Category: Trading Ideas & Charts

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Commodities Trading Ideas & Charts

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

Investment Thesis:

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

Key Risks:

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

Key Highlights:

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

Company Description:

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

(Source: Banyantree)

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

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

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

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

Investment Thesis

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

Key Risks

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

Key Highlights 

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

Company Description

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

(Source: Banyantree)

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

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

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

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

Business Strategy & Outlook

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

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

Financial Strengths

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

Bulls Say

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

Company Description

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

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

Evergy’s Growth Based on Regional Clean Energy Buildout

Business Strategy & Outlook:   

Evergy formed in June 2018 when Great Plains Energy and Westar Energy completed their merger after two years spent working through the regulatory approval process in Kansas and Missouri. With the integration complete and a new management team in place, Evergy is working to improve historically challenging regulation and invest in clean energy. Regulatory negotiations in Missouri during the second half of 2022 will test how much the state’s ratemaking framework has improved in recent years. Despite recent changes, still consider Missouri’s rate regulation less constructive than most other states. Evergy must secure constructive regulatory outcomes in Missouri and Kansas to support growth plans that include $11 billion of capital investment during the next five years, primarily to replace aging coal plants with renewable energy. New legislation in Missouri should allow Evergy to securitize the remaining book value of coal plants as they retire in the coming years, improving cash flow and reducing equity needs. 

Kansas, which represents about half of Evergy’s total asset base, has a more constructive regulatory environment than Missouri. Kansas regulators have supported renewable energy investment for many years. Evergy also benefits from favorable federal regulation for its electric transmission assets, which could top 15% of its asset base in the coming years. Unlike other utilities that are pursuing investments outside their regulated-rate structure, Evergy management said it plans to direct all of Evergy’s growth capital to its regulated utilities at least through 2025. Senior leadership has extensive experience at companies with unregulated power businesses, and management wouldn’t be surprised if Evergy directs some capital investment outside of the utilities, perhaps with a partner. Evergy raised the dividend 6% during the two years following the merger and raised it 7% for 2022 to $2.29 per share annualized. Company expects the dividend to grow in line with earnings for the foreseeable future.

Financial Strengths:  

Evergy had an equity-heavy balance sheet following the all-stock combination of Westar and Great Plains. However, the company repurchased over 45 million shares following the merger for about $2.6 billion and has issued nearly $3 billion of net new debt, bringing its leverage in line with peers’. Company expects Evergy will continue financing a large share of its capital investments with debt such that debt/total capital remains near 55%. Following the merger, the board raised the dividend 6.3% in late 2019, 5.9% in late 2020, and 7% in late 2021. Management’s payout ratio target is 60%-70% of operating earnings, in line with most other regulated utilities. It has forecasted 6% dividend increases for at least the next four years, in line with earnings growth.

Bulls Say: 

  • The annual dividend increases to average 6% over the next four years, in line with earnings growth. 
  • Evergy’s operating cost savings during the last few years are helping offset some of the customer bill increases related to its capital investments. 
  • Recent legislation has improved the regulatory framework in Missouri, home to one third of Evergy’s rate base. This should reduce regulatory lag.

Company Description:  

Evergy is a regulated electric utility serving eastern Kansas and western Missouri. Major operating subsidiaries include Evergy Metro, Evergy Kansas Central, Evergy Missouri West, and Evergy Transmission Co. The utility has a combined rate base of approximately $16 billion, about half in Kansas and the rest split between Missouri and federal jurisdiction. Evergy is one of the largest wind energy suppliers in the U.S. 

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

Soaring Refiner Margins Launch No-Moat Viva’s Q2 2022

Business Strategy & Outlook:    

Viva, along with Ampol, BP and Mobil, is a rare breed of vertically integrated Australian refined fuel supplier. The Australian downstream petroleum industry runs from sourcing, transporting and storing crude oil, refining that crude into marketable products or directly sourcing imported refined product, and then transporting refined products for sale to retail and commercial customers. Refined products are mostly used in the transport sector, including commercial and private motoring, aviation, marine, and other transport demand. The Australian market equates to approximately 60 billion liters of product, with road use the largest segment at over 50%, followed by aviation at 14% and industry at 12%. Coronavirus notwithstanding, volumes in the Australian fuels market grow at close to rates in GDP, with solid increases in diesel and jet fuel consumption offsetting a slow decline in petrol. 

