Category: Commodities

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

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Commodities Trading Ideas & Charts

PG&E Investing Heavily in California Energy Policy Projects

Business Strategy and Outlook

PG&E emerged from bankruptcy on July 1, 2020, after 17 months of negotiating with 2017-18 Northern California fire victims, insurance companies, politicians, lawyers, and bondholders. The new PG&E is well positioned to grow rapidly, given the investment needs to meet California’s aggressive energy and environmental policies. PG&E is set to invest more than $8 billion annually for the next five years, leading to 8% annual growth. California’s core ratemaking regulation is highly constructive with usage-decoupled rates, forward-looking rate reviews, and allowed returns well above the industry average. Morningstar analysts expect California regulators to support premium allowed returns to encourage energy infrastructure investment to support the state’s clean energy goals, including a carbon-free economy by 2045. This upside is partially offset by the uncertain future of PG&E’s natural gas business, which could shrink as California decarbonizer its economy.

PG&E will always face public and regulatory scrutiny as the largest utility in California. That scrutiny has escalated with the deadly wildfires and power outages. Legislative and regulatory changes during and since the bankruptcy have reduced PG&E’s financial risk, but the state’s inverse condemnation strict liability standard remains a concern. CEO Patti Poppe faces a tall task restoring PG&E’s reputation among customers, regulators, politicians, and investors. 

Financial Strength 

Following the bankruptcy restructuring, PG&E has substantially the same capital structure as it did entering bankruptcy with many of the same bondholders after issuing $38 billion of new or reinstated debt. PG&E’s $7.5 billion securitized debt issuance would eliminate $6 billion of temporary debt at the utility and further fortify its balance sheet. The post bankruptcy equity ownership mix is much different. PG&E raised $5.8 billion of new common stock and equity units in late June 2020, representing about 30% ownership. Another $3.25 billion of new equity came from a group of large investment firms.  analysts expect PG&E to maintain investment-grade credit ratings. Morningstar analysts estimate PG&E will invest more than $8 billion annually during the next few years. Tax benefits and regulatory asset recovery should result in minimal new equity and debt needs at least through 2023.Morningstar analysts expect PG&E will be prepared to reinitiate a dividend in 2024 after meeting the terms of its bankruptcy settlement. 

Bulls Says

  • California’s core rate regulation is among the most constructive in the U.S. with usage-decoupled revenue, annual rate true-up adjustments, and forward-looking rate setting. 
  • Regulators continue to support the company’s investments in grid modernization, electric vehicles, and renewable energy to meet the state’s progressive energy policies. 
  • State legislation passed in August 2018 and mid-2019 should help limit shareholder losses if PG&E faces another round of wildfire liabilities.

Company Profile

PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.3 million electricity customers and 4.6 million gas customers in 47 of the state’s 58 counties. PG&E operated under bankruptcy court supervision between January 2019 and June 2020. In 2004, PG&E sold its unregulated assets as part of an earlier post bankruptcy reorganization

 (Source: Morningstar)

General Advice Warning

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

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Commodities Trading Ideas & Charts

BHP reported strong 1H22 results reflecting strong revenue and earnings growth; With strong balance sheet position

Coal is excavated at the Jim Bridger Mine, owned by energy firm PacifiCorp and the Idaho Power Company, outside Point of the Rocks, Wyoming March 14, 2014. West Virginia mined 120 million tons (109 metric tons) of coal in 2012, second to Wyoming, or about 12 percent of total U.S. production. Kentucky was third with about 9 percent of output, according to the National Mining Association. REUTERS/Jim Urquhart (UNITED STATES - Tags: ENERGY BUSINESS) - RTR3H5NY

Investment Thesis 

  • Based on blended valuation (consisting of DCF, PE-multiple & EV/EBITDA multiple), BHP is trading at fair value but on an attractive dividend yield.
  • Commodities prices especially iron ore prices deteriorate on lower demand from China.
  • Focus on returning excess free cash flow to shareholders in the absence of growth opportunities (hence the solid dividend yield). 
  • Quality assets with competitive cost structure and leading market position.
  • Growth in China outperforms market expectations.
  • Management’s preference for oil and copper in the medium to long-term.
  • Solid balance sheet position.
  • Ongoing focus on productivity gains.

