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

Exxon’s Integrated Model Benefits From Current Market; Increasing Fair Value Estimate

Business Strategy & Outlook

While many of its peers have announced intentions to divert investment to renewables to achieve long-term carbon intensity reduction targets, ExxonMobil remains committed to oil and gas. It has responded to calls to bring in more outside voices to its board and announced emissions reduction targets. It is also investing in low-carbon technologies, but each of these efforts is measured and keeps oil and gas production at the core. While this strategy is unlikely to win praise from environmentally oriented investors, it’s likely to prove more successful and probably holds less risk. The end of oil is likely to occur, but not anytime soon. Gas is likely to have an even longer life, thanks to the relative attractiveness of its emissions intensity to coal for power generation and the need to supplement intermittent renewable power. These trends along with growing demand for chemicals are what drives Exxon’s investment strategy and will likely deliver superior returns. To satisfy investors, Exxon has reduced previously aggressive spending plans by over 30% to $20 billion-$25 billion annually for 2022-26, which should keep the dividend safe at $50 a barrel. Earnings should still grow, however. Current plans call for a doubling of earnings and cash flow from 2019 levels by 2027, thanks to structural cost efficiencies and high-margin new projects. Production will grow modestly through 2027, but portfolio profitability is set to improve thanks largely to high-margin Guyana volumes (more than 850 thousand barrels of oil equivalent per day by 2027) backfilling declines in North American dry gas production and lower value divestments. Exxon’s high-quality Permian position, which affords capital flexibility and generates free cash flow, should surpass 800 mboe/d by 2027. Exxon’s downstream and chemical segments have suffered from decade-low industry margins in the recent past, but market conditions are beginning to revert to midcycle levels, lifting earnings. Investments will focus on producing higher-value lubricants and diesel in its downstream segment and performance products in its chemical segment, which should lift returns and earnings further.

Financial Strengths

In 2020, Exxon relied on its balance sheet to avoid cutting its dividend. As a result, gross debt increased from $46.9 billion at year-end 2019 to $67.6 billion at year-end 2020. By year-end 2021, Exxon reduced total debt to $47.7 billion, bringing debt/capital to 22%, within its targeted range of 20%-25%. Further debt reduction year to date has brought net debt/capital to 13% by mid-2022. Management expects to spend $21 billion-$24 billion in 2022, in line with its long-term guidance of $20 billion-$25 billion annually through 2027. At this level, Exxon estimates it can cover the capital program and dividend, assuming $37/bbl oil and average downstream and chemical margins in 2022. Proceeds from the remaining half of an ongoing $15 billion divestment program should supplement cash flow, as well. There is enough flexibility in the plan to keep the dividend safe in the event that commodity prices are marginally lower than expected. In a higher oil price environment, one does not expect Exxon to increase capital spending but to direct excess cash flow to debt reduction and shareholder returns. After reintroducing share repurchases with a $10 billion plan, Exxon increased that amount to $30 billion through 2023. Dividend growth is likely to resume soon, given the sharp reduction in debt. Shareholder return increases, particularly repurchases, should continue, considering the high oil price environment and guidance for $100 billion in surplus cash flow through 2027 assuming $60/bbl oil.

Bulls Say

  • Exxon has responded to shareholder concerns by reducing spending, appointing new board members, increasing disclosure, and announcing emissions reduction targets. 
  • Exxon will see its portfolio mix shift to liquids pricing as gas volumes decline and new oil projects start production. Cash margins should improve as a result, thanks to Permian and Guyana volumes. 
  • With coordination between upstream and downstream operations, as well as integrated refining and chemical facilities, Exxon achieves a high level of integration that creates value, as opposed to simply owning the assets.