Viva is Australia’s second-largest vertically integrated refined transport fuel supplier, delivering over 14.5 billion liters of refined product annually or approximately 24% of national requirement. Viva can be described as vertically integrated because it refines, supplies and markets fuel to customers. Few companies refine fuel locally with much of Australia’s refining capacity shut in recent decades, unable to compete with Asian mega-refineries. There are only four refineries remaining including Viva’s Geelong in Victoria. Geelong converts imported and locally sourced crude oil into gasoline, diesel, jet fuel and lubricants. These are then distributed, along with directly imported products, into the retail channel via supply channels. The Geelong refinery is one of the most complex in the country due to its greater ability to produce higher value products. Against the relatively sanguine outlook for the refined fuels industry, there are a number of concerns. These include the potential for heightened competition, driving lower margins given the entrance of new players. Further, investing in older and far smaller refineries than Asian mega-cousins is a potential money pit.

Financial Strengths:  

At end December 2021, Viva had net debt of just AUD 95 million, excluding operating leases. Gearing (ND/(ND+E)) is modest at 4% and net debt/EBITDA a negligible 0.2. The balance sheet is in great shape to fund investments in new businesses. The strong status is despite returning AUD 680 million in after-tax Viva Energy REIT sale proceeds in full to shareholders in 2020 and making a AUD 100 million capital return in 2021. Forecasted solid free cash flows in the foreseeable future, growing to over AUD 400 million by 2023, which should comfortably support Viva’s target dividend payout ratio of between 50% and 70% of underlying distributable NPAT.

Bulls Say: 

  • Viva boasts significant refined fuel distribution, supplying around 24% of Australia’s national requirement; second only to Ampol.
  • Australia’s fuel demand continues to grow at low single digits as population growth and rising aviation use offset increasing vehicle fuel efficiency gains.
  • While not sufficient to warrant awarding an economic moat, Viva’s pipeline and terminal infrastructure furnish competitive advantages–notably the efficient scale with its jet fuel pipeline supplying Sydney Airport.

Company Description:

Viva is Australia’s second-largest vertically integrated refined transport fuel supplier. Viva is rated as the second-most-significant pipeline owner, and at approximately 1,155 locations, Viva supplies the third-largest number of retail sites in Australia behind Ampol at approximately 1,985 and BP at 1,400. Vitol bought Shell’s Australian downstream operations in 2014, and renamed them Viva Energy. Viva subsequently bought Shell’s Australian aviation operations and a 50% investment in Liberty Oil. In 2016, Viva sold (and leased back) a portfolio of its retail sites to Viva Energy REIT and listed Viva Energy REIT on the ASX. It has since sold its entire REIT stake for AUD 734 million.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

Raising Interest Rates, Slowing Economic Growth, and Weaker Prices Soften BlueScope Steel’s Outlook

Business Strategy & Outlook:    

BlueScope’s strategy appropriately plays to its strengths and attempts to neutralize its weaknesses within its portfolio of legacy assets. Steel manufacturers produce largely undifferentiated products and have limited pricing power. Maintainable competitive advantage is typically generated by being the lowest cost provider. BlueScope’s Australian business operates at a relatively high cost and struggles to compete in highly competitive export markets. North Star is significantly more entrenched and operates toward the low end of the cost curve. 

Over the past decade, BlueScope sensibly restructured Australian operations away from commodity export markets where the relatively high cost of production places it at a competitive disadvantage. The Australian operations are now tailored to the domestic market with a focus on shifting its sales mix to its value-add metal coated and painted product brands. The group’s Ohio-based North Star operations are the business’ crown-jewel. North Star specializes in the production of hot rolled coil for the U.S. domestic market and utilizes highly efficient electric arc furnaces which can produce at a lower per unit cost than blast furnace competitors. BlueScope has gradually expanded production capacity at North Star over time to maximize the value of its operations. BlueScope is taking appropriate actions to manage its environmental, social, and governance risks. BlueScope is proactively investing in technologies to limit the carbon intensity of its steelmaking operations and has committed to a net zero emissions target by 2050.

Financial Strengths:  

BlueScope has a strong balance sheet. As at the end of the first half of fiscal 2022, BlueScope’s net cash position was approximately AUD 700 million (including operating leases) and had approximately AUD 2.7 billion in undrawn debt facilities. BlueScope’s balance sheet will be put to work over the next few years to fund a range of initiatives across Port Kembla, North Star, the U.S. buildings segment, and acquiring the coil coatings business from Cornerstone Building Brands. BlueScope is also strategically investing in sustainability programs associated with its commitment to net zero emissions by 2050. Longer term, BlueScope is targeting a relatively conservative net debt position of around AUD 400 million with at least 50% of free cash flows distributed to shareholders in the form of dividends and share buybacks.