Key Risks

  • Poor execution of corporate strategy.
  • Prolonged impact on demand if coronavirus is not contained.
  • Deterioration in global macro-economic conditions.
  • Deterioration in global iron ore/oil supply & demand equation.
  • Deterioration in commodities’ prices.
  • Production delay or unscheduled site shutdown.
  • Movements in AUD/USD.

1H22 Results Highlights Relative to the pcp: 

  • Earnings and Margins: Attributable profit of US$9.4bn includes an exceptional loss of US$1.2bn (which mainly accounts for Samarco dam failure of US$821m as well as an impairment of US deferred tax assets no longer expected to be recoverable after the Petroleum demerger of US$423m). This was significantly above 1H21 profit of US$3.9bn, which included an exceptional loss of US$2.2bn. Underlying attributable profit of US$10.7bn was much improved from US$6.0bn in the pcp. Profit from operations (continuing operations) of US$14.8bn was up +50%, due to higher sales prices across BHP’s major commodities, near record production at WAIO and higher concentrate sales at Spence, and favourable exchange rate movements; partially offset by impacts of planned maintenance across several assets, expected copper grade decline at Escondida, significant wet weather at Queensland Coal and inflationary pressures, including higher fuel, energy and consumable prices. Total Covid impacts was US$223m (pre-tax) versus US$405m in 1H21. Underlying EBITDA (continuing operations) of US$18.5bn, was up +33%, as margin of 64% improved from 60% in 1H21. Underlying return on capital employed improved to 39.5% from 23.6% in 1H21 (underlying return on capital employed, excluding Petroleum, is ~42.9%). 
  • Costs. BHP’s FY22 unit cost guidance for WAIO and Escondida remains unchanged whilst for Queensland Coal, it was increased, reflecting lower expected volumes for the full year as previously announced. At 1H22, unit costs at WAIO are below guidance and are tracking towards the lower end of the guidance range. WAIO unit costs (C1) excluding third party royalties, were 18% higher at US$14.74 per tonne, driven by higher diesel prices and costs relating to South Flank ramp up. Escondida unit costs were at the top end of the guidance range, driven by planned lower concentrator feed grade. Queensland Coal unit costs are tracking above the revised guidance range as BHP saw lower volumes due to significant wet weather impacts and labour constraints. 
  • Balance Sheet: BHP’s balance sheet remains strong with gearing of 10.0% versus 6.9% in the pcp, and with net debt at US$6.1bn versus US$4.1bn in the pcp. The increase of US$2.0bn in net debt reflects strong free cash flow generation, offset by the record final dividend paid to shareholders in September 2021 of US$10.0bn. Following a review of the net debt target, BHP also revised the range to between US$5-15bn from the previous target range of between US$12-17bn. 
  • Dividends: The Board declared a record interim dividend of US$1.50 per share or US$7.6bn, including an additional US$2.7bn above the minimum payout policy. This equates to 78%. 
  • Capex: Capex of US$3.7bn in 1H22 covers US$1.1bn maintenance expenditure, US$0.1bn minerals exploration and US$0.8bn petroleum expenditure. BHP expects FY22 capital and exploration expenditure of ~US$6.5bn (continuing operations), which is US$0.2bn lower than previous guidance due to favourable exchange rate movements. 

Company Profile

BHP Group Limited (BHP) is a diversified global mining company, with dual listing on the London Stock Exchange and Australia Stock Exchange. The company’s principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate. The company also has petroleum exploration, production and refining.

 (Source: Banyantree)

General Advice Warning

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

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Commodities Trading Ideas & Charts

Rio Tinto Ltd reported strong FY21 results reflecting strong earnings with strong balance sheet position

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 automobile industry provide long-term growth runway for aluminium demand.