Company Description

ExxonMobil is an integrated oil and gas company that explores for, produces, and refines oil around the world. In 2021, it produced 2.3 million barrels of liquids and 8.5 billion cubic feet of natural gas per day. At the end of 2021, reserves were 18.5 billion barrels of oil equivalent, 66% of which were liquids. The company is the world’s largest refiner with a total global refining capacity of 4.6 million barrels of oil per day and one of the world’s largest manufacturers of commodity and specialty chemicals.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities

Genesis’ Strong Fiscal 2022 Underpinned by High Prices and Increased Rainfall

Business Strategy & Outlook

Genesis operates a mix of thermal (coal and gas) and hydro generation, with total annual production of approximately 7,000 GWh. The company’s hydro generation provides it with low-cost generation during times when there is sufficient rainfall and/or snowmelt. Conversely hydro generation can fall sharply when inflow to the firm’s lakes recedes because of insufficient rainfall. During such times, production from its thermal power plants can be ramped up to make up for the shortfall in hydro generation. Spot prices can increase dramatically during periods of low rainfall, reflecting the demand-supply mismatch caused because of lower nationwide energy output. Such times tend to favor Genesis as the excess generation is sold at higher prices. Consequently, Genesis’ profitability and margins can increase during periods of low rainfall and high electricity prices. Genesis hedges its gas requirements by holding a 46% stake in New Zealand’s Kupe gas field. Under the current contract, Genesis is obligated to purchase the entire natural gas output from Kupe. This provides the firm with a reliable supply of gas to power its thermal plants and also underpins Genesis’ dual-fuel offering to its customer base. Genesis is also entitled to its share of LPG and oil from Kupe. The oil is exported, while LPG is on-sold to its residential and commercial customers. Kupe introduces oil price risk, though hedging helps in the near term. The main concern is that Kupe earnings will end in 10-15 years, depending on the extent to which its life can be extended through new oil and gas discoveries. This is a risk to Genesis’ earnings, cash flow, and dividends over the long term. As transmission lines are upgraded and more renewable energy is developed, Genesis will likely close some of its aging thermal generation units in the medium term.

Financial Strengths

Genesis Energy’s financial leverage is aggressive following recent acquisitions, however, the given expectations for solid earnings growth, long average debt maturity profile and the ongoing dividend reinvestment plan. As of June 2022, gearing (as measured by debt/capital) was 36%, down slightly on last year. Net debt/EBITDA (adjusted for equity credit on subordinated debt and excluding one-off costs) was 2.7 times in fiscal 2022, within management’s target of 2.4-3.0 times. The forecasted unadjusted net debt/EBITDA, which one can think is the better way to judge financial strength, of 2.7 times in fiscal 2023. This is a little aggressive but this ratio is to fall toward 2.5 times by fiscal 2024. Guidance is for capital expenditure of up to NZD 80 million in fiscal 2023. The elevated capital expenditure for a few years before falling back to typical levels of below NZD 70 million per year. Nonetheless, free cash flow should remain strong.

Bulls Say

  • Persistently high wholesale electricity prices are flowing through to customer tariffs, supporting earnings growth. 
  • A mix of thermal and hydro generation assets allows Genesis Energy to take advantage of high electricity prices during periods of low rainfall and low hydro storage. 
  • The Pole 3 cable, linking the South Island to the North Island, reduces price disparity between the two islands and reduces location cost risk for all generators.

Company Description

Genesis Energy is one of New Zealand’s leading producers of electricity, accounting for more than 15% of the country’s total generation. The firm enjoys a strong retail presence, with the highest retail market share, at over 25%. The company has a mix of renewable and thermal assets, with the latter accounting for about 55%-60% of the firm’s overall production. The company has a 46% interest in the Kupe oil and gas field.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

SQM’s Growing Lithium Capacity Should Benefit From Higher Prices as EV Adoption Rises

Business Strategy & Outlook

Through its access to high-quality mineral deposits, Sociedad Quimica y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert. As electric vehicle penetration increases, the high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities. SQM is the top three lithium producers globally. The company is in the midst of expanding its lithium carbonate production capacity to at least 250,000 metric tons from 70,000 in 2019. SQM is also investing in lithium hydroxide production in Australia through a joint venture with Wesfarmers, Covalent Lithium, which will be a fully integrated spodumene-based lithium hydroxide producer. The first part of the project entered production in the mid-2020s, with a capacity expansion in the second half of the decade. Unit costs should sit on the lower half of the lithium hydroxide cost curve. SQM is a market leader in potassium nitrate, a specialty fertilizer used in high-value crops, including fruits and vegetables. Specialty potash demand should benefit from the shift in emerging-market diets to higher-value foods. While specialty fertilizer prices tend to move in line with commodity potash prices, they have been less affected by movements in commodity potash prices. SQM is also a small player in commodity potash. SQM is the world’s largest producer of iodine, used in X-ray contrast media, pharmaceuticals, and LCD films. Iodine demand has grown 3% annually over the past decade and should continue to grow at this pace as healthcare spending rises with aging populations. SQM had increased its market share to 35% by the end of 2017 through a volume-over-price strategy, which caused iodine prices to fall. After higher-cost supply reduced production and SQM achieved its market share goals, the company is now acting as a rational player and prices have increased since 2018.