Bulls Say: 

  • Supply side reform in China will reduce industry overcapacity and act to boost steelmaking spreads and operating margins relative to depressed levels in the early 2010s.
  • The strength of Australia’s residential construction market will aid in shifting the Australian segment’s sales mix to value-added products in the near term.
  • Fiscal stimulus programs enacted during the coronavirus pandemic will support demand for steel products over the near term.

Company Description: 

BlueScope is an Australian-based steelmaking firm with five steel related business units. The Australian Steel Products segment mainly specializes in a range of high-value coated and painted flat steel products for the domestic market. North Star is the group’s U.S. mini-mill specializing in the production of hot rolled coil for the U.S. construction and automotive sectors. Building Products Asia and North America comprise operations across Southeast Asia, China, India, and the U.S. West Coast involved in metal-coating, painting, and roll-forming. New Zealand Steel and the Pacific Islands business has steel operations across New Zealand and the Pacific. The Buildings North America segment specializes in nonresidential buildings, including materials manufacturing and support services.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

Soaring Refiner Margin Launch No-Moat Ampols Q2 2022. FVE Increases to AUD 34.50

Business Strategy & Outlook:   

Ampol owns and operates a major refined petroleum product import terminal at Kurnell in Sydney and a refinery at Lytton in Brisbane. Annual refining capacity fell by half to 6.0 billion liters, about one third of company marketed volumes, when Kurnell closed. Kurnell refinery was shut in 2014 because of operational issues and unfavorable demand for the product mix. Refineries and finished product import terminals are integrated with pipelines, distribution, and marketing. The national service station network exceeds 2,000, including 350 jointly branded Ampol/Woolworths (ASX: WOW) sites. Strong growth in transport fuels reflects favorable market attributes. Australia’s relatively sparse rail network and low population density favor trucks for distribution of goods. Pandemics notwithstanding, volumes in the Australian liquid fuels market grow at close to growth rates in gross domestic product, with solid increases in diesel and jet fuel consumption offsetting a slow decline in petrol. 

Ampol’s extensive network and comprehensive product offerings provide some competitive advantage. A very efficient supply chain makes Ampol an effective competitor. Still don’t see this as sufficient to justify a moat rating other than none. The closure of refining sees Ampol’s business rest largely on fuel distribution. In this space, it wrestles with expert competition in BP, Shell, and Mobil. Potential long-term threats include substitution of diesel for alternative fuels such as liquid natural gas, or LNG, and electricity. In the case of LNG in particular, Ampol is likely to participate in any shift via its logistics network and filling stations. Ampol maintains a market-leading 35% share of all transport fuels sold. Ampol substantially rests on its competitive supply chain now that Kurnell has been converted into an import terminal. Competitive pressures in the refining segment meant Ampol could not earn its cost of capital on Kurnell. The highly profitable and fast-growing marketing segment can enjoy increased investment that was previously wasted in laggard refining. Ampol successfully completed an NZD 2.0 billion bid for New Zealand peer Z Energy in first-half 2022.

Financial Strengths:  

Ampol completed a NZD 2.0 billion or NZD 3.78 per share cash offer for Z Energy via scheme of arrangement in first-half 2022. Company viewed this as a sound move on its part given compelling value. Ampol funded the acquisition in accordance with its existing capital allocation framework, including an adjusted net debt/EBITDA target of 2.0-2.5 times. Ampol will have to sell down some New Zealand assets to meet NZ competition guidelines. This includes the Gull network. Z Energy had NZD 608 million net debt at end March 2021, net debt/EBITDA of 2.67 quite high versus Ampol’s AUD 724 million at end December 2021, but this in the context of a low growth company focused on yield. Ampol’s standalone leverage was conservative at 18.6% (ND/(ND+E)) and annualized net debt/EBITDA is just 0.8. Company expected Ampol’s post acquisition gearing to temporarily increase to around 35%, ignoring potential for an equity raise or asset sell down. While this is manageable and within Ampol’s target net debt/EBITDA range of 2.0-2.5, current strong cash flows courtesy of refiner margins will be more than welcome. The balance sheet is in reasonable shape to fund a minimum AUD 100 million investment in new energy and decarbonization projects.

Bulls Say: 

  • Ampol is well placed, with a leading market share in transport fuels. This position is backed by an extensive distribution network. 
  • Australia’s demand for transport fuels is growing at close to GDP rates. 
  • Closing the highest-cost Kurnell refining operations materially improved return on invested capital.