Key Risks

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

FY21 Results Highlights. Relative to the pcp: 

  • $25.3bn net cash generated from operating activities was +60% higher than FY20 driven by higher prices for RIO’s key commodities. This flowed through to +88% YoY change in free cash flow of $17.7bn, despite a +19% increase in capex to $7.4bn. 
  •  $21.1bn of net earnings, up +116%, mainly reflecting higher prices, the impact of closure provision increases at Energy Resources of Australia (ERA) and other non-operating sites, $0.5bn of exchange and derivative gains and $0.2bn of impairments. $7.4bn capex was made of $0.6bn of growth capital, $3.3bn of replacement capital and $3.5bn of sustaining capital, funded from internal sources, except for Oyu Tolgoi underground development, which is project finance. 
  • $37.7bn underlying EBITDA was up +58% on a margin of 57%. 
  •  $21.4bn underlying earnings (or underlying EPS of US1,321.1cps) were up +72%. 
  •  RIO retained a strong balance sheet with $1.6bn of net cash at FY21-end, versus net debt of $0.7bn at the start of the year, reflecting the free cash flow of $17.7bn, partly offset by $15.4bn of cash returns to shareholders. 
  •  The Board declared a record $6.7bn final ordinary dividend (or US417cps) and $1.0bn final special dividend (or US62cps). This brings the full-year dividend to $16.8bn, equivalent to US1,040cps and 79% of underlying earnings.

Company Profile

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 aluminium, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium dioxide feedstock and diamonds. 

  • FY21 Results Highligh

(Source: Banyantree)

General Advice Warning

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

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Commodities Trading Ideas & Charts

ABC reported solid FY21 results and strong balance sheet with focus on cost savings

Investment Thesis

  • Macro conditions remain uncertain in key regions.
  • Strong pipeline of infrastructure projects over the next 2 years is a positive but timing and execution is a risk. 
  • Solid balance sheet position provides some flexibility to the Company to pursue growth. 
  • Leading positions as a lime producer, concrete products producer and cement and clinker supplier.
  • Outlook for lime looks relatively positive with higher infrastructure projects and resource sector activity
  • Cost-out and vertical integration (cement) programs expected to deliver cost benefits that exceed cost headwinds of $10m in FY21.

Key Risks

  • Macro conditions remain uncertain in key regions.
  • Strong pipeline of infrastructure projects over the next 2 years is a positive but timing and execution is a risk. 
  • Solid balance sheet position provides some flexibility to the Company to pursue growth. 
  • Leading positions as a lime producer, concrete products producer and cement and clinker supplier.
  • Outlook for lime looks relatively positive with higher infrastructure projects and resource sector activity
  • Cost-out and vertical integration (cement) programs expected to deliver cost benefits that exceed cost headwinds of $10m in FY21.

FY21 results summary: Compared to pcp: 

  • Revenue increased +8% to $1,569.2m with increased sales volumes experienced for all products other than lime (as a result of lower Alcoa volumes) and strong cement pricing, partially offset by lower average prices for lime amid pricing resets across key alumina contracts. 
  • EBITDA margin declined -120bps to 17.5% and included Covid-19 impacts and interrupted production, much of which are expected to be non-recurring (non-recurring impacts were $16.2m with management expecting $10.3m of these to be non-recurring, with higher demurrage and pallet costs expected to continue in the short term). 
  • Net finance cost declined -6%, as a result of lower average borrowings which saw interest cover improve +1.1x to 14.4x. 
  • Operating cash flow declined -23.8% to $195.2m, in line with expectations, as pcp benefited from tax refunds. 
  • Capex increased +3% to $140.5m million ($106m million stay-in-business capex + $34.5m for development). 
  • Joint Ventures earnings contribution increased +23.8% to $33.3m, with Sunstate’s contribution improving by +115% driven by strong demand across the southeast Queensland construction sector, ICL increasing earnings contribution by +13% and Mawsons increasing earnings contributions by +23%. 