Financial Strengths

SQM is in excellent financial health. As of June 30, 2022, cash and cash equivalents, including current financial assets, and total debt both stood at roughly $2.6 billion. SQM’s debt position has grown in recent years as the company is in the midst of quadrupling its Chilean lithium capacity, funding development of its Australian lithium joint venture project, and expanding its fertilizer and iodine production capacities. The company plans to spend over $2 billion in capital expenditures from 2021 to 2024 to support these growth initiatives. To help fund these investments, the company issued $1.1 billion in equity in early 2021. However, given the recent rise in lithium, fertilizer, and iodine prices, it is expected SQM will be able to pay for the remaining capital expenditures with cash generated from its operations. Ultimately, the company’s balance sheet remains healthy as profits grow from the increased volumes and higher lithium prices. SQM’s dividend varies each year. It is calculated as a percentage of net income that ranges between 50% and 100% depending on balance sheet metrics, including total current assets divided by total current financial liabilities and total liabilities minus current financial assets divided by total equity. While SQM’s dividend will fluctuate from year to year, the company will generate enough cash flow to meet all of its financial obligations, including dividends.

Bulls Say

  • SQM’s crown jewel is its Salar de Atacama operation in Chile, which is the lowest-cost lithium deposit globally. Its capacity expansions at this resource should create long-term value. 
  • The company’s specialty fertilizer blends of potassium, nitrates, and sodium garner a premium to commodity fertilizers due to their use in high-value crops, including fruits and vegetables. 
  • Lithium prices will remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for SQM.

Company Description

Sociedad Quimica y Minera de Chile is a Chilean commodities producer with significant operations in lithium (primarily used in batteries for electric vehicles and energy storage systems), specialty and standard potassium fertilizers, iodine (primarily used in X-ray contrast media), and solar salts. The company extracts these materials through its high-quality caliche ore and salt brine deposits. SQM is also developing a hard rock lithium project in Australia.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities

Celanese’s acetate tow sales will slightly decline over the long term

Business Strategy and Outlook 

Celanese is the world’s largest producer of acetic acid and its chemical derivatives, including vinyl acetate monomer and emulsions. These products are used in the company’s specialized end products or sold externally. Celanese produces these commodity chemicals in its acetyl chain segment (roughly 45% of 2022 pro forma EBITDA including acquisitions), which primarily serves the automotive, cigarette, coatings, building and construction, and medical end markets. Celanese’s Clear Lake, Texas, plant benefits from a cost-advantaged feedstock from low-cost U.S. natural gas. The company plans to expand acetic acid production capacity at Clear Lake by roughly 50%, which should benefit segment margins thanks to lower unit production costs relative to other geographies. The engineered materials, or EM, segment (45%) produces specialty polymers for a wide variety of end markets. Celanese is investing in the expansion of this business through acquisition. The company completed the acquisition of Santoprene in late 2021 and announced plans to acquire the majority of DuPont’s mobility and materials portfolio in a deal that should close by the end of 2022. Both deals add complementary products to Celanese’s existing portfolio. After the DuPont acquisition closes, the EM segment will generate the majority of revenue.

The automotive industry will account for the majority of EM segment revenue, while other key end markets include electronics. EM uses commodity chemicals, such as acetic acid, methanol, and ethylene to produce specialty polymers. Celanese should benefit from automakers light weighting vehicles, or replacing small metal pieces with lighter plastic pieces. Celanese should also see growth from increasing electric vehicle and hybrid adoption, as the company will sell multiple components specific to these powertrains. By 2030, the two thirds of all new global auto sales will be EVs or hybrids. Acetate tow, which is Celanese’s smallest segment, produces acetate tow primarily for cigarette filters. Cigarette sales are in secular decline across most countries, and Celanese’s acetate tow sales will slightly decline over the long term.

