value, respectively. Exploration and production stocks have surged in the last three months, and on average the group is 8% overvalued (though a handful of 4-star stocks are still underappreciated, in our view).

The ongoing mass rollouts of COVID-19 vaccinations in developed markets will be the main catalyst for year-on-year demand growth of 5.1 million barrels per day in 2021. Our updated demand estimates for 2021 and 2022 are 96.2 mmb/d and 100.4 mmb/d, respectively. While optimistic about demand improvements, producers remain hesitant on the supply end.

During its June 1 meeting, OPEC+ confirmed it will go ahead with modest volume increases of 350 and 450 mb/d in June and July, respectively (which means the group will still be withholding at least 2 mmb/d). And U.S. shale drillers—which have historically acted as swing producers, like OPEC—have steadfastly refused to increase capital budgets to take advantage of higher oil prices, preferring to prioritize free cash flows and distributions to shareholders.

As a result, we now anticipate global demand will outpace supply this year by 1.0 mmb/d. These dynamics have pushed oil prices to what we consider frothy levels, with the West Texas Intermediate benchmark currently 33% higher than our $55/bbl midcycle forecast. Without an abrupt change in strategy from OPEC or the U.S. shale industry, the oil markets will remain tight this year, and short prices could climb even higher.

(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.