Capital management

  • Strong balance sheet with liquidity of $453.7m (down -13.6% over pcp) and net debt of $437.4m (up +17.5% over pcp), representing a leverage ratio of 1.6x underlying EBITDA (vs 1.4x in pcp) and gearing of 34.5% (up +400bps over pcp), both well within banking covenants and Board’s capital management target range. 
  •  Return on Funds Employed (ROFE) declined -30bps over pcp to 10.6%, however, remained above cost of capital (normalising for Covid-19 and operational non-recurring costs of $16.2m, ROFE increased to 11.6%), with management expecting long-term ROFE improvement coming from Kwinana Upgrade project cost savings, development of downstream land investments and ongoing cost-out. 
  • The Board declared fully franked final ordinary dividend of 7cps (down -3.45% over pcp), bringing full year total to 12.5cps, up +4.2% over pcp and representing a payout ratio of 68.5% of underlying earnings, within the Board’s target range of 65-75%. 

Cost savings above target

Management remains focused on their cost reduction program, delivering gross savings of $26.1m through operational efficiencies, procurement, and a more simplified organisational structure, equating to net cost out of $13.6m, +36% higher than expected.

Company Profile

Adbri Ltd (ABC) is an Australia listed construction materials and liming producing company. ABC is Australia’s leading (1) lime producer in the minerals processing industry; (2) concrete products producer; and (3) cement and clinker importer. ABC is Australia’s number two cement and clinker supplier to the Australian construction industry and number four concrete and aggregates producer.

(Source: Banyantree)

General Advice Warning

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

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Commodities Trading Ideas & Charts

SGM delivered a strong 1H22 driven by higher volumes and selling prices.

Investment Thesis
Improvement in scrap volumes.
Improvement in scrap prices across key regions.
Cloud recycling could add significant earnings over the long run.
Investment in improving scrap quality should improve SGM’s competitive position.
Undemanding valuation relative to its own historical average and ASX200 Industrials Index.
Self-help initiatives to support earnings.
Improving Return on Capital (ROC).
Current on-market share buyback.

Key Risks
Significant downturn in global economy.
Trade war between China and the U.S. escalates.
Weaker scrap prices in key regions.
Lower volumes.
Regulatory changes – particularly around China’s anti-pollution policies.
Cost pressures impacting group margins.

1H22 Results Highlights
North America Metal (NAM) sales revenue of $1,997.2 was up 87.2% driven by higher sales prices and sales volumes (up +11.3%). Intake also improved over the period and returned to pre-Covid levels. Trading margin of $421.6m was up +74.6% as a significant proportion of the trading margin spread in percentage terms was retained due to higher commodity prices. Segment underlying EBIT of $142.2m was up +478%.
Australia & New Zealand Metal (ANZ) revenue of $815.6m was up +70.5% driven by +72.2% increase in average selling prices. Sales volumes were largely unchanged on pcp. Trading margin of $225m was up +58.8%. Costs were up +12.3% driven by higher contract labour costs to cover staffing shortages and inflationary pressures. Segment EBIT of $94.9m was up +243.8%. Management noted that despite Covid disruptions in Australia and New Zealand, intake volumes showed improvement and recovered to near pre-Covid levels.
UK Metal sales volumes was up +5.8% and average selling prices up +64.4%, leading to sales revenue of $744.4m increasing +73.9%. Management noted that Trading Margin of $115.7m was up +39.6% “due to market structure and competitive dynamics, UK was not able to hold onto as much of the sales price increase as NAM or ANZ.” Segment underlying EBIT of $29.4m was up +180% on pcp. Management noted that whilst the intake volumes in 1H22 were consistent with pcp, they remain below pre-Covid levels.
Sims Lifecycle Services reported revenue of $166m (up +9%) and underlying EBIT of $9.9m was up +45.6% driven by +44.4% growth in repurposed units and +9% growth in sales revenue. SA Recycling reported sales volumes growth of +18.6% and underlying EBIT (50% share) growth of +427.5% to $128.7m.

Company Profile
Sims Ltd (SGM) collects, sorts and processes scrap metal materials which are recycled for resale. SGM’s segments include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of steel semi-fabricated products.