Financial Strength

Celanese is currently in excellent financial health. As of June 30, the company had around $3.8 billion in debt and $0.8 billion in cash. The net debt/operating EBITDA ratio of around 1. Celanese is undergoing a portfolio transformation, exiting legacy joint venture deals and acquiring new assets to increase its engineered materials portfolio, such as the Santoprene business from ExxonMobil. To continue this transformation, the company plans to acquire the majority of DuPont’s mobility and materials portfolio for $11 billion in cash, which will be largely financed through debt issuance. As a result, Celanese will carry elevated leverage ratios over the next several years from the time the deal closes, which will be the end of 2022. However, management will likely use excess cash to pay down debt. As EBITDA grows and debt levels fall, Celanese will be able to restore its balance sheet health within a few years of the deal closing. The cyclical nature of the chemicals business could cause coverage ratios to fluctuate from year to year. However, with the Santoprene and DuPont mobility and materials acquisitions, the more stable downstream engineered materials business will become the majority of total profits. As a result, Celanese should still generate positive free cash flow well in excess of dividends even in an economic downturn.

Bulls Say’s

  • Celanese built out its core acetic acid production facilities at a significantly lower capital cost per ton than its competitors thanks to the scale of its facilities (1.8 million tons versus average 0.5 million tons). 
  • Celanese should benefit from producing an increasing proportion of its acetic acid in the U.S. to take advantage of low-cost natural gas. 
  • Through acquisition, Celanese will transform the engineered materials business into a premiere chemicals business that will create value for shareholders.

Company Profile 

Celanese is one of the world’s largest producers of acetic acid and its downstream derivative chemicals, which are used in various end markets, including coatings and adhesives. The company also produces specialty polymers used in the automotive, electronics, medical, and consumer end markets as well as cellulose derivatives used in cigarette filters.

 (Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

Hess’s track record for efficiently allocating capital and generating value has been steadily improving for several years

Business Strategy & Outlook

Hess’ track record for efficiently allocating capital and generating value has been steadily improving for several years. This had been a source of frustration for shareholders in the past. Before 2012, the firm was struggling with persistent budget overruns and costly exploration failures, and the eventual collapse in its share price led to a heated proxy fight with an activist investor (which it lost). Subsequently, the board was reshuffled and management began streamlining the company, selling midstream and downstream assets and rationalizing its upstream portfolio. The current portfolio is substantially more competitive, but the development cost requirements are heavily front-loaded. Currently, Hess is one of the largest producers in the Bakken Shale. This includes a large portion in the highly productive area near the Mountrail-McKenzie county line in North Dakota. Management believes this acreage still contains at least 2,000 incremental drilling opportunities and hopes to develop this asset with a four-rig program in the long run (giving it well over 10 years of potential drilling inventory). Four rigs would optimize the usage of its infrastructure and keep production flat at around 200 mboe/d. But in 2022, the firm is allocating capital stringently and is only planning for three rigs.

Hess also holds a 30% stake in the Exxon-operated Stabroek block in Guyana, which will be the firm’s core growth engine going forward and is a game-changer for the company, due to its large scale and exceptional economics. Current guidance indicates 6 development phases will come online by 2027, culminating in gross volumes of about 1.2 mmb/d. But with over 20 confirmed discoveries already, this feels conservative. Four developments have been sanctioned to date, and two of them are already producing. Management has hinted at 10 phases in the ultimate development. Total gross recoverable resources in the region are a moving target, but the latest estimate is over 11 billion barrels of oil equivalent.

Financial Strengths

Hess’ Guyana assets are capital-intensive (it must pay 30% of the development costs, which run to $1 billion-$2 billion for each sanctioned phase of development; a total of six are currently planned and more than that are likely eventually). And these commitments are heavily front-loaded. As a result, capital spending has significantly exceeded cash flows in the last few years. However, the firm has made the best of very strong commodity prices recently, while enjoying peer-leading revenue growth due to its ongoing expansion in Guyana. As a result, the firm’s leverage ratios are close to historical norms, and are likely to decline further given that all of Hess’ assets are now generating net cash flows. At the end of the last reporting period, debt/capital was 50%, while net debt/EBITDA was 0.9 times. In any case, the firm’s liquidity backstop is very strong. The firm has a $2.2 billion cash war chest, and there is more than $3 billion available on its credit facility as well. In addition, the term structure of the firm’s debt is fairly well spread out, and there are no maturities before 2024 (other than a $500 million term loan due 2023 and likely to be paid in full with operating cash flows by the end of 2022). The firm does have a covenant requiring it to keep debt/capital above 0.65, though it isn’t expected to get close to that level even in a downturn scenario, because in the associated debt agreement capital is defined to exclude impairments.

