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.

Commodities Trading Ideas & Charts

Longtime Cost Leader Diamondback Thriving in Higher Commodity Environment

Post author By lvc-admin
Post date May 17, 2022
No Comments on Longtime Cost Leader Diamondback Thriving in Higher Commodity Environment

Business Strategy & Outlook

Diamondback Energy was a modest-size oil and gas producer when it went public in 2012, but it has rapidly become one of the largest Permian-focused oil firms through a combination of organic growth and corporate acquisitions, most notably Energen in 2018 and QEP Resources in 2021. The firm consistently ranks among the lowest-cost independent producers in the entire industry, supporting a maintainable margin advantage.

Keeping costs low is baked into the culture at Diamondback, and the operations to remain lean and efficient, despite the recent expansions. From the outset, the company has enjoyed a competitive advantage that enables it to systematically undercut its upstream peers. This was initially based on the ideal location of its acreage in the core of the basin, and helped by the early adoption of innovations like high-intensity completions (resulting in more production for each dollar spent). More recently, the firm has started seeing significant economies of scale as well.

Management has fiercely protected the balance sheet over the years and has been willing to tap equity markets, when necessary, as it did several times during the 2015-16 downturn in global crude prices. But that’s ancient history now. Diamondback’s financial health is excellent, and the firm can maintain or grow its production while generating substantial free cash flows under a wide range of commodity scenarios. There is no chance that the firm will choose to allocate more capital for new drilling than appropriate, which means production will probably stay flat or grow at low-single-digit rates for the foreseeable future. Excess cash will be used for debt reduction or returned to shareholders. To preserve flexibility for management, the firm has not committed to a specific reinvestment rate or vehicle for capital returns, like certain peers have, but it does intend to distribute at least half of its free cash somehow. Finally, highlight the firm’s stake in its mineral rights subsidiary, Viper Energy Partners. This vehicle owns the mineral rights relating to some of Diamondback’s most attractive acreage, further juicing returns on drilling for the parent.

Financial Strengths

Diamondback has historically maintained excellent financial health, with one of the strongest balance sheets in upstream coverage. The Energen acquisition pushed up its leverage ratios for a brief spell in 2019, COVID-19 kept them elevated in 2020, and the Guidon and QEP deals extended these periods of above average leverage into 2021. But borrowing never reached an unmaintainable level, even in these periods, and the firm’s leverage has already recovered. At the end of the last reporting period, debt to capital was 30% and annualized debt/EBITDA was 0.7 times. And as the firm is capable of generating substantial free cash under a wide range of commodity price scenarios, these ratios to continue improving. Consolidated liquidity is over $1.5 billion, with no material debt maturities until 2024.

Bulls Say

Diamondback is one of the lowest-cost oil producers operating in the United States.

The firm generates substantial free cash under a wide range of commodity scenarios and has to pledged to return at least half of that to shareholders.

Diamondback has been an early adopter of returns-enhancing technology in the field, and is expected to remain at the leading edge.

Company Description

Diamondback Energy is an independent oil and gas producer in the United States. The company operates exclusively in the Permian Basin. At the end of 2021, the company reported net proven reserves of 1.8 billion barrels of oil equivalent. Net production averaged about 375,000 barrels per day in 2021, at a ratio of 60% oil, 20% natural gas liquids, and 20% 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.

Tags Energy, Street Talks

Commodities Trading Ideas & Charts

Cronos Projected To Experience 11% Average Annual Volume Growth Based On 10-Year DCF

Post author By lvc-admin
Post date May 17, 2022
No Comments on Cronos Projected To Experience 11% Average Annual Volume Growth Based On 10-Year DCF

Business Strategy & Outlook

Cronos Group cultivates and sells cannabis predominantly in Canada and hemp-derived CBD in the U.S. but also participates in the global medical cannabis market. Cronos does not disclose its sales by recreational and medical end-markets. The entire Canadian market is forecasted to grow roughly 20% per year on average over the next decade, driven by the conversion of black-market consumers into the legal market and new cannabis consumers. Cronos is half the size or smaller than the majority of other Canadian licensed producers. This adds to the challenge of reaching profitability given a harder ability to scale overhead expenses. International medical cannabis exports are a small but growing part of Cronos. At present, Cronos exports into Germany, Poland, and Israel. The global market looks lucrative, given higher realized prices and the growing acceptance of cannabis’ medical benefits. Exporters must pass strict regulations to enter markets, protecting early entrants like Cronos. Roughly 20% average annual growth is forecasted over the next decade. Cronos’ U.S. operations largely center on hemp-derived CBD.

