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Santos reported strong FY21 results with underlying profit up by 230%

Investment Thesis:

  • Leveraged to the oil price.
  • High quality assets which offer a number of core assets within its portfolio (no single asset risk).  
  • On-going focus on cost reduction and positioning of the business for a lower oil price environment.
  • Strong balance sheet position. 
  • High quality management team who are able to operate assets and extract synergistic value from the recent merger with Oil Search.

Key Risks:

  • Supply and demand imbalance in global oil/gas markets.
  • Lower oil / LNG prices.
  • Not meeting cost-out targets (e.g. reducing breakeven oil cash price).
  • Production disruptions (not meeting GLNG ramp up targets).
  • Strategic investors sell down their stake or block any potential M&A activity.

Key highlights:

  • Management highlighted lower unit costs, our focus on safe, low-cost and efficient operations delivered a free cash flow breakeven of $21 per barrel in 2021. 
  • EBITDAX was up 48% to $2.8bn driven by higher oil prices and lower unit costs. Underlying profit was up 230% to a record $946m.
  • Production was up +3% to of 92.1mmboe. Sales volume of 107.1mmboe, down -3%
  • Product sales revenue of US$4.71bn, up +39%
  • Record free cash flow of US$1.5bn and underlying profit of US$946m, driven by higher oil and LNG prices vs pcp due to a recovery in global energy demand and supply constraints across the industry due to lower capital investment through the pandemic
  • Reported NPAT of US$658m includes losses on commodity hedging and costs associated with acquisitions and one-off tax adjustments and is significantly higher relative to the pcp due to impairments included in FY20
  • Reported NPAT of US$658m includes losses on commodity hedging and costs associated with acquisitions and one-off tax adjustments and is significantly higher relative to the pcp due to impairments included in FY20

Company Description: 

Santos Limited (STO) explores for and produces natural gas, liquefied natural gas, crude oil, condensate, naptha and liquid petroleum gas. STO conducts major onshore and offshore petroleum exploration and production activities in Australia, Papua New Guinea, Indonesia, Vietnam. The company also transports crude oil by pipeline.  

(Source: Banyantree)

General Advice Warning

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

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Commodities Trading Ideas & Charts

Northern Star Resources reported solid 1H22 results;Aims to become a 2Mozpa gold producer by FY26

85215903 - attractive businessman using mobile phone while having lunch

Investment Thesis

  • On track to achieve FY22 production and operational guidance.
  • Commodities price (Gold) surprises on the upside especially due to geopolitical tensions.
  • Leveraged to changes in theUSD.
  • Solid assets with reserve/resource. 
  • New acquisitions provide upside (resource and operational improvement). 
  • Strong management team with significant mining expertise.
  • Strong balance sheet.
  • Company has a good track record on shareholder return

Key Risk

  • Further deterioration in global macroeconomic conditions.
  • Deterioration in global gold supply & demand equation.
  • Deterioration in gold prices.
  • Production issues, delay or unscheduled mine shutdown.
  • Adverse movements in AUD/USD.

1H22 Results Key Highlights:  Relative to the pcp:

  • Revenue of A$1,807m was up +63%, mainly driven by higher gold volumes, with gold sales 289,786 ounces higher. Reported NPAT of A$261m, was up +43% (or Underlying NPAT of A$108m, excluding significant items of A$153m) was driven by higher production. 
  • Underlying EBITDA of A$699m, was up +47%, on a margin of 39%. Cost of sales were higher than the pcp due to increased activity with the inclusion of the Saracen Minerals Holdings’ merger assets in the current half (107% increase period on period), higher average cash costs per ounce (H1 2022: A$1,256/oz vs H1 2021: A$1,196/oz) and the increase in D&A unit costs (increase of A$291/solid oz), due to the required non-cash uplift to fair value of the merger assets, compared to the historic cash cost of those same assets. 
  • NST saw cash earnings of A$430m. 
  • NST retained a strong balance sheet with cash and bullion of A$588m; net cash of A$288m. 
  • The Board declared a fully franked interim dividend of 10cps, up +5%. 
  • NST remains on track with its key growth projects progressing as expected to become a 2Mozpa producer by FY26, including KCGM open pit development (Kalgoorlie) and Thunderbox mill expansion (Yandal). 
  • In 1H22, NST made net repayment of A$361m of corporate bank debt, completed its acquisition of Newmont’s power business for A$130m and made a A$170m investment in a Convertible Debenture with Osisko Mining Inc. NST also sold Kundana Assets realising A$402m (and contributing a pre-tax gain of A$242m).