Bulls Say

  • The Stabroek block (Guyana), in which Hess has a 30% stake, is a huge resource, with at least 10 billion barrels of oil equivalent recoverable.
  • The first phase of the Liza development is profitable at around $30/bbl (Brent), making it competitive with the best shale. Management expects similar economics from subsequent projects in Guyana.
  • Hess’ activity in Guyana provides geographic diversification and insulates it from domestic issues (like anti fracking regulations).

Company Description

Hess is an independent oil and gas producer with key assets in the Bakken Shale, Guyana, the Gulf of Mexico, and Southeast Asia. At the end of 2021, the company reported net proved reserves of 1.3 billion barrels of oil equivalent. Net production averaged 315 thousand barrels of oil equivalent per day in 2021, at a ratio of 69% oil and natural gas liquids and 31% natural gas.

 (Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities

AGL Energy’s Earnings Have Probably Bottomed; Strong Recovery From 2024 Is Likely

Business Strategy & Outlook

AGL Energy is one of Australia’s largest integrated energy companies. It has a narrow economic moat, underpinned by its low-cost generation fleet, concentrated markets, and cost-advantages from vertical integration. Earnings are dominated by energy generation (wholesale markets), with energy retailing about half the size. Strategy is heavily influenced by government energy policy, such as the renewable energy target. AGL Energy’s planned demerger was scrapped and the firm is undergoing another strategic review, with a focus on decarbonization strategies to keep banks happy. AGL Energy’s consumer market division services over 4 million electricity and gas customers in the eastern and southern Australian states, representing roughly a third of available customers. Retail electricity consumption has barely increased since 2008, reflecting the maturity of the Australian retail energy market and declining electricity consumption from the grid. Despite deregulation and increased competition, the market is still dominated by AGL Energy, Origin Energy, and Energy Australia, which collectively control three fourths of the retail market. AGL Energy’s wholesale markets division generates, procures, and manages risk for the energy requirements of its retail business. The acquisition of Loy Yang A and Macquarie Generation means electricity production significantly outweighs consumption by its retail customers. Exposure to energy-price risks are mitigated by vertical integration, peaking generation plants and hedging. More than 85% of AGL’s electricity output is from coal-fired power stations. AGL Energy has the largest privately owned generation portfolio in the National Electricity Market, or NEM.

Financial Strengths

AGL Energy is in reasonable financial health, but banks are increasingly reluctant to lend to coal power stations because of risks to their reputations. This poses a risk despite the firm’s relatively conservative credit metrics. From 1.4 times in 2020, net debt/EBITDA increased to 2.3 times in fiscal 2022 as earnings fell. Nonetheless, net debt/EBITDA is in line with Australian and New Zealand peers, and reasonable. The rapid improvement to a conservative 1.5 times in fiscal 2024. Funds from operations interest cover was comfortable at 13 times in fiscal 2022, comfortably above the 2.5 times covenant limit, and should remain strong as earnings growth offsets expectations for costs of debt to rise. AGL Energy aims to maintain an investment-grade credit rating. To bolster the balance sheet amid falling earnings and one-off demerger costs, the dividend reinvestment plan will be underwritten until mid-2022. Dividend payout ratio is 75% of EPS, though may be cut to help fund investment in renewable energy.

Bulls Say

  • As AGL Energy is a provider of an essential product, earnings should prove somewhat defensive. 
  • Its balance sheet is in relatively good shape, positioning it well to cope with industry headwinds. 
  • Longer term, its low-cost coal-fired electricity generation fleet is likely to benefit from rising wholesale electricity prices.