Company Description:  

Ampol (nee Caltex) is the largest and only Australian-listed petroleum refiner and distributor, with operations in all states and territories. It was a major international brand of Chevron’s until that 50% owner sold out in 2015. Caltex transitioned to Ampol branding due to Chevron terminating its license to use the Caltex brand in Australia. Ampol has operated for more than 100 years. It owns and operates a refinery at Lytton in Brisbane, but closed Sydney’s Kurnell refinery to focus on the more profitable distribution/retail segment. It successfully completed a NZD 2.0 billion bid for New Zealand peer Z Energy in first-half 2022. 

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

OGE Energy completed its long transition to a fully regulated utility in 2021

Business Strategy & Outlook

OGE Energy completed its long transition to a fully regulated utility in 2021 when it divested its midstream energy business through a swap transaction with Energy Transfer. Typical utilities investors should be more comfortable with OGE now that it has no direct exposure to energy commodity markets. OGE’s elimination of its midstream energy exposure along with improving regulation at its core Oklahoma operations puts it on track to produce more stable, growing earnings in 2022 and beyond than it has in many years. OGE management has said it plans on selling the 95 million limited partner units of Energy Transfer worth some $950 million acquired as part of the deal for OGE’s Enable. OGE had formed Enable with two other firms in 2013, contributing all its interstate pipelines and field services business. The OGE will realize after-tax proceeds exceeding $500 million that it can use to fund its planned growth investments at the electric utility.

Improving rate regulation in Oklahoma is a key part of OGE’s growth plan. In 2020, subsidiary Oklahoma Gas & Electric proposed an $810 million grid modernization plan that includes a rate tracker cost recovery mechanism. A settlement established a partial rate tracker with the remainder of the investments recovered in a general rate case. The modified framework reduces regulatory lag and will improve cash flow available for dividends and growth. In 2019, the Oklahoma Corporation Commission approved a settlement for environmental upgrades at the Sooner coal-fired plant and natural gas conversions of coal units at the Muskogee coal plant. OG&E had been seeking approval for these investments for a decade. Exiting the midstream business will reduce earnings and will increase the payout ratio on OGE’s common dividend to over 85% by as per estimates. Even though the earnings grow 6% annually, the dividend likely will grow around 2% during the next four years until OGE’s payout ratio reaches the mid-70% range.

Financial Strengths

Between 2022 and 2025, the OGE will invest nearly $4 billion in its utility. The company should be able to finance these investments with cash flow from utility operations, proceeds from the sale of its Energy Transfer units, and roughly $600 million of additional debt. One cannot foresee any material equity issuances in the next five years. The company has maintained a conservative capital structure, and one doesn’t expect a sizable shift in that strategy once it exits its Energy Transfer position and issues securitized debt to cover its excess fuel costs related to Winter Storm Uri in February 2021. The OGE’s dividend growth slowed after losing the earnings and cash distributions from Enable following the Energy Transfer transaction. Cash distributions from Enable helped OGE average 10% annual dividend growth since forming Enable in 2013. However, a large drop in energy prices and the economic impact of COVID-19 led Enable to cut its distribution by 50% in 2020. Less cash flow from Enable required OGE’s board to slow dividend increases to 6.2% in 2019, 3.9% in 2020, and 2% in 2021. Without the Enable earnings expected OGE’s payout ratio will climb above 80% for several years. The dividend increases will average 2% annually for the next few years until the payout ratio falls to within management’s 65%-70% target.

Bulls Say

  • OGE is making progress improving Oklahoma regulation so that it can execute its growth investment plan without creating a drag on its return on equity. 
  • Although the expected dividend increases too slow to about 2% annually, investors still should benefit from growing earnings and minimal equity needs. 
  • The economy in OG&E’s service territory is healthy and annual customer growth is again exceeding 2%, higher than most electric utilities.

Company Description

OGE Energy is a holding company for Oklahoma Gas & Electric, a regulated utility offering electricity generation, transmission, and distribution to more than 800,000 customers in Oklahoma and western Arkansas. In December 2021, OGE closed a merger between Enable Midstream Partners and Energy Transfer. This resulted in OGE acquiring 95.4 million limited partner units of Energy Transfer in return for its 25.5% limited partner interest in Enable, a midstream services company it created in 2013.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

China is BHP’s largest customer, accounting for more than 65% of total sales in fiscal 2021

Business Strategy and Outlook 

BHP Group is the world’s largest publicly traded mining conglomerate and positioned at the centre of the China boom. The company correctly values a strong balance sheet to provide some stability through the inevitable cycles and derives some modest benefit from commodity and geographic diversification, relative to its mining peers. BHP produces a range of commodities and is a major producer of iron ore, copper, and metallurgical coal. Exposure to conventional oil and gas ended with the spinoff and subsequent merger with Woodside in 2022. The onshore U.S. shale assets were divested in 2018. Much of the company’s operations are in Australia, particularly the low-cost iron ore business. Many of BHP’s assets are located close to key Asian markets, particularly iron ore and metallurgical coal, which provides a modest freight cost advantage relative to peers. 