Company Profile

Northern Star Resources Limited (Northern Star) is a gold production and exploration company with a Mineral Resource base of 10.2 million ounces and Ore Reserves of 3.5 million ounces, located in highly prospective regions of Western Australia and the Northern Territory. NST is the third largest gold producer in Australia. The Company also recently acquired a gold mine in Alaska. 

(Source: Banyantree)

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

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First-Half Earnings Evaporate for No-Moat Mineral Resources. Despite This, FVE Upped to AUD 47.30

Business Strategy and Outlook

Mineral Resources grew significantly following listing on the Australian Securities Exchange in 2006. Demand for crushing and screening services grew strongly with iron ore output from the major Western Australian iron ore miners. Cost inflation encouraged large mining companies to outsource capital-intensive, lower-returning processes. Mineral Resources also rapidly expanded its own iron ore mining business, though lacking the integrated rail and port infrastructure of major competitors and at a competitive disadvantage. More recent diversification into lithium production at Mt Marion and the Wodgina mine has sustained earnings momentum. 

The financial record to now is impressive and the balance sheet is unleveraged. Mineral Resources has diversified its earnings streams and improved financial disclosure. In fiscal 2010, the company was a mining service provider and minerals producer as now. But disclosure extended to just iron ore production tonnage, and segment earnings. Mining Services and Processing contributed 96% of group EBIT. Step forward to fiscal 2020 and Mineral Resources has materially improved its level of financial disclosure, and the greater depth of clients and number of project sites also reduces risk. We think the business model is demonstrably sustainable. The volume-linked crushing and screening business should be somewhat more resilient to commodity price weakness.

Mineral Resources’ mining services business builds, owns, and operates crushing and screening plants on behalf of mining customers. Despite contributing only 40% of group EBIT, Mining Services is core. Twelve 5 to 15 million tonne per year crushing and screening plants are owned and operated on 12 sites. Clients substantially include the largest mining companies and contract books have been renewed over time leading to volume growth. Power is supplied by mining companies and margins are comparatively stable. Bolstering growth in the core business centred on mining services around Australian bulk commodities, Mineral Resources will selectively own and develop its own mining operations, with the aim of subsequent sell-down while retaining core processing and screening rights.

First-Half Earnings Evaporate for No-Moat Mineral Resources. Despite This, FVE Upped to AUD 47.30

Group revenue fell 12% to AUD 1.4 billion reflecting a sharp 40% drop in realised iron ore price, only partially countered by improved lithium pricing and higher mining services volumes and revenue.Underlying first-half NPAT collapsed to a loss of AUD 36 million against a previous corresponding period, or pcp, profit of AUD 430 million. Despite this, Morningstar analyst increased its fair value to A$47.30 as they don’t think the drivers behind the first-half earnings miss affect the longer-term outlook, and time value of money is an ever present tailwind.

Financial Strength

Mineral Resources is in reasonable financial health. Albemarle’s acquisition of a 60% stake in Wodgina lithium instantly expunged net debt in first-half fiscal 2020, from a net debt position of AUD 872 million at end June 2019. But strong net cash outflows in first-half fiscal 2022, including high costs associated with COVID-19, see the net cash balance deteriorate to an AUD 583 million net debt position as of December 2021 . The current circumstance is unusual and a return to the normal territory is expected for Mineral Resources, which operated in a position of little to no net debt for at least the eight years to fiscal 2018; a sensible position for a company operating in the volatile mining services space. Mineral Resources had faced the key question of what it should do with its cash, with a shrinking pool of growth and investment opportunities in a lower iron ore price environment. A failed investment in Aquila Resources in 2014 attempted to leverage Mineral Resources into Aquila’s West Pilbara Iron Ore Project, and was symptomatic of where Mineral Resources found itself. Booming lithium markets directed the investment decision.