CBD is generally viewed as a less attractive opportunity given the massive amount of competition and low barriers to entry. The company recognized a $236 million impairment in 2021, which confirms this concept. In June 2021, it acquired an option for a 10.5% stake in U.S. multistate operator PharmaCann, giving Cronos THC investment exposure. For THC, the U.S. market remains murky with individual states legalizing recreational or medical cannabis while it remains illegal federally. However, it is expected that federal law will be changed to allow states to decide THC legality within their borders by the end of 2023. Cronos’ strategy is geared for an eventual national distribution model more akin to alcohol and tobacco rather than today’s multi-state operator model. Speculation that national distribution will come anytime soon is met with skepticism, and the dispensary will hold most of the value nevertheless. The PharmaCann option is a good albeit small hedge should this scenario be the case in the future of the U.S. market.

Financial Strengths

Cronos carries virtually no debt. At the end of its first quarter, the company had only about $9 million in lease obligations compared with a market capitalization of roughly $1.2 billion as of May 2022. Cronos continues to carry roughly $1 billion in cash, including short-term investments, which represents the majority of its current market value. The company continues to generate cash losses, but a $1.8 billion investment from Altria in March 2019 reduced the need for significant capital raises in the future. The company is projected to reach positive free cash flow in 2028 and that the Altria investment will be enough to fund expanded operations to meet surging demand growth in Canada and U.S. CBD. Benefiting its financial health, Cronos has generally relied on equity to fund acquisitions and expansion, with no significant debt raises in its history. The company is expected to rely on equity to fund capital needs, which is typical for growth companies such as Cronos to help alleviate potential pressure on its financial health.

Bulls Say

Altria Group’s investment of $1.8 billion provides Cronos with capital and a strategic partner with significant product development, branding, and regulatory experience. If successful, Altria Group may increase its ownership of Cronos or potentially acquire it.

Altria’s distribution network gives Cronos an advantage in the hyper competitive U.S. CBD market and can be leveraged for eventual THC distribution.

Cronos’ option to acquire 10.5% of U.S. multistate operator PharmaCann gives U.S. THC investment exposure and a hedge if the dispensary model persists.

Company Description

Cronos Group, headquartered in Toronto, Canada cultivates and sells medicinal and recreational cannabis through its medicinal brand, Peace Naturals, and its two recreational brands, Cove and Spinach. Although it primarily operates in Canada, Cronos exports medical cannabis to Poland and Germany. In addition, it has entered joint ventures in Israel, Colombia, and Australia to drive further international cultivation and distribution growth. In the U.S. the company directly sells hemp-derived CBD and has an option to acquire 10.5% of U.S. multistate operator PharmaCann.

(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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Maintaining $135 FVE as FMC Reports Solid Q1; Shares Slightly Undervalued

Post author By lvc-admin
Post date May 16, 2022
No Comments on Maintaining $135 FVE as FMC Reports Solid Q1; Shares Slightly Undervalued

Business Strategy & Outlook

FMC is a pure-play crop chemicals producer. The company is one of the five largest patented crop protection companies globally. FMC acquired Cheminova in 2015, increasing exposure to Europe and expanding its portfolio of crop chemicals. In late 2017, FMC acquired DuPont’s divested crop chemicals portfolio, which included blockbuster insecticide Rynaxypyr. At the same time, the company divested noncrop chemicals businesses. FMC is fairly balanced from a geographical standpoint among North America, Latin America, Asia, Europe, the Middle East, and Africa. Latin America is the largest region, contributing 32% of revenue in 2021, while the remaining regions accounted for 20%-25% each. The company is also balanced from a crop exposure standpoint, with soybeans being the largest at nearly 20% of total revenue.

As emerging-market food consumption rises, demand for patented crop chemicals should rise to facilitate yield improvements. FMC’s pipeline of new premium products should generate sales growth

above the general crop chemical industry. Both acquisitions greatly enhanced FMC’s research and development pipeline, which should allow the company to continue producing new crop chemicals as

older products roll off patent. The company plans to launch 10 new molecules over the next decade that feature new modes of action. FMC also plans to launch new biologicals, or environmentally

friendly pesticides. These new products should help farmers fight resistant pests, which are increasingly rendering older crop chemicals ineffective and require new crop chemicals.

