Category: Financial Markets
public industrial gas companies have consistently delivered lucrative returns because of their economic moats. Demand for industrial gases is strongly correlated to industrial production. As such, organic revenue growth will largely depend on global economic conditions. Since Seifi Ghasemi was appointed CEO in 2014, new management has launched several initiatives that drastically improved Air Products’ profitability, raising EBITDA margins by over 1,500 basis points. Air Products is poised for rapid growth over the next few years due to its 10-year capital allocation plan. The industrial gas firm aims to deploy over $30 billion during the decade from fiscal 2018 through fiscal 2027 and has already either spent or committed roughly $18 billion of that amount.
Financial Strength
Management has indicated that maintaining an investment-grade credit rating is a priority. The company has used proceeds from its divestments of noncore operations (including the spin-off of its electronic materials division as Versum Materials in 2016 and the sale of its specialty additives business to Evonik in 2017) to reduce debt and fuel investment.The company held roughly $8 billion of gross debt as of Dec. 31, 2020, compared with $6.2 billion in cash and short-term investments. Liquidity includes an undrawn $2.5 billion multicurrency revolving credit facility, which is also used to support a commercial paper program.
Narrow-moat rated Air Products reported mixed fiscal third quarter results, as its sales of $2,605 million beat the FactSet consensus estimate of $2,498 million, but adjusted EPS of $2.31 fell $0.05 short of expectations. The industrial gas firm also lowered the top end of its full-year fiscal 2021 adjusted EPS guidance range by a nickel, from $8.95-$9.10 to $8.95-$9.05. Fiscal third-quarter sales increased 26% year over year and 4% sequentially, driven by a continued recovery in the firm’s end markets.
Air Products unveiled its updated capital deployment plan and aims to deploy over $30 billion during the decade from fiscal 2018 through fiscal 2027. The company has already either spent or committed roughly $17.8 billion of that amount. Management said on the earnings call that of the remaining $12.2 billion, it expects to invest roughly $5 billion to support the existing business and the remainder in large growth projects, focusing on opportunities in gasification, green hydrogen, and carbon capture.
Bulls Say’s
- Air Products is poised for rapid growth due to business opportunities that drive its ambitious $30 billion capital allocation plan.
- After acquiring Shell’s and GE’s gasification businesses in 2018, Air Products is the global leader in this segment and is poised to benefit from growing coal gasification in China and India.
- The company’s focus on on-site investments will result in a derisked portfolio with more stable cash flows.
Company Profile
Since its founding in 1940, Air Products has become one of the leading industrial gas suppliers globally, with operations in 50 countries and 19,000 employees. The company is the largest supplier of hydrogen and helium in the world. It has a unique portfolio serving customers in a number of industries, including chemicals, energy, healthcare, metals, and electronics. Air Products generated $8.9 billion in revenue in fiscal 2020.
(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.
fair value is estimated to $37 per share, from $32. The increase primarily reflects a reduced cost of capital assumption. Given how quickly the firm is deleveraging it is appropriate to penalize the firm with an above average cost of debt.
The preoccupation with near-term capital returns has driven investors away from Occidental. The firm is still coping with uncomfortable leverage ratios following the ill-timed 2019 acquisition of Anadarko Petroleum, making debt reduction the only prudent use of its excess cash. The market is overlooking the firm’s relatively modest base decline.
Oxy has a diversified portfolio, with oil and gas contributions from non-shale assets in the Middle East and the Gulf of Mexico to complement its unconventional operations in the Permian Basin and the DJ Basin. So it can more easily sustain its production than shale pure plays that must continually invest in new drilling to offset steep declines from existing wells.
Company’s performance
The firm’s enhanced oil recovery operations further reduces the base decline. The firm also generates stable cash flows from its extensive midstream and chemical segments. As a result, the firm can hold its volumes flat with a long term reinvestment rate of about 35%. And when the firm reaches its target debt level, which it can realistically do in 6 months from now, given how quickly it is generating excess cash, then that very low reinvestment rate should leave plenty of free cash to distribute. The three firms we highlighted earlier–Pioneer, Devon, and EOG–have 2025 discretionary cash flow yields of about 10% at current prices.
Company’s Future Outlook
That means the market is baking in long-term dividend yields of around 5%, assuming these firms plan to return half of their surplus cash. In contrast, Oxy’s discretionary cash flow yields in 2025, after accounting for all capital spending and preferred dividends, is over 20% at the current price. This underscores our view that shares are undervalued.
Company Profile
Occidental Petroleum Corporation (NYSE: OXY) is an independent exploration and production company with operations in the United States, Latin America, and the Middle East. At the end of 2020, the company reported net proved reserves of 2.9 billion barrels of oil equivalent. Net production averaged 1,306 thousand barrels of oil equivalent per day in 2020 at a ratio of 74% oil and natural gas liquids and 26% 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.
