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Improving North Carolina Regulatory Environment Supports Clean Energy Transition

Business Strategy & Outlook

Duke Energy is one of the largest regulated utilities in the United States. Florida is Duke’s most constructive and attractive jurisdiction, with higher-than-average load growth and best-in-class regulation that allows for higher-than-average returns on equity, forward-looking rates, and automatic base-rate adjustments. The significant solar growth in the region and storm-hardening investments.

In North Carolina, Duke’s largest service territory, recent state legislation includes numerous provisions that improve the state’s regulatory ratemaking. The legislation allows multiyear rate plans up to three years, including increases for projected capital investments. Duke expects to file rate cases at both state subsidiaries later this year. Additionally, it allows for performance incentive mechanisms and usage-decoupled rates for residential customers, protecting utilities from underlying usage trends. The legislation also updates the state’s carbon-reduction targets, now aiming for a 70% reduction by 2030, and supports utilities’ efforts to play a critical role in the clean energy transition. Indiana remains constructive. Regulators approved a peer-average allowed return on equity. The subsidiary is allowed recovery for investments for renewable energy and future recovery on and of investments for coal ash remediation, with a forward-looking test year. The unit’s 20-year integrated resource plan calls for 7 gigawatts of renewables, 400 megawatts of energy storage, and 2.4 GW of natural gas generation. Duke’s $63 billion five-year capital investment plan is focused on clean energy, as the company works toward net-zero carbon emissions by 2050 and net-zero methane emissions by 2030. Management sees growth opportunities beyond its five-year forecast, with expectations for $70 billion-$75 billion of capital expenditures helping to support future rate base growth.

Management is transitioning Duke away from coal generation. The company, which has among the largest coal fleets in the industry, aims to reduce its coal fleet by up to 70% and install roughly 15 GW of renewable energy by 2030. The company plans to eliminate coal generation by 2035.

Financial Strengths

As per forecast $63 billion of capital investment over the next five years, which will require Duke to be a frequent debt issuer. The company has manageable long-term debt maturities. Duke will be able to refinance its debt as it comes due and maintain its debt/capital ratio by funding about half of its growth capital expenditures through debt issuance. The sale of a minority interest in Duke Energy Indiana helps reduce equity needs to fund this plan. The Duke’s total debt/EBITDA to remain around 5 times and its debt/capital ratio to remain in the mid-50s during the five-year forecast. Interest coverage should remain near 5 times. Duke has ample cash liquidity and borrowing capacity available under its master revolving credit facility. The Duke’s dividend is well covered with its regulated utilities’ earnings. There were always expected slower dividend growth for Duke. As per the expectations for 3.5% average annual dividend growth will represent a 64% payout based on 2026 earnings estimate. Duke’s liquidity position and cash flow generation should give investors’ confidence that it can maintain and increase its dividend.

Bulls Say

  • Duke’s regulated utilities provide a stable source of earnings. The company’s large capital expenditure plan should drive rate base and earnings growth for the next several years. The management’s 5%-7% earnings growth target is achievable.
  • The company operates in mostly constructive regulatory jurisdictions, which account for most of its revenue.
  • Duke’s management team has focused on core regulated operations and moaty growth investments.

Company Description

Duke Energy is one of the largest U.S. utilities, with regulated utilities in the Carolinas, Indiana, Florida, Ohio, and Kentucky that deliver electricity to nearly 8 million customers. Its natural gas utilities serve more than 1.5 million customers. Duke operates in three major segments: electric utilities and infrastructure; gas utilities and infrastructure; and commercial renewables.

(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.

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Commodities Trading Ideas & Charts

Initiating Coverage of Bloom Energy With No-Moat Rating, $15 FVE

Business Strategy & Outlook

Bloom Energy’s core product is its Bloom Energy Server, a distributed solution to meet commercial and industrial customers’ 24/7 power needs. Customer use cases vary, but typically prioritize reliability and emission reduction, and to a lesser extent cost savings. Bloom’s Energy Server is based on solid oxide fuel cell, or SOFC, technology and runs on natural gas, biogas, or hydrogen. Natural gas has historically been the dominant fuel, but one can expect greater emphasis on biogas and hydrogen in coming years. In comparison with other fuel cell companies, Bloom’s SOFC technology is best suited for stationary power applications.