FMC’s product portfolio currently skews toward insecticides, which generate over half of revenue. As genetically modified seeds, which are equipped with traits to fight insects, expand to new markets such as China and India over the next decade, the insecticide demand falling over the long term. Conversely, GMO seeds increase herbicide demand. For FMC, most of its new products in the pipeline are herbicides and fungicides, which should result in a more balanced portfolio among the three primary types of crop protection chemicals as new products are commercialized over the next decade.

Financial Strengths

FMC is in good financial health. To calculate a net debt/adjusted EBITDA ratio of roughly 2.5 times as of March 31, 2022. FMC’s leverage ratios fluctuate throughout the year as the company is subject to seasonality. With no large planned capital additions, the company should maintain its financial health and should be able to meet all its financial requirements, including dividends, going forward.

Bulls Say

FMC has transformed its portfolio to focus on crop chemicals, which should see strong growth prospects as yield gains are needed to support rising food consumption from emerging markets.

FMC has a large presence in Brazil, one of the few places with meaningful growth potential in arable land.

FMC’s pipeline should allow the company to continue expanding profits as the patents expire for its two largest molecules over the next decade.

Company Description

FMC is a pure-play crop chemical company. The company has diversified its sales to create a balanced crop chemical portfolio across geographies and crop exposure. Through acquisitions, FMC is now one of the five largest patented crop chemical companies and will continue to develop new products through its research and development pipeline.

(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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Livent Corp Capitalises On Cost Advantage In Lithium Carbonate Production

Post author By lvc-admin
Post date May 11, 2022
No Comments on Livent Corp Capitalises On Cost Advantage In Lithium Carbonate Production

Business Strategy and Outlook

Spun out of FMC in late-2018, Livent is a pure-play lithium producer. The company’s lithium carbonate production in Argentina is among the world’s lowest-cost lithium sources. As electric vehicle adoption increases, high-double-digit annual growth is projected for global lithium demand. Livent is looking to expand its Argentine brine-based lithium production capacity from 20,000 metric tons in 2020 to 100,000 metric tons on a lithium carbonate equivalent basis by 2030. The company also plans to increase its lithium hydroxide capacity from 25,000 metric tons in 2020 to at least 45,000 metric tons. Lithium carbonate is produced by pumping brine out of the ground (primarily in South America) or via pegmatite mining that produces spodumene, which is later converted to lithium carbonate. Lithium hydroxide can be produced either from the conversion of carbonate or directly from spodumene. Producing hydroxide from spodumene can cost less than starting from low-cost carbonate for fully integrated producers with low-cost spodumene operations.

Livent’s strategy is to have the flexibility to produce either lithium hydroxide or carbonate. Hydroxide is a higher-quality and typically higher-priced product. It can either be produced as a derivative of lithium carbonate, or directly from spodumene. Livent is one of the lowest-cost carbonate producers globally but has a higher-cost position in hydroxide. Fully integrated hydroxide producers that start with high-quality spodumene assets can produce hydroxide at a lower cost than Livent, which may result in Livent’s position on the lithium hydroxide cost curve rising over time. Livent also increased its stake in the Nemaska lithium operation to 50%. The proposed project is a fully integrated hard rock operation in Quebec, Canada. While the project can be profitable, it carries risk as the previous owner, Nemaska, filed for bankruptcy due to cost overruns. The company is also planning to build a lithium recycling plant that will likely have tolling economics.

Financial Strength

As of March 31, 2022, Livent had a little over $240 million in debt and a little less than $70 million in cash. Net debt/adjusted EBITDA calculations show 1.5 times but all of the debt sits in long-term convertible bonds, which is anticipated to be converted into equity, leaving the company debt-free. Livent is in the midst of a major capacity expansion, planning to spend $1 billion in capital expenditures over the next three years. To fund these projects, Livent issued equity and raised over $250 million. Combined with increasing EBITDA and cash flow from higher lithium prices and sales volumes, the company should have adequate cash to fund the first wave of capacity expansion. Further, with a clean balance sheet, the company can draw from its untapped $400 million credit facility to help fund the expansion projects. However, with lithium prices rising, the company should be able to fund a decent portion of its capital expenditures from operating cash flow.

Bulls Say’s

Livent benefits from a low-cost position in lithium carbonate production, which is among the lowest cost globally.
Livent’s decision to invest in increased lithium carbonate and hydroxide production should create value as the marginal cost of lithium production is well above the company’s cost position.
As a lithium pure play, Livent is well positioned to increase profits from EV growth through lithium batteries.