Company Description

AGL Energy is one of Australia’s largest retailers of electricity and gas. It services 4 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)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

BP Plc (BP) reported strong 2Q22 results, beating consensus estimates on both top and bottom line, with revenue of $67.866bn

Investment Thesis:

  • Trading on undemanding 1-yr valuation multiples – 4x PE-multiple, 4.4% dividend yield (excluding additional capital management) and 2.4x EV/EBITDA multiple.
  • Clearly articulated capital management framework, which should lead to additional capital management in CY21. 
  • Improving the demand picture for oil, which should be supportive of oil prices.
  • Given the disruption in oil markets, there has been significant underinvestment in new oil projects – the supply picture could see a deficit if demand picks up faster than expected.
  • Management is targeting to be net zero carbon emissions by 2050.
  • Low carbon strategy will bring opportunities.

Key Risks:

  • Geo-political and macroeconomic risks. 
  • Execution risk on low carbon future strategy.
  • Significant collapse in the oil price.
  • Adverse regulatory policies. 

Key Highlights:

  • FY22 outlook. Management expects; Reported upstream production to be broadly flat y/y despite the absence of production from BP’s Russia incorporated JVs, however, should be slightly higher y/y on an underlying basis. Other businesses & corporate underlying annual charge to be $1.2-1.4bn. 
  • Depreciation, depletion and amortization to be flat y/y. 
  • Underlying ETR to be ~35% (vs prior guidance of ~40%), however, remaining sensitive to the impact that volatility in the current price environment may have on the geographical mix of profits and losses. (5) Capex of $14-15bn. 
  • Divestment and other proceeds of $2-3bn billion.
  • Gulf of Mexico oil spill payments to be ~$1.4bn (pre-tax) including the $1.2bn (pre-tax) paid during 2Q22. 
  • To use 60% of surplus cash flow for share buybacks and allocate the remaining 40% to further strengthen the balance sheet. 
  • Continue delivering share buybacks of $4.0bn per annum and having capacity for an annual increase in the dividend per ordinary share of ~4% through FY25, subject to Brent remaining ~$60/barrel.
  • Capital management – debt reduction continues + further share buybacks announced. Net debt fell for the ninth successive quarter to reach $22.8bn at the end of 2Q22, down -17% q/q and -30% y/y, primarily due to stronger free-cash generation driven by elevated commodity prices and proceeds from divestments, with the Company achieving $14.7bn of proceeds from divestitures vs target of $25bn by 2025. 
  • The Board increased 2Q22 dividend by +10% to 6.006 cps and executed share buybacks of $2.3bn, completing $2.5bn programme announced in 1Q22, and further announced intention to execute a $3.5bn share buyback in 3Q22 given strong surplus cash flow of $6.6bn in 2Q22. 
  • Continued disciplined allocation of investment to low carbon and convenience and mobility businesses and to resilient hydrocarbons with management anticipating FY22 capex of $14-15bn and FY23-25 capex of $14-16bn with $5-7bn/year allocated to low carbon and convenience and mobility and $9-10bn/year allocated to resilient hydrocarbons.

Company Description:

Megaport Ltd (MP1) is a software-based elastic connectivity provider – that is, it is a global Network as a Service (NaaS) provider. MP1 develops an elastic connectivity platform providing customers interconnectivity and flexibility between other networks and cloud providers connected to the platform. 

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

Rio Tinto Limited (RIO) is an international mining company with operations in Australia, Africa, the Americas, Europe and Asia

Investment Thesis

  • One of the largest miners in the world with a competitive cost structure.
  • Tier 1 assets globally, which are difficult to replicate. 
  • Highly cash generative assets with attractive free cash flow profile. 
  • Shareholder return focused – ongoing capital management initiatives.  
  • Commodities price surprises on the upside (potential China stimulus to combat Coronavirus impact). 
  • Strong balance sheet position.
  • Electrification and light-weighting trends in the automobile industry provide long-term growth runway for aluminum demand.

Key Risks

  • Further deterioration in global macroeconomic conditions.
  • Deterioration in global iron ore/aluminum supply & demand equation.
  • Production delay or unscheduled site shutdown.
  • Natural disasters such as Tropical Cyclone Veronica.
  • Unfavorable movements in AUD/USD.
  • Company not achieving its productivity gain targets. 