Bulls Say 

  • Mineral Resources grew strongly since listing in 2006. The chairman and managing director have been with the business for over a decade and have meaningful shareholdings. 
  • Australian iron ore is mainly purchased by Chinese steel producers, meaning Mineral Resources offers leveraged exposure to Chinese economic growth. 
  • Mineral Resources has a recurring base of revenue and earnings from processing infrastructure.
  • Mineral Resources’ balance sheet is very strong with net cash. This has opened up the opportunity for lithium investments selling into highly receptive markets.

Company Profile

Mineral Resources listed on the ASX in 2006 following the merger of three mining services businesses. The subsidiary companies were previously owned by managing director Chris Ellison, who remains a large shareholder despite selling down. Operations include iron ore and lithium mining, iron ore crushing and screening services for third parties, and engineering and construction for mining companies. Mining and contracting activity is focused in Western Australia.

(Source: Morningstar)

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

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Commodities Trading Ideas & Charts

Onsemi’s Sales Growth Above That Of The Broader Semiconductor Industry

Business Strategy and Outlook

It is seen Onsemi is a power chipmaker aligning itself to the differentiated parts of its portfolio in order to accelerate growth and margin expansion. It is probable Onsemi to outpace the growth of its underlying markets over the next five years as it tailors its portfolio of transistors, analog chips, and sensors to pursue secular trends toward electrification and connectivity that allow it to sell into new sockets. Specifically, Onsemi is the top supplier of image sensors to automotive applications like advanced driver-assist systems, or ADAS, and its semiconductors enable power management and conversion in electric vehicles, or EVs, and renewable energy–all of which is likely to keep Onsemi’s sales growth above that of the broader semiconductor industry. 

It is viewed onsemi will be vulnerable to modest cyclicality in the short term, but think its portfolio realignment will lend itself to more durable returns through a cycle. The firm’s increased focus on sticky verticals, as well as its differentiated sensor and silicon carbide technologies, contribute to Analysts narrow economic moat rating. Onsemi’s bread and butter historically was in more commodity like discrete power chips, but it is probable for it to focus on higher-value applications in the automotive and industrial end markets going forward and in turn earn more consistent returns on invested capital. 

It is seen Onsemi will focus on expanding margins over the medium term. Management invested heavily in pruning and improving its manufacturing efficiency in 2018 and 2019, and it is alleged it see the fruits of these efforts after 2022 when Onsemi fully acquires its first 12-inch fab. It is also alleged the firm will focus its investments on the automotive and industrial markets–higher growth and higher margin than its legacy consumer and smartphone markets. It is seen management faces execution risk in hitting its lofty goal of 48%-50% adjusted gross margin, but expect both a focus on higher-margin verticals and an improved manufacturing footprint to get it to the high-40% range in the next five years–from a previous midcycle margin below 38%.

Financial Strength

It is probable Onsemi’s primary financial focus in the medium term will be generating free cash flow and paying down debt after hefty investments over the last five years. Onsemi took on more than $2 billion debt for its 2016 Fairchild acquisition, and also committed over $1 billion in capital expenditures between 2018 and 2019 to improve its manufacturing footprint (shuttering inefficient fabs and purchasing equipment for its new 12-inch fab). Management has a stated goal of holding off on new share repurchases until the firm meets its 2:1 net leverage goal (net debt/adjusted EBITDA). As of the end of fiscal 2021, Onsemi held $1.4 billion in cash compared with $3.1 billion in total debt, putting its year-end net leverage at 0.88 times. It is projected Onsemi to generate an average of $2 billion in free cash flow through 2026-even while committing roughly 10% of sales to capital expenditures-and seen the firm can use its extra cash to resume repurchases. If Onsemi were to come into a liquidity crunch, it has $1.3 billion available (as of end-fiscal 2021) under its $2 billion revolving credit facility.

Bulls Say’s

  • Onsemi’s image sensors are best of breed in the automotive market, with a leading market share in high-growth, mission-critical applications like ADAS. 
  • It is viewed Onsemi will continue to outgrow its underlying markets and the broader semiconductor industry by selling greater dollar content into applications like cars and servers, which also helps stave off its vulnerability to market cycles. 
  • Onsemi is focusing its portfolio on the automotive, industrial, and cloud markets, which is seen, will expand margins and create stickier customer relationships.