Company Profile

Livent is a pure-play lithium producer formed when FMC spun off its lithium business in October 2018. Livent should benefit from increased lithium demand via higher electric vehicle adoption, as lithium is a key component of EV batteries. The company’s low-cost lithium carbonate production comes from brine resources in Argentina. Livent also operates downstream lithium hydroxide conversion plants in the United States and China and has a 50% stake in a fully integrated Canadian lithium project.

(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.

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.

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Economic Recovery And Resurging Construction Demand To Increase Aggregate Shipment Volume For Vulcan Materials Co.

Post author By lvc-admin
Post date May 11, 2022
No Comments on Economic Recovery And Resurging Construction Demand To Increase Aggregate Shipment Volume For Vulcan Materials Co.

Business Strategy and Outlook

Aggregates producer Vulcan Materials is well positioned to benefit from the ongoing recovery of U.S. construction spending. Strengthening demand growth for the public sector and modest growth for the private sector is forecasted. Accounting for roughly half of shipments, public-sector demand is generally more stable, and projects, primarily highway construction, are more aggregate-intensive per dollar of spending. At a national level, public infrastructure spending is projected to grow by 6% per year on average, an acceleration from the last couple of decades. Federal funding power has weakened as better vehicle mileage and inflation have diminished the buying power of the $0.18 per gallon gasoline tax, unchanged since 1993. The FAST Act, passed in December 2015, provided stability and near-term funding certainty, but didn’t solve the still-weakening gas tax. However, long-term federal funding was passed in late 2021, totaling $1.2 trillion.

The outlook for road spending differs considerably from state to state. Differences in population growth, road conditions, funding mechanisms, and overall state fiscal health influence spending. Vulcan’s largest states by revenue–Texas, California, Virginia, Tennessee, and Georgia–have significant road spending needs and strong finances to support high growth. Private-sector demand consists of residential and nonresidential construction, including commercial and industrial properties. Nonresidential construction is the most important driver in the category, as spending is more material-intensive per dollar than residential construction. Nonresidential spending growth is projected to slow to 4% in the longer term, as many key sectors are anticipated to make more efficient use of their construction spending. Additionally, residential starts are expected to converge to a long-term housing-start forecast of 1.5 million by 2030. Residential construction historically supports nonresidential construction growth.

Financial Strength

In 2021, net leverage was roughly 2.5 times net debt/adjusted EBITDA, compared with the company’s target of roughly 2-2.5 times. Continued improvement in construction markets should help leverage to improve further, falling below 1 times net debt/adjusted EBITDA by the end of 2024, all else equal. The weighted average debt maturity is 11 years (as of year-end 2021), so maturities look quite manageable. In June 2021, Vulcan announced the acquisition of U.S. Concrete. Given the healthy balance sheet before the close, the deal is unlikely to hamper Vulcan’s financial health. This case is bolstered by the relatively smaller size of U.S. Concrete. With the poorly timed and expensive acquisition of Florida Rock Industries in 2007, Vulcan’s debt surged from roughly $500 million to $3.7 billion. Combined with the recession that devastated construction activity, Vulcan’s leverage soared to more than 8 times debt/adjusted EBITDA. The company took difficult but important steps to protect its cash flow and improve its balance sheet in the aftermath. The company learned a lesson, given its current approach to M&A with more discipline. The acquisition of Aggregates USA in 2017 exemplifies Vulcan’s more disciplined, balance sheet-friendly approach.

Bulls Say’s

Vulcan has a favorable geographic footprint in states that have a strong need for increased road work and the capability to fund it.
Not-in-my-backyard tendencies make the permitting process incredibly difficult for new quarries, forming high barriers to entry and protecting Vulcan’s business from incoming entrants.
Vulcan has made significant progress on its cost cutting initiatives, demonstrated by its improving cost per ton despite relatively flattish demand.

Company Profile

Vulcan Materials is the United States’ largest producer of construction aggregates (crushed stone, sand, and gravel). Its largest markets include Texas, California, Virginia, Tennessee, Georgia, Florida, North Carolina, and Alabama. In 2021, Vulcan sold 222.9 million tons of aggregates, 11.4 million tons of asphalt mix, and 5.6 million cubic yards of ready-mix. As of Dec. 31, 2021, the company had nearly 16 billion tons of aggregates reserves.

(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.

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.