Key Highlights 

  • Revenue of $29,775m, down -10%. 
  • Underlying EBITDA of $15,597m, down -26%.  
  • Free cash flow of $7,146m, down -30%.
  • The Board declared a dividend of 276cps, down -29% and no special dividend (relative to 185cps in the pcp). This equated to 50% of underlying earnings, in line with RIO’s shareholder returns policy, and consistent with the Company’s policy of paying out 50% on the ordinary interim dividend.
  • Iron ore: Underlying EBITDA of $10.4bn was 35% lower, due to lower prices ($5.7bn), following the 26% decline in the monthly average Platts index for 62% iron fines adjusted to an FOB basis. Higher cash costs were offset by increased sales portside in China. 
  • Aluminum: Underlying EBITDA of $2.9866bn, was up +49%, due to higher product premiums for primary metal and a stronger pricing environment for primary metal and alumina; however according to management, this was partly offset by higher input costs for key materials such as caustic soda, coke, pitch and anodes, leading to an increase in cash costs for alumina and primary metal.
  • Copper: Underlying EBITDA fell -27% to $1.487m on lower refined copper at Kennecott and by product sales volumes, particularly lower gold in concentrate at Oyu Tolgoi, consequently resulting in associated fixed cost inefficiencies. 
  • Minerals: Underlying EBITDA of $1.259m was -10% lower due to higher cash costs, energy price increases and lower volumes, partially offset by higher EBITDA in relation to the increased ownership in Diavik. 

Company Description

Rio Tinto Limited (RIO) is an international mining company with operations in Australia, Africa, the Americas, Europe and Asia. RIO has interests in mining for aluminum, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium dioxide feedstock and diamonds.  

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

Improving Offshore Activity Supports Strong Sequential Revenue Growth in Saipem’s Second Quarter

Business Strategy & Outlook

Saipem offers services in four distinct business lines: offshore engineering and construction, or E&C, onshore E&C, offshore drilling and onshore drilling. Offshore E&C is historically one of Saipem’s larger segments, historically representing a bit over 40% of the overall business. Generally, E&C firms manage an array of vessels (often owned) and equipment in addition to overseeing project management and engineering activities involved in developing the well. They also typically manage manufacturing operations, such as pipes fabrication. Saipem is one of the larger offshore E&C providers, mainly competing with Subsea 7 and TechnipFMC. The high degree of engineering expertise required to win contracts in the offshore space partially protects Saipem and its peers from high competition, which helps protect pricing power. Offshore E&C tends to be a profitable segment, though its high reliance on fixed-price contracts introduces a good deal of operating risk. 

Increased investment in offshore oil and gas production will provide numerous opportunities for growth in this segment over the next five years, while Saipem’s internal measures (mainly reducing its high capital intensity) will improve margins over time. Onshore E&C is Saipem’s other largest segment, averaging about 43% of the overall business prior to the pandemic. The segment features much lower operating profits, averaging just over 2% prior to the pandemic. Saipem targets infrastructure contracts, mostly for downstream oil and gas projects. Recently, Saipem aims to target contracts that will provide longer-term revenue streams, including biorefineries and fertilizer plants. Expanding beyond traditional oil and gas end-markets means Saipem will compete with generalist E&C providers, reducing the firm’s ability to command the same kind of pricing premiums enjoyed by its offshore E&C business. Overall, the Saipem’s profitability will improve over the next five years as capital expenditure expands in both onshore and offshore markets.

Financial Strengths

Following the capital increase in July 2022, the Saipem’s financial strength is sound. Over the last five years, net debt/EBITDA has averaged around 1.5 times. As Saipem’s profitability improves, This will settle below one time by mid cycle. At the last reporting period, Saipem’s total debt outstanding was EUR 3.7 billion. This includes five tranches of EUR 500 million notes maturing in 2023, 2025, 2026, and 2028, respectively. As such, the Saipem will have sufficient liquidity to make its payments, with about EUR 2 billion in cash on hand as of the last reporting period and EUR 1 billion available on an untapped credit facility. The 2022 debt to capital will be 50%, in line with the firm’s historic average.

Bulls Say

  • Saipem’s early investment in offshore wind will allow the firm to benefit from the very high growth expectations for offshore wind investment over the next decade. 
  • The firm’s shift to a more asset-light business coupled with longer-term contracts will reduce the impact of downcycles on the firm’s operating results. 
  • The company’s XSIGHT division will help XSIGHT develop more integrated product offerings that create a stickier customer base over time.