(Source: Banyantree)

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

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Commodities Trading Ideas & Charts

AGL Posted Strong 1H22 result with Potential Capital Management and Demerger initiative

Investment Thesis

  • Energy margins bottom out and could potentially start to improve (higher customer and volume numbers). 
  • Strong cash flow business which provided flexibility to deploy cash in growth opportunities and capital management.
  • On-going focus on costs and digitalization should support margins.
  • Potential capital management initiatives (e.g., buyback).
  • Demerger into AGL Australia and Accel may unlock shareholder value. 
  • Potential favourable changes to the regulatory environment. 
  • Potential M&A – AGL has already received a takeover bid at $7.50 per share which was rejected by the AGL Board. 

Key Risk

  • Competitive pressures leading to margin erosion.
  • Cost pressure and fuel supply issues leads to margin erosion. 
  • Increase in supply leading depressed prices. 
  • Regulatory risk (policy uncertainty), such recent regulation in electricity markets [ Victorian Default Offer (VDO) and Default Market Offer (DMO)]
  • Un-scheduled shutdowns impacting earnings. 

1H22 headline results

  • 1H22 group underlying profit after tax of $194m, was down -41% on pcp or down -23% excluding the non-recurrence of the Loy Yang outage insurance proceeds. In term of AGL Australia, the key drivers of performance were consumer energy margin was down predominantly due to the impact of milder weather on demand, higher cost of energy with increased residential solar volumes, and margin compression from customers switching to lower priced products. Further, supply and trading gas margin was lower as expected, impacted by lower priced legacy supply contracts rolling off, during the 2H21. With respect to Accel Energy, trading and origination electricity margin were lower due to lower contracted electricity prices and lower offtake sales to consumer electricity resulting from increased penetration of solar. Providing some positive offsets to underlying profit was positive movement in centrally managed expenses driven by cost-out initiatives, favourable movement in depreciation due to the asset impairments recognized in FY21 and lower tax expense (reflecting the fall in profit). 
  •  Underlying cash flow from operations was up +8% YoY, driven by a large inflow from margin calls versus an outflow pcp and positive working capital movements, which was able to more than offset the decline in underlying EBITDA
  • FY Q21 Results 
  • 1H22 headline result. C

Company Profile

AGL Energy Limited (AGL) is one of Australia’s leading integrated energy companies and the largest ASX listed owner, operator and developer of renewable energy generation in Australia. The company sells and distributes gas and electricity. Further, it also retails and wholesales energy and fuel products to customers throughout Australia. The business operates four main segments: Energy Markets, Group Operations, New Energy and Investments.

(Source: Banyantree)

  • Relative to the pcp: (1) 

General Advice Warning

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

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Commodities Trading Ideas & Charts

NRG Narrows Winter Storm Uri Loss, Moves Forward With Capital Allocation Plan

Business Strategy and Outlook

NRG Energy has completed its latest strategic shift following the $3.625 billion acquisition of Direct Energy in January 2021, the sale of most of its Northeast power generation fleet, and the planned closure of four Midwest power plants. A higher share of retail energy earnings helps offset the long-term threat to NRG’s legacy fossil fuel generation fleet as renewable energy grows. NRG will benefit the most if electricity demand grows in its key markets, particularly Texas and the Northeast. In Texas, brief summer heat spells in 2018 and 2019 along with Winter Storm Uri in February 2021 show that growing demand can also create more energy price volatility and risk. Uri resulted in $1 billion of gross losses for NRG in just two weeks. 

Despite offsetting much of those one-time losses, it’s uncertain how energy market reforms in Texas will impact NRG in the long run. NRG’s transformation has taken twists and turns during the last five years, ultimately shrinking its wholesale generation business and increasing its retail energy business. Between 2016 and 2020, NRG divested half of its generation fleet, brought in nearly $3 billion of cash, and eliminated $10 billion of debt. In spring 2017, NRG sent subsidiary GenOn Energy into bankruptcy and in 2018, NRG sold its renewable energy business, its 47% stake in NRG Yield, and its South Central generation.