Bloom’s growth strategy for its Energy Server product is to continually lower the cost of its product to allow for a broader customer base to adopt its solution. Historically, the vast majority of Bloom’s sales have come from four to five American states and South Korea. The company is looking to broaden its appeal both domestically and internationally. In order to achieve this, the company must lower the cost of its product, at which it has been successful over time. The cost of Bloom’s Energy Server has declined from approximately $6,000 per kilowatt at the time of its IPO in 2018 to below $2,500 in 2021 and the company expects roughly 10% per year cost reduction declines in the years ahead.

Bloom added to its product portfolio in 2021 with the introduction of its solid oxide electrolyzer for producing hydrogen. Many fuel cell providers such as Bloom have entered the electrolyzer market given synergies between fuel cell and electrolyze technology. Bloom expects to have a few pilot projects in 2022 before expecting broader commercial sales in 2023 and beyond. In contrast to competing electrolyze technologies that are expected to pair with renewable electricity, the Bloom’s solid oxide technology as best suited for nuclear-pairing applications. In the longer term, the company is also working on adapting its fuel cell technology for the marine end market. The high power needs of the marine industry could align well with solid oxide fuel cells, but view this opportunity as long-dated (late this decade).

Financial Strengths

The Bloom’s financial strength as fair. Current debt outstanding totals approximately $500 million and consists of both recourse and nonrecourse issuances. Recourse debt is composed primarily of $230 million of 2.5% convertible notes due August 2025 and $70 million of 10.25% senior secured notes due March 2027. Nonrecourse debt totals $235 million and pertains to Bloom’s power purchase agreement financing structures. In addition, the company has roughly $460 million of financing obligations associated with sale leaseback financing structures. Given the company’s limited size, one cannot believe further increases in recourse debt would be prudent. Bloom’s financial strength is supported by an additional $250 million equity commitment from SK Eco plant, which it must invest by December 2023 at a minimum share price of $23. The operating cash flow to remain negative in 2022 before turning modestly positive in 2023 as sales growth drives operating leverage. Future capital requirements consist largely of working capital and an expansion of the company’s manufacturing operations. The company has a 1-gigawatt expansion of capacity underway in Fremont, California, and plans to add 1 gigawatt every two to three years based on current expectations.

Bulls Say

  • Bloom is a first-mover within the baseload distributed generation market.
  • Bloom has made strides in extending the life of its fuel cells, which should improve its service margins in coming years.
  • Bloom entry into the electrolyze market provides a large addressable market to leverage its technology.

Company Description

Bloom Energy designs, manufactures, sells, and installs solid-oxide fuel cell systems (“Energy Servers”) for on-site power generation. Bloom Energy Servers are fuel-flexible and can use natural gas, biogas, and hydrogen to create 24/7 electricity for stationary applications. In 2021, the company announced plans to leverage its technology and enter the electrolyze market. Bloom primarily sells its systems in the United States and South Korea.

(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.

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Commodities Trading Ideas & Charts

One Step Forward With Cost-Cuts, Two Steps Back As Revenue Falls In Aurora’s Path To Profit In Q3

Business Strategy & Outlook

Aurora cultivates and sells cannabis predominantly in Canada but also exports into the global medical market. Aurora considers itself a medical cannabis company first but has benefited from the legalization of recreational cannabis in Canada in 2018. Recreational now accounts for nearly 40% of gross sales, although this share is slightly lower than peers. The Canadian medical market is expected to grow slowly at roughly 1.5% as recreational legalization takes customers. Robust recreational growth of roughly 15% is forecasted, driven by the conversion of illicit-market consumers into the legal market and new cannabis consumers. Aurora has expanded its global medical exports, currently shipping to more than 20 countries. The global market looks lucrative, given higher realized prices and the growing acceptance of cannabis’ medical benefits. Exporters must pass strict regulations to enter markets, protecting early entrants like Aurora. Continued growth in its medical exports has helped Aurora see volume and price growth even as its domestic market has struggled during pandemic lockdowns. Roughly 20% average annual growth is projected through 2031. 