Company Profile 

Onsemi is a leading supplier of power and analog semiconductors, as well as sensors. Onsemi is the second-largest global supplier of discrete transistors like insulated gate bipolar transistors, or IGBTs, and metal oxide semiconductor field-effect transistors, or MOSFETs, and also has a significant integrated power chip business. Onsemi is also the largest supplier of image sensors to the automotive market, targeting autonomous driving applications. The firm is concentrated in and focused on the automotive, industrial, and communications markets, and is reducing its exposure to the consumer and computing markets.

(Source: MorningStar)

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

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Murphy Oil Sees Major Gulf Projects Nearing Fruition, Plans Long-Term Harvest

Business Strategy and Outlook

Murphy Oil repositioned itself as a pure-play exploration and production company in 2013, spinning off its retail gas and refinery businesses.The firm is a top-five producer in the Gulf of Mexico, and the region accounts for almost half of its production. Murphy has a number of expansion projects lined up there that should offset legacy declines and enable it to hold production flat in the next few years. There is regulatory risk, though: after entering office, U.S. President Joe Biden has pledged to halt offshore oil and gas permitting activity (to demonstrate his climate credentials). Murphy already holds valid leases for its upcoming projects and is ahead of schedule on permitting but will eventually require further approvals if it wants to continue its development plans. Thus far, the Biden administration has taken little action, leaving Murphy unencumbered. But we would not rule out a more comprehensive ban.

The firm has made considerable progress cutting costs and boosting productivity since the post-2014 downturn. However, while the firm still has over 1,400 drillable locations in inventory.When this portion is exhausted, well performance, and thus returns, could deteriorate. And in Canada, the firm is currently prioritizing the Tupper Montney gas play while natural gas prices in the region are more stable after a period of steep discounts caused by takeaway constraints that have now cleared.

Morningstar analysts have increased its fair value estimate for Murphy to $33 from $26, after taking a second look at Murphy’s fourth quarter operating and financial results. 

Financial Strength 

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

Bulls Say

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

Company Profile

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

(Source: Morningstar)

General Advice Warning

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

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Marathon Petroleum’s Strong Performance Leads to Greater Shareholder Returns, Increased FVE

Business Strategy and Outlook

The combination of Marathon and Andeavor created the U.S.’ largest refiner with facilities in the Midcontinent, Gulf Coast, and West Coast. Through the combination, Marathon planned to leverage this geographically diverse footprint to optimize its crude supply from North America to reduce feedstock cost, while also improving its operating cost structure. It delivered $1.1 billion of a planned $1.4 billion in synergies by year-end 2019, but its focus shifted to capital and cost reductions in 2020 when the pandemic hit. These efforts proved successful with the company delivering over $1 billion in operating expense reductions. In the near term, its focus remains on delivering more cost and capital improvements.

Financial Strength

Cash flow has been sufficient to cover capital spending while allowing for share repurchases and dividend increases in recent years. Based on our current forecast, however, we expect operating cash flow to sufficiently cover capital spending and the dividend. Marathon received $17.2 billion in after-tax proceeds from sale of its Speedway segment in second-quarter 2021. As of the year 2021, it has retired $3.75 billion in debt and repurchased $4.5 billion shares. It plans to repurchase another $5.5 billion shares by year-end 2022 at the latest and repurchase another $5 billion of shares beyond then. 

The large amount of repurchases have reduced the dividend burden, and as such it is expected that  management to return to dividend growth at some point given the company’s strong cash flow. It’s possible management returns to its previous shareholder return target of 50% of discretionary free cash flow including dividend growth and share repurchases. Our fair value estimate to $79 from $68 per share after updating our near-term margin forecast with the latest market crack spreads and incorporating management’s guidance, and the latest financial results.

Bulls Say’s 

  • Marathon Petroleum’s high-complexity facilities in the midcontinent and Gulf Coast leave it well-positioned to capitalize on a variety of discount crude streams, endowing it with a feedstock cost advantage. 
  • Closure of lower-quality refineries and investment in renewable diesel leaves Marathon