Financial Strength

NRG’s transformation, which started in mid-2017, simplified its balance sheet and improved its credit metrics. Before the Direct Energy acquisition, NRG had cut its recourse debt below $6 billion and was on track to reach investment-grade credit metrics by the end of 2020. The all-cash Direct Energy acquisition and losses from the Texas winter storm in February 2021 push that back slightly. Management is targeting 2.5-2.75 times net debt/EBITDA, a level it reached in 2019 but might not reach again until 2023 or later. The winter storm losses led management to scale back its 2021 debt reduction target to less than $300 million from the pre-storm $1.05 billion target. The board’s decision to initiate a $1 billion stock repurchase plan in late 2021 suggests NRG’s capital allocation focus has shifted away from balance sheet repair. Lower capital expenditures should boost cash flow as NRG adjusts to maintenance levels at its core business. The retail business requires little capital investment.  

The $3 billion of cash proceeds from the renewable energy, NRG Yield, and South Central business sales helped NRG finance the Direct Energy acquisition with no new equity. Management reset the dividend at $1.20 per share annualized in 2020, up from $0.12 in 2019. NRG plans to pay a $1.40 per share annualized dividend in 2022. Robust free cash flow and share buybacks should allow management to meet its 7%-9% dividend growth target easily. Before the 2017-18 restructuring, NRG carried $19.5 billion of consolidated debt at year-end 2015, but only $7.9 billion was recourse parent debt. The rest was nonrecourse debt at GenOn Energy, NRG Yield, or project financing. The GenOn bankruptcy eliminated $2.7 billion of debt, and the 2018 divestitures eliminated another $7 billion of debt. NRG used $2 billion of cash proceeds from its 2018 asset sales to pay down parent debt and repurchase $1.25 billion of stock. NRG bought back $1.6 billion of stock in 2019-20 before the Direct Energy acquisition.

Bulls Say’s

  • NRG’s transformation in 2017-20 cut the business in half, improved its credit metrics, and generated substantial cash to use for the dividend, stock buybacks, and acquisitions like Direct Energy. 
  • NRG’s match between its wholesale generation earnings and its retail supply earnings provides a hedge that stabilizes consolidated earnings. 
  • NRG’s primary operations are in Texas, which we think will have among the fastest electricity demand growth of any state during the next decade.

Company Profile 

NRG Energy is one of the largest retail energy providers in the U.S., with 7 million customers, including its 2021 acquisition of Direct Energy. It also is one of the largest U.S. independent power producers, with 16 gigawatts of nuclear, coal, gas, and oil power generation capacity primarily in Texas. Since 2018, NRG has divested its 47% stake in NRG Yield, among other renewable energy and conventional generation investments. NRG exited Chapter 11 bankruptcy as a stand-alone entity in December 2003.

(Source: Morningstar)

General Advice Warning

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

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Commodities Trading Ideas & Charts

S32 reported strong 1H22 results driven by higher commodities prices and strong production results

Investment Thesis

  • Prices of S32’s key commodities expected to moderate or be relatively flat relative to FY21 realized prices.
  • Management highlighted “FY22 guidance is unchanged with the exception of non-operated Brazil Alumina and our underground base metals operation Cannington. Separately volumes at Mozal Aluminium and Cerro Matoso are expected to lift from FY21 following our investment in high returning improvement projects that will increase production into currently favourable markets for aluminium and nickel”. 
  • Analysts estimate the Company will produce significant free cash flow over the next three years; adequate to support growth and capital management.
  • Significant cash on the balance provides flexibility = capital management. 
  • The Board has resolved to further expand S32’s capital management program by $110m to $2.1bn, leaving $302m to be returned to shareholders by 2 September 2022. 
  • The Company is still paying a dividend despite the uncertainty and volatility.   
  • Both Standard and Poor’s and Moody’s reaffirmed their respective BBB+ and Baa1 credit ratings.

Key Risk

  • Decline in key commodity prices.
  • Significant shock to global growth. 
  • Cost blowouts (inflationary pressures) / production disruptions.
  • Company fails to deliver on adequate capital management initiatives.
  • Adverse movement in currencies. 
  • Value destructive acquisition. 