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CMS’ Long-Term Resource Plan Settlement, Usage Growth Support Earnings Outlook

Post author By lvc-admin
Post date May 10, 2022
No Comments on CMS’ Long-Term Resource Plan Settlement, Usage Growth Support Earnings Outlook

Business Strategy & Outlook

CMS Energy’s decade-long transformation into a high-quality regulated utility positions it for a long runway of growth. CMS’ work with Michigan regulators and politicians has turned the state into one of the most constructive areas for utility investment. These constructive relationships will be critical as CMS pursues an aggressive clean energy growth plan.

With regulatory and political backing, CMS plans more than $14 billion of investment the next five years and could add to that as it receives regulatory backing for new projects. Its goal to reach net-zero carbon emissions by 2040 is a key part of its growth plan, supporting 6%-8% annual earnings growth for many years.

Michigan’s 2008 energy legislation and additional reforms in the state’s 2016 Energy Law transformed the state’s utility regulation. As a result of those changes, CMS Energy has achieved a series of constructive regulatory decisions. CMS has secured regulatory approval for almost all of its near-term capital investment as part of the state’s 10-year integrated resource plan framework. The regulators to approve CMS’ 10-year integrated resource plan settlement. If CMS can keep rate increases modest by controlling operating costs, it will continue to get regulatory support and could even add as much as $5 billion of investment on top of its current plan. CMS’ growth strategy focuses on investment in electric and gas distribution and renewable energy, which aligns with Michigan’s clean energy policies and is likely to earn regulatory support. CMS plans to retire the Palisades nuclear plant and all of its coal fleet by 2025, keeping it on track to cut carbon emissions 60% by 2025 and reach net-zero carbon emissions by 2040. Proceeds from its EnerBank sale in 2021 will help finance growth investment. CMS carries an unusually large amount of parent debt, which has helped boost consolidated returns on equity, but investors should consider the refinancing risk if credit markets tighten.

Financial Strengths

Although CMS has trimmed its balance sheet substantially, its 65% consolidated debt/capital ratio remains high primarily because of $4 billion of parent debt. Accordingly, the company’s EBITDA/interest coverage ratio is lower than peers, near 5 times. CMS has reduced its near-term financing risk with opportunistic refinancing. The CMS to maintain its current level of parent debt and take advantage of lower interest rates as it refinances. This should enhance returns for shareholders. Management appears committed to maintaining the current balance sheet and improving its credit metrics through earnings growth. The CMS’ consolidated returns on equity to top 13% for the foreseeable future, among the best in the industry due to this extra leverage. CMS has taken advantage of favorable bond markets to extend its debt maturities, including issuing three series of 60-year notes in 2018 and 2019. CMS now has $1.1 billion of parent notes due in 2078-79 at a weighted-average interest rate near 5.8%. CMS also has been able to issue 40- and 50-year debt at the utility subsidiary. Regulators thus far have not imputed CMS’ parent debt to the utilities, but that’s a risk that ultimately could end up reducing CMS’ allowed returns, customer rates and earnings. Apart from financing the large Covert power plant acquisition in 2023, it doesn’t expect that CMS to issue large amounts of equity after pricing a $250 million forward sale at an average $51 per share in 2019 and issuing $230 million of preferred stock in 2021 at a 4.2% yield. We expect the $930 million after-tax cash proceeds from the EnerBank sale will offset new equity needs through 2024. With constructive regulation, we expect CMS will be able to use its operating cash flow to fund most of its investment plan during the next five years.

Bulls Say

Regulation in Michigan has improved since landmark reforms in 2008 and 2016. Support from policymakers and regulators is critical to realizing earnings and dividend growth.

CMS’ back-to-basics strategy has focused on investment in regulated businesses, leading to a healthier balance sheet and more reliable cash flow

CMS’ board has more than doubled the dividend since 2011 and 7% annual dividend increases going forward even if the payout ratio remains above management’s 60% target.

Company Description

CMS Energy is an energy holding company with three principal businesses. Its regulated utility, Consumers Energy, provides regulated natural gas service to 1.8 million customers and electric service to 1.9 million customers in Michigan. CMS Enterprises is engaged in wholesale power generation, including contracted renewable energy. CMS sold EnerBank in October 2021.