Company Description

Saipem is a conglomerate of oil and gas engineering and construction and drilling services. The company began as the services appendage of oil major Eni, although today Eni as a customer account for generally less than 10% of revenue. Saipem is distinguished for leading industry megaprojects like the Nord Stream pipeline carrying large volumes of natural gas from Russia to European markets.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities

Kinder Morgan Continues to Be Prudent in Hot Gas Market in Q2

Business Strategy & Outlook:    

Kinder Morgan’s assets span natural gas, natural gas liquids, oil, and liquefied natural gas. The company’s U.S. gas pipeline business is particularly impressive. Management claims its daily gas transportation capacity is equivalent to 40% of average U.S. gas consumption and it handles 50% of the LNG market. Kinder serves most major U.S. gas supply and demand regions. Kinder Morgan’s size is both an opportunity and a challenge. Its expansive asset footprint provides numerous investment opportunities if supply or demand bottlenecks develop. Kinder has the financial and commercial heft to execute any project, no matter the size. However, large-scale projects have been fleeting in the past few years, particularly as legal, regulatory, and stakeholder protests have successfully delayed and canceled major U.S. and Canadian pipelines. The shift forced Kinder out of Canada, particularly as Trans Mountain pipeline costs have soared since Kinder’s exit. With limited growth prospects, management has slashed investment, strengthened the balance sheet, and focused on returning cash to shareholders through the dividend and stock buybacks. For example, it has bought back $270 million in stock so far in 2022 with some of the cash generated by better-than-expected results. With ample excess free cash flows, Kinder is pursuing more clean energy investments. It already considers about 70%-75% of its backlog to be low-carbon investments, and it has formed an energy transitions group to pursue investments in renewable natural gas, biofuels, and carbon capture projects. 

The Kinetrex deal added several renewable natural gas projects at a highly attractive multiple in 2021, and it built on this success with the Mas CanAm deal in mid-2022. Given Kinder’s extensive experience with CO2 pipelines and processing facilities, it is better positioned than most U.S. peers to evaluate and invest in carbon capture and storage opportunities across its footprint, as well. Methane reduction is another opportunity, and Kinder has been working on this area since 2014 via its ONE Future efforts.

Financial Strengths:  

After stretching the balance sheet to consolidate in 2014, Kinder Morgan has completed its plan to strengthen its balance sheet and achieve investment-grade credit ratings while buying back stock and bringing the dividend back to a level in line with peers’. Kinder has channeled most of its cash into debt reduction recently. Debt/EBITDA peaked at 5.5 times following the 2014 consolidation, but Kinder has reached management’s 4.5 times target and should be able to maintain that on a normalized basis.  Leverage is expected to be about 4.3 times in 2022. Beyond 2022, leverage will eventually fall below 4 times. Kinder’s stable cash flow can support an investment-grade balance sheet, $1.5 billion of annual growth investment factoring in contributions from joint venture partners (or $2.35 billion factoring in sustaining capital spending), and a growing dividend. A drop in growth investment gives management more financial flexibility. Kinder’s dividend is expected to hit $1.25 per share in 2020, in line with management’s plan announced in 2017 after a 75% cut in 2016. But management abandoned that target, paying $1.05 per share in 2020 and $1.08 annualized in 2021. The dividend will eventually reach $1.20 a share in the next few years. Kinder’s share-buyback plan could expand as management looks for ways to deploy excess free cash flow, now that its balance sheet goals have been met and its growth investment has normalized. Management doesn’t expect to pay federal cash taxes for several more years even if the 2017 tax cuts are reversed.

Bulls Say: 

  • Kinder Morgan’s natural gas midstream footprint is unrivaled in North America, giving it high-return investment opportunities as gas supply/demand fundamentals shift.
  • The Kinetrex deal shows that Kinder is willing to aggressively pursue clean energy efforts, putting it well ahead of most peers.
  • After paying down $12 billion of debt since 2015, Kinder Morgan now has the financial flexibility to invest in growth projects, raise the dividend, and repurchase stock.

Company Description: 

Kinder Morgan is one of the largest midstream energy firms in North America, with an interest in or an operator on about 83,000 miles in pipelines and over 140 storage terminals. The company is active in the transportation, storage, and processing of natural gas, crude oil, refined products, natural gas liquids, and carbon dioxide. The majority of Kinder Morgan’s cash flows stem from fee-based contracts for handling, moving, and storing fossil fuel products.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

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