Commodity demand is tied to global economic growth, China in particular. China is BHP’s largest customer, accounting for more than 65% of total sales in fiscal 2021. With demand for most products likely to soften with the end of the China boom, and BHP’s fiscal 2021-22 earnings back near the fiscal 2011-12 peak, the outlook is for earnings to materially decline, with iron ore the likely key driver. The good times saw significant capital expenditure, notably on iron ore and onshore U.S. shale gas and oil. Overinvestment in the boom diluted returns to the point where long-term excess returns are unlikely. Structurally lower earnings with the demise of the China boom peaks means it is expected that midcycle returns on adjusted invested capital, after adding back the impairments and write-downs, to be close to the cost of capital. Ignoring the cumulative impairments and write-downs, returns to modestly excess the cost of capital by mid cycle.

Financial Strength

BHP is in a strong financial position. With ongoing debt repayment, modest near-term capital requirements and the fortuitous bounce in commodity prices since 2016, BHP’s financial position is strong. For the five years ended fiscal 2026, the net debt/EBITDA remains to be below 0.5 and EBIT/net interest to average more than 30. Net debt at end-June 2021 was about USD 4 billion, below BHP’s net debt target range of USD 12 billion to USD 17 billion. Given the limited capital expenditure requirements, with only modest commitments to new expenditure in the lower demand growth environment, BHP’s balance sheet remains strong with excess cash flow to be returned to shareholders. Share buybacks and special dividends are possible, depending on the level of commodity prices, given the relatively modest outlook for capital expenditure. The likelihood of special dividends and buybacks would decline if BHP chose to pursue acquisitions.

Bulls Say’s

  • BHP is a beneficiary of continued global economic growth and demand for the commodities it produces. 
  • The company’s cash flow base is diversified and is less susceptible to the vagaries of the market than single-commodity producers. 
  • BHP’s iron ore assets are industry-leading. The company remains well placed to continue low-cost production and increase output with minimal expenditure and an efficiency focus.

Company Profile 

BHP is a leading global diversified miner supplying iron ore, copper, oil, gas, and metallurgical. The merger of BHP Limited (now BHP Ltd.) and Billiton PLC (now BHP PLC) created the present-day BHP. Shareholders in each company have equivalent economic and voting rights in BHP as a whole and in 2022 voted to reunify the dual listed structure. Major assets include Pilbara iron ore, Queensland coking coal, Escondida copper and conventional petroleum assets, principally in Australia and the Gulf of Mexico. Onshore U.S. oil and gas assets were sold in 2018 and the remaining Petroleum assets are likely to be spun off and merged with Woodside.

(Source: MorningStar)

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

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

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

Categories
Commodities Trading Ideas & Charts

Constructive Regulatory Outcomes Power CMS Energy’s Growth

Business Strategy & Outlook:   

CMS Energy’s decade-long transformation into a high-quality regulated utility positions it for a long runway of growth. CMS Energy’s 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 Energy plans more than $14 billion of investment during the next five years. That investment plan could expand if the firm 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 settlements and regulatory decisions. 

CMS has secured regulatory approval for almost all of its near-term capital investment as part of the state’s integrated resource plan framework. In June, regulators approved updates to CMS’ 20-year clean energy plan. If CMS can keep rate increases modest by controlling operating costs, the company expects 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 its entire 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. Low interest rates and easy access to capital have allowed management to maintain the current balance sheet leverage and support its investment-grade credit ratings with earnings growth. The company  expects CMS’ consolidated returns on equity to top 13% for the next few years, among the best in the industry due to this extra leverage. But with interest rates rising, management might be less eager to refinance parent-level debt, potentially leading to lower returns on equity in the future. CMS has taken advantage of favorable bond markets in recent years to reduce its refinancing risk and 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 could lead to lower allowed returns, customer rates and earnings. Apart from financing the large Covert power plant acquisition in 2023, the management doesn’t expect 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. The company  expects the $930 million after tax cash proceeds from the EnerBank sale will offset new equity needs through 2024. With constructive regulation, 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. The company expects 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.

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.

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