(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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FVEs Raised for Miners on Higher Commodity Prices Driven by Economic Recovery and Supply Constraints

Post author By lvc-admin
Post date May 9, 2022
No Comments on FVEs Raised for Miners on Higher Commodity Prices Driven by Economic Recovery and Supply Constraints

Business Strategy & Outlook:

Newcrest has no moat despite a history of low-cost production and long mine life. Returns have improved post the expensive acquisition of Lihir, but are likely to remain below the company’s cost of capital for the foreseeable future. Newcrest accounts for less than 3% of global mine production and is a price taker. Gold is increasingly the plaything of investors and subject to swings in sentiment. In 2001, gold consumption for jewelry and technology accounted for 91% of global demand, but in 2020 this had fallen to 38% as a result of increased investor demand and weaker gold consumption. There is also uncertainty around exploration success and the cost to buy or develop new mines, which are an important part of Newcrest’s future value. Operations are focused on the Asia-Pacific region, with production split roughly evenly between Australia and Papua New Guinea, or PNG, with a smaller contribution from the Americas. The company is a long-established low-cost producer, save a cost spike in 2013, which subsequently abated. Current management was installed in 2014 and brought a focus on cost efficiency, capital discipline and optimisation. Under Sandeep Biswas, Newcrest has been a much more reliable producer and has delivered incremental improvements at its operations, boosting throughput and lowering unit costs, particularly at Lihir and Cadia. Copper is a secondary product, contributing approximately 15% of revenue in fiscal 2019, but it is likely to rise over time. It represents approximately 40% of the in-ground value of Newcrest’s reserves and resources. Newcrest has a solid exploration record. Excluding acquired Lihir ounces, gold equivalent reserves increased from 3.4 million ounces in 1992 to 78 million ounces in December 2017, while resources increased from 8.5 million ounces to 144 million ounces. Gold equivalent resources were added at less than AUD 20 per ounce. Reserves at the end of 2020 were 49 million ounces of gold and 6.8 million metric tons of copper.

Financial Strengths:

The company’s balance sheet is sound. The company ended June 2021 with modest net cash of USD 0.2 billion. The net debt to grow to end fiscal 2022 to about USD 1.5 billion with the acquisition of Pretium Resources and elevated capital expenditure at Cadia, Lihir and with the development of Havieron and Red Chris. However, despite the increase, the balance sheet is still sound. The forecasted debt/EBITDA to peak slightly to around 0.7 in fiscal 2022 before declining gradually through the forecasted period. Newcrest has long-dated corporate bonds totaling USD 1.65 billion. The bonds mature in fiscal2030, 2042, and 2050 with maturities of USD 650 million, USD 500 million, and USD 500 million, respectively. At the end of fiscal 2021, the company had USD 1.8 billion of cash and USD 1.6 billion of undrawn debt.

Bulls Say:

Gold companies can behave countercyclically. They provide a hedge to inflation risk and tend to offer some benefit in times of market uncertainty. Gold can gain from continued money printing and/or if there is a flight to safety.
Newcrest’s reserves are massive and mine life is long, offering leverage to upwards movements in the gold price.
Newcrest owns several world-scale deposits in Cadia, Telfer, Lihir, and Wafi-Golpu. Large deposits typically bring significant exploration upside and expansion options.

Company Description:

Newcrest is an Australia-based gold and, to a lesser extent, copper miner. Operations are predominantly in Australia and Papua New Guinea, with a smaller mine in Canada. Cash costs are below the industry average, underpinned by improvements at Lihir and Cadia. Newcrest is one of the larger global gold producers but accounts for less than 3% of total supply. Gold mining is relatively fragmented.

(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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APA Group’s Earnings Bounce Back in First Half

Post author By lvc-admin
Post date May 6, 2022
No Comments on APA Group’s Earnings Bounce Back in First Half

Business Strategy & Outlook:

APA Group is Australia’s premier gas infrastructure company. Limited regulation, scale, and a superior skills base help it capitalizes on gas demand growth and generate competitive advantages that warrant a narrow economic moat. However, gas market reform will weaken its competitive advantages. Fair value uncertainty is medium, as secure revenue is balanced by high gearing and limited transparency over customer contracts. Infrastructure, primarily gas transmission and distribution, is the core business, generating more than 90% of group EBITDA. The rest comes from part-owned investments and asset management. The investments division owns stakes in smaller gas infrastructure companies, providing solid returns and giving some influence. The asset management division provides management, operating, and maintenance services to most part-owned companies, leveraging APA Group’s skills base to generate good returns outside the regulatory framework.