The U.S. is envisioned to change federal law to recognize states’ choices on legality within their borders, unlocking the fastest-growing and largest potential cannabis market, which will estimatedly be more than 5 times larger than the Canadian market. At present, Aurora would not benefit from a change in U.S. federal law on THC cannabis, as its only exposure is through hemp-derived CBD products through its May 2020 acquisition of Reliva. Aurora is one of the few Canadian producers with no standing deals with a U.S. multistate operator, although it believes it would be able to draw an attractive partner should the law change. Aurora has not entered a major strategic partnership. This forces it to rely more heavily on equity market access while its peers can rely on the deep pockets of a large partner for capital. This raises the risk of massive equity dilution to avoid running out of cash. In fact, shares outstanding nearly doubled from March 2020 to March 2021.

Financial Strengths

Aurora’s financial health has been a lingering concern but is improving. At the end of its third quarter of fiscal 2022, the company had about CAD 334 million of convertible notes compared with a market capitalization of roughly CAD 700 million. The notes are due in 2024, so the company has some time. Subsequent to quarter-end, the company repurchased CAD 128 million of the notes funded with shares issued under its at-the-market equity program. Aurora continues to generate cash losses. This is particularly concerning because the company has limited capital markets access and no major strategic partner backing it. However, since announcing its restructuring program, the company has significantly reduced its cash burn and positive EBITDA is nearing. 

Aurora’s access to debt markets is limited. Consequently, the company has relied on equity offerings to fund its cash needs, leading to significant dilution for existing shareholders. In fact, shares roughly doubled from March 2020 to March 2021. Having sizable leverage while remaining unprofitable creates additional risk for Aurora. This creates a wide range of possible valuation outcomes for shares amid the significant risk of value destruction. With Aurora shares having fallen over the last several months along with the broader cannabis sector, any share issuances would be even more dilutive.

Bulls Say

  • Aurora has rationalized its production facilities and head count, significantly reducing its cash burn. 
  • Cannabis cultivation is complicated, including challenging operational ramp-ups and optimization. Aurora’s strategic focus on its cultivation operations will help it achieve lower production costs than peers. 
  • Aurora’s international exposure can deliver high margin sales to help its path to profitability

Company Description

Aurora Cannabis, headquartered in Edmonton, Canada, cultivates and sells medicinal and recreational cannabis through a portfolio of brands that include Aurora, CanniMed, Daily Special, MedReleaf, and San Rafael ’71. Although the company primarily operates in Canada, it has expanded internationally through medical cannabis exporting agreements or cultivation facilities in more than 20 countries.

(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.

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Commodities Trading Ideas & Charts

Sempra Could See Additional LNG Opportunities but Focus Should Remain on Utilities

Business Strategy & Outlook

Sempra Energy’s investment opportunities at its regulated utilities in California and Texas will remain the primary growth driver. California’s regulatory environment has remained constructive for Sempra, as its emphasis on distribution-related safety and reliability infrastructure upgrades aligns well with the state’s regulatory priorities. Sempra has received constructive regulatory treatment in the state. The company’s most recent outcome positions the California utilities to grow rate base 9% annually at SDG&E and 12% at SoCalGas, supported by a combined $21 billion of capital investment during the next five years. The state’s regulatory environment will be put to a test during a busy regulatory calendar in the state. Both of Sempra’s subsidiaries in the state filed cost of capital proceedings for 2023-25. Additionally, the company will soon file a general rate case proposal with regulators to determine revenue in 2024-27. Overall, the constructive outcomes.

Sempra’s Texas subsidiaries’ transmission assets should continue to benefit from Texas’ aggressive wind generation build-out. Management continues to identify capital investment opportunities in the state. The expected $17.0 billion capital investment for 2022-26 to address economic development, customer growth, and grid hardening and expansion. Sempra’s natural gas infrastructure businesses should be able to capitalize on the increasing demand for natural gas. Management is moving forward on developing its LNG portfolio, including its ECA LNG export facility. Sempra management limits the risk with LNG development by entering into long-term contracts with creditworthy counterparties, many of which also become equity owners. Management has effectively recycled capital to fund its growing capital plan. Sempra Energy recently sold a 20% noncontrolling interest in Sempra Infrastructure Partners to KKR, which houses LNG, natural gas infrastructure, and Mexican renewable energy and transmission assets. In December, Sempra announced that it would sell an additional 10% ownership to Abu Dhabi Investment Authority. Both transactions were at what one can consider very attractive valuations.