1H22 Results Highlights. Relative to the pcp: 

  • Underlying revenue increased +32% to $4.602m driven by higher prices for most commodities, which combined with -4.6% reduction in total cost base amid divestment of South Africa Energy Coal, led to underlying EBITDA increasing +138% to $1,871m with margins improving +19.7% to 44%. 
  • Underlying EBIT increased +288% to $1,514m with margin improving +23.5% to 35.5%, further benefitting from a reduction in underlying depreciation and amortisation following the recognition of a non-cash impairment charge for Illawarra Metallurgical Coal in FY21. 
  •  Underlying earnings increased +638% to $1,004m and statutory profit after tax increased +1847% to $1,032m, benefiting from portfolio changes completed in FY21 and a broad recovery in commodity prices.

Company Profile

South32 (S32) is a globally diversified metals and mining company. S32’s strategy is to invest in high quality metals and mining operations where their distinctive capabilities and regional model enables them to extract sustainably performance. The regional model means their businesses are run by people from within the region. The company’s African operations are supported by a regional office in Johannesburg South Africa and Australian and South American operations by an office in Perth. 

  • Relative to the pcp: (1) 

(Source: Banyantree)

General Advice Warning

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

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Commodities Trading Ideas & Charts

Origin Energy Ltd signals to exit coal-fired power generation; Replacing the plant with a large-scale battery

Investment Thesis

  • Higher oil prices benefit ORG’s APLNG project (higher revenues).
  • Balance sheet position is being restored with management focused on getting the debt covenants back to an investment grade level.
  • Achieving milestones within the APLNG project.
  • On-going focus on operating cost and capital expenditure reduction.
  • Increasing dividend profile and with a restored balance sheet the Company can also consider other capital management initiatives. 
  • Rationalization of asset portfolio, including asset sales and the IPO of its conventional upstream business should help improve the balance sheet position.  

Key Risks

  • Exploration and production risks.
  • Lower energy prices, particularly oil prices (for its APLNG project). 
  • Structural change in energy markets & increased competition.  
  • Not meeting cost-out targets. 
  • Highly geared balance sheet, with the company not being able to reduce debt fast enough. 

1H22 Key Highlights

  • Underlying EBITDA declined -4.8% over pcp to $1,099m, as increased earnings from Australia Pacific LNG amid higher oil and gas prices were more than offset by expected lower earnings in Energy Markets reflecting lower retail tariffs (set in FY21 when wholesale electricity prices were at lows due to subdued economic activity and increased renewables penetration) and higher energy procurement costs. 
  • Underlying profit increased +18% over pcp to $268m, driven by strong commodity prices, however, the Company recorded statutory loss of $131m, reflecting the one-off impairment and net capital gains tax expense associated with the $2bn sale of its 10% interest in Australia Pacific LNG. 
  •  Operating cash flow was an outflow of $79m vs inflow of $669m in pcp, amid lower earnings from Energy markets, higher working capital primarily due to timing of LNG cargo delivery and oil hedging and LNG trading losses. FCF (including major growth projects of Octopus equity investment of $260m and Kraken licence implementation costs of $37m) was an outflow of $112m vs inflow of $594m in pcp. 
  • Adjusted net debt increased +10.6% over 2H21 to $5.133bn, driven by the consideration associated with the investment in Octopus and higher working capital associated with the payment for an LNG cargo partially offset by APLNG cash distributions. (5) The Board declared an unfranked interim dividend of 12.5cps, representing 66% of FCF (excluding major growth projects), with partial franking expected to be restored in FY23.

Sale of 10% interest in APLNG – expected to restore balance sheet flexibility

Management executed an agreement to sell 10% of APLNG for net proceeds of $2.12bn (ORG retains 27.5% of shareholding, existing two APLNG board seats and upstream operatorship), with sale expected to be completed in 3Q22 (first half of CY22) and proceeds used to restore balance sheet flexibility with post sale adjusted Net Debt/adjusted Underlying EBITDA and gearing ratio declining to lower end of the target ranges of 2-3x and 20-30% from current levels of 3.9x and 34%, respectively. It will also provide FY22 net interest saving of $45-65m

Coal-fired generation

Management has submitted notice to AEMO for the potential early retirement of Eraring Power Station in August 2025 (vs prior targeted closure in 2032) and plans to install a large-scale battery of up to 700 MW at the site.