The vast majority of revenue within the core infrastructure business is unregulated. Unregulated assets and auxiliary services like storage operate under long-term contracts with energy retailers, LNG exporters, and major industrial/mining companies. Returns are traditionally 100-200 basis points above regulatory returns to compensate for higher demand risk, though this has likely increased as regulatory returns have fallen markedly in recent years. APA Group’s core strategy during the past decade has been to create an integrated east-coast gas transmission grid connecting multiple gas sources to multiple markets. This is now complete following numerous acquisitions and the firm is progressing a similar strategy in Western Australia, connecting to remote mine sites and towns. Expansion creates economies of scale and synergies from linking pipes together into a network with one manager. Further acquisitions of transmission pipelines are unlikely given competition concerns, but organic expansion is ongoing.

Financial Strengths:

APA Group is in sound financial health. It carries a lot of debt, but this should be manageable given highly secure revenue. Net debt/EBITDA was 5.7 times in fiscal 2021, which is considered reasonable. The net debt/EBITDA to fall to 5.5 times in fiscal 2023 as development projects complete and earnings start to flow. The firm’s average interest rate is around 4.6%, down substantially in recent years following the issue of the cheap debt to fund the WGP acquisition and refinancing other debt. Average debt maturity is long at more than seven years, and 100% of interest rates are fixed or hedged.

Bulls Say:

APA Group owns and operates an excellent portfolio of gas infrastructure assets. Its large footprint ensures it is at least partially exposed to growth anywhere in the country.
The east-coast gas grid provides improved reliability, greater flexibility, a wider range of services, and economies of scale over single pipelines.
Limited regulation allows stronger returns on investment than regulated peers, particularly from organic expansion. However, gas market reform will reduce its advantage.
Strong returns are possible from organic growth.

Company Description:

APA Group is Australia’s largest gas infrastructure company with an extensive portfolio of transmission pipelines, distribution networks, and storage facilities. It is internally managed and has direct operational control over all assets. It owns minority stakes in a few smaller gas infrastructure companies and manages operations for most of these. The stapled securities comprise a unit in Australian Pipeline Trust and in APT Investment Trust.

(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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Murphy Feels Inflationary Pressures and Increases Full-Year Spending Guidance

Post author By lvc-admin
Post date May 5, 2022
No Comments on Murphy Feels Inflationary Pressures and Increases Full-Year Spending Guidance

Business Strategy & Outlook:

Murphy Oil repositioned itself as a pure-play exploration and production company in 2013, spinning off its retail gas and refinery businesses. Historically, the company’s capital efficiency was skewed to the weaker end of the peer group range, even after this transformation, but management has since narrowed the gap by downsizing the portfolio and shifting capital toward higher-margin projects. The firm is a top-five producer in the Gulf of Mexico, and the region accounts for almost half of its production. It signed a joint-venture agreement with Petrobras in late 2018, giving it an 80% stake in the combined assets of the two companies.

Murphy has a number of expansion projects lined up there that should offset legacy declines and enable it to hold production flat in the next few years. This includes Samurai, Khaleesi, and Mormont, which will start contributing this year and are expected to collectively add about 30 thousand barrels of oil equivalent by 2025. There is regulatory risk, though: after entering office, U.S. President Joe Biden pledged to halt offshore oil and gas permitting activity (to demonstrate his climate credentials). But high crude prices have made it politically unpalatable to follow through, and so far the only action taken was a temporary suspension that came into effect in early 2021 and was long since rescinded. This would not rule out a more comprehensive ban eventually, but for now it remains business as usual for Murphy.

Murphy also has onshore assets in several parts of North America. This includes 120,000 acres in the South Texas Eagle Ford play. Like other shale producers, the firm has made considerable progress cutting costs and boosting productivity since the post-2014 downturn. However, while the firm still has over 1,000 drillable locations in inventory, only around 350 of them are in the prolific Karnes County area. When this portion is exhausted, well performance, and thus returns, could deteriorate. And in Canada, the firm is currently prioritizing the Tupper Montney gas play while natural gas prices in the region are more stable after a period of steep discounts caused by takeaway constraints that have now cleared.

Financial Strengths:

The COVID-19-related collapse in crude prices during 2020 impacted the balance sheets of most upstream oil firms, and Murphy saw its leverage ratios tick higher as well. But management has engineered a rapid recovery, aided by strengthening commodity prices. At the end of the last reporting period, debt/capital was 37% and net debt/EBITDA was 0.9 times. That’s about average for the peer group. The firm is generating substantial free cash, and management intends to prioritize further debt repayments. Its leverage ratios to continue improving in the next few years, even if commodity prices recede from current high levels. The firm currently holds about $2.5 billion of debt, and has roughly $2 billion in liquidity ($500 million cash and about $1.5 billion undrawn bank credit). The term structure of the firm’s debt is reasonably well spread out, and nothing is due before 2024, though management intends to accelerate their payment of these obligations using the windfall from very high commodity prices. The firm should have no issues covering its obligations with cash from operations going forward, unless oil prices fall significantly below the midcycle forecast ($60 Brent) for a significant period.