Financial Strengths

The Sempra to maintain a balance sheet with about mid-50% debt through 2026, in line with most regulated utilities. Small equity issuances will help fund the company’s investment plans. With the Cameron LNG export facility completed, Sempra is also considering pursuing incremental large-scale development of other export facilities in its infrastructure portfolio. Any of Sempra’s incremental capital expenditures for the facility would likely be mostly project-financed with equity contributions from LNG off takers. The debt/EBITDA to be below 5.0 times through 2026. With robust capital expenditure plans and ongoing development of its unregulated business, the company to continue borrowing at both the utility and parent levels in the next few years. EBITDA/interest coverage should remain solid, averaging above 5 times through 2026 in the forecast. Sempra’s liquidity remains strong. Sempra’s liquidity position and cash flow generation should give investors’ confidence that it can maintain and grow its dividend.

Bulls Say

  • Opportunities for rate base growth at Sempra’s utilities are above average, and California and Texas regulation generally allows timely recovery of capital expenditures and a dynamic cost of capital.
  • As an early and large investor in the Mexican energy sector, Sempra could see an outsize share of new development projects under market deregulation.
  • Sempra’s LNG terminals and pipeline give investors exposure to a growing market for natural gas in the U.S. and Mexico.

Company Description

Sempra Energy serves one of the largest utility customer bases in the United States. It distributes natural gas and electricity in Southern California and owns 80% of Oncor, a transmission and distribution business in Texas. SoCalGas and San Diego Gas & Electric distribute gas to more than 20

million customers, while Oncor serves more than 10 million Texas customers. The firm’s other affiliates own and operate liquefied natural gas facilities in North America and infrastructure in 

Mexico.

(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.

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Commodities Trading Ideas & Charts

Longtime Cost Leader Diamondback Thriving in Higher Commodity Environment

Business Strategy & Outlook

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

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

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

Financial Strengths

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

Bulls Say

  • Diamondback is one of the lowest-cost oil producers operating in the United States.
  • The firm generates substantial free cash under a wide range of commodity scenarios and has to pledged to return at least half of that to shareholders.
  • Diamondback has been an early adopter of returns-enhancing technology in the field, and is expected to remain at the leading edge.

Company Description

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

(Source: Morningstar)

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

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

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

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

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

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

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

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Commodities Trading Ideas & Charts

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

Business Strategy & Outlook

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

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

Financial Strengths

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

Bulls Say

  • Altria Group’s investment of $1.8 billion provides Cronos with capital and a strategic partner with significant product development, branding, and regulatory experience. If successful, Altria Group may increase its ownership of Cronos or potentially acquire it. 
  • Altria’s distribution network gives Cronos an advantage in the hyper competitive U.S. CBD market and can be leveraged for eventual THC distribution. 
  • Cronos’ option to acquire 10.5% of U.S. multistate operator PharmaCann gives U.S. THC investment exposure and a hedge if the dispensary model persists.

Company Description

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

(Source: Morningstar)

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

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

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.

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Commodities Trading Ideas & Charts

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

Business Strategy & Outlook

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

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

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

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

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

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

Financial Strengths

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

Bulls Say

  • FMC has transformed its portfolio to focus on crop chemicals, which should see strong growth prospects as yield gains are needed to support rising food consumption from emerging markets.
  • FMC has a large presence in Brazil, one of the few places with meaningful growth potential in arable land.
  • FMC’s pipeline should allow the company to continue expanding profits as the patents expire for its two largest molecules over the next decade.

Company Description

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

(Source: Morningstar)

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

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

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

Livent Corp Capitalises On Cost Advantage In Lithium Carbonate Production

Business Strategy and Outlook

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

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

Financial Strength

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

Bulls Say’s

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

Company Profile 

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

(Source: MorningStar)

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

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

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

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

Business Strategy and Outlook

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

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

Financial Strength

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

Bulls Say’s

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

Company Profile 

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

(Source: MorningStar)

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

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

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.

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Commodities Trading Ideas & Charts

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

Business Strategy & Outlook

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

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

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

Financial Strengths

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

Bulls Say

  • Regulation in Michigan has improved since landmark reforms in 2008 and 2016. Support from policymakers and regulators is critical to realizing earnings and dividend growth.
  • CMS’ back-to-basics strategy has focused on investment in regulated businesses, leading to a healthier balance sheet and more reliable cash flow
  • CMS’ board has more than doubled the dividend since 2011 and 7% annual dividend increases going forward even if the payout ratio remains above management’s 60% target.

Company Description

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

(Source: Morningstar)

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

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

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.

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