Company Profile

Origin Energy (ORG) is an integrated energy company with operations in exploration, production, generation and the sale of energy to millions of households and businesses across Australia. The Company has extensive operations across Australia and New Zealand and pursuing opportunities in the fast-growing energy markets of Asia and South America. The Company has two main segments: (1) Energy Markets – retail sales of electricity, gas and other customer solutions; electricity generation; and wholesale trading of electricity and gas. (2) Integrated Gas – consists of upstream exploration, development and production; the segment also holds the 37.5% ownership in Asia Pacific LNG project (APLNG). 

  • Sale of 10% inte(Sourc                    (Source: Banyantree)

General Advice Warning

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

Categories
Commodities Trading Ideas & Charts

EOG Resources scale and double premium drilling strategy support its narrow economic moat

Business Strategy and Outlook

EOG Resources is one of the largest independent oil exploration and production companies. It derives almost all of its production from shale fields in the U.S., with a small incremental contribution from Trinidad. The firm differentiates itself by attempting to identify prospective areas before most peers catch on, enabling it to secure leasehold at attractive rates (rather than overpaying for land after the market overheats). It has only one large-scale M&A deal under its belt, related to its 2016 entry to the Permian Basin. Nevertheless, the firm is also active in most other name-brand shale plays, including the Bakken and Eagle Ford. Additionally, the focus now includes the Powder River Basin (Wyoming) and a new natural gas play in southern Texas that the firm has christened “Dorado.”

The firm’s acreage contains over 10,000 potential drilling locations that management designates as “premium.” These are expected to generate internal rates of return of at least 30% (assuming $40/bbl WTI and $2.50/mcf natural gas). However, management is now prioritizing a sizable subset, 6,000-plus locations, designated “double premium.” These are expected to deliver twice the returns at the same commodity prices. Opportunities that don’t currently satisfy this criteria may be upgraded later, if the company can reduce the expected development cost or boost the likely flow rate of the well. During the past several years, EOG added more premium locations than it drilled, resulting in a net increase to its premium drilling opportunities, and the firm expects to do the same with its double premium inventory.

Financial Strength

Overall, EOG’s financial health is excellent compared with peers, giving it the ability to tolerate prolonged periods of weak commodity prices, if necessary. It has more cash than debt, generates substantial free cash under a wide range of commodity scenarios, and aims to retain a substantial cash cushion to enable it to take advantage of downcycles by repurchasing stock without unduly stressing the balance sheet at an inopportune time.The firm holds about $5.1 billion of debt, resulting in very low leverage ratios. At the end of the most recent reporting period, debt/capital was 19% and net debt/EBITDA was slightly negative. Furthermore, the firm also has a comfortable liquidity stockpile, with $5 billion cash and another $2 billion available on its undrawn revolver (though a portion of this will be used to fund the firm’s $600 million special dividend payable March).

Bulls Say’s

  • EOG is among the most technically proficient operators in the business. Initial production rates from its shale wells consistently exceed industry averages. 
  • EOG’s vast inventory of premium drilling locations provides a long runway of low-cost resources. 
  • EOG often adds new premium drilling opportunities to its queue via exploration or by using improved knowhow and technology to “upgrade” opportunities that did not previously qualify.

Company Profile 

EOG Resources is an oil and gas producer with acreage in several U.S. shale plays, including the Permian Basin, the Eagle Ford, and the Bakken. At the end of 2021, it reported net proved reserves of 3.7 billion barrels of oil equivalent. Net production averaged 829 thousand barrels of oil equivalent per day in 2021 at a ratio of 72% oil and natural gas liquids and 28% natural gas.

(Source: Morningstar)

General Advice Warning

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