Bulls Say:

The joint venture with Petrobras is accretive to Murphy’s production and generates cash flows that can be redeployed in the Eagle Ford and offshore.
The Karnes County portion of Murphy’s Eagle Ford acreage offers economics that are as good as or better than any other U.S. shale.
Murphy’s diversified portfolio gives it access to oil and natural gas markets in several regions, insulating it to a degree from commodity price fluctuations or regulatory risks.

Company Description:

Murphy Oil is an independent exploration and production company developing unconventional resources in the United States and Canada. At the end of 2021, the company reported net proved reserves of 699 million barrels of oil equivalent. Consolidated production averaged 167.4 thousand barrels of oil equivalent per day in 2021, at a ratio of 63% oil and natural gas liquids and 37% 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.

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Xylem Raises Full-Year Guidance After Solid First Quarter; Increasing Fair Value Estimate

Post author By lvc-admin
Post date May 5, 2022
No Comments on Xylem Raises Full-Year Guidance After Solid First Quarter; Increasing Fair Value Estimate

Business Strategy & Outlook

Xylem is one of the leading water technology companies in the world. Its extensive portfolio spans a wide range of equipment and solutions for the water industry, including the transport, treatment, testing, and efficient use of water for public utilities as well as industrial, commercial, and residential customers. Xylem operates three business segments: water infrastructure, applied water, and measurement and control solutions.

After several strategic acquisitions, including Sensus in 2016, Xylem can offer utilities a comprehensive portfolio of solutions aimed at addressing the problem of nonrevenue water, including pumps, sensors, smart meters, and leak detection, as well as a data management platform to monitor and analyse data from all these products. The ability to cross-sell these products and link them together will make Xylem a one-stop shop for utilities and will help widen the firm’s economic moat by increasing switching costs and customer loyalty. The Xylem is poised to benefit from long-term trends, including global population growth, water scarcity in developing countries, and the need to replace aging water infrastructure in developed countries. Furthermore, revenue synergies from the Sensus acquisition have already exceeded management’s initial targets. The company will continue to capitalize on cross-selling opportunities, as Xylem has traditionally held a strong position in the wastewater and outdoor water sectors, while Sensus has established a strong presence on the clean water side.

The firm has room for further margin expansion. Management is implementing multiple initiatives aimed at expanding adjusted EBITDA margins by 50-75 basis points per year, including business simplification, global procurement, and lean initiatives. The margin expansion to be driven by operating leverage and the mix shift to digital solutions as well.

Financial Strengths

Xylem owed roughly $2.4 billion of short-term and long-term debt as of Dec. 31, 2021, while holding approximately $1.3 billion in cash and equivalents. Debt maturities are reasonably well laddered over the next few years, with a $586 million note due in 2023. The company also relies on commercial paper to meet short-term borrowing needs and has a $1 billion revolving credit facility that augments its liquidity. The company will have a net debt/adjusted EBITDA ratio of roughly 1.0 times in 2022. The Xylem will generate average annual operating cash flow of approximately $900 million over the next five years. Management has indicated it will prioritize organic growth, continued dividend growth (increasing roughly in line with earnings growth), and strategic acquisitions, with excess capital allocated to share repurchases.

Bulls Say

Growing demand for fresh water in developing countries and the need to replace aging infrastructure in developed countries will create long-term growth opportunities for Xylem.

After recent acquisitions of smart meter and leak detection companies, Xylem can offer utilities a comprehensive portfolio of products aimed at addressing the problem of nonrevenue water.

The company has room for further margin expansion, with management targeting cost savings from business simplification, global procurement, lean initiatives, and synergies from recent M&A deals.

Company Description

Xylem is a global leader in water technology and offers a wide range of solutions, including the transport, treatment, testing, and efficient use of water for customers in the utility, industrial, commercial, and residential sectors. Xylem was spun off from ITT in 2011. Based in Rye Brook, New York, Xylem has a presence in over 150 countries and employs 16,200. The company generated $6.2 billion in revenue and $611 million in adjusted operating income in 2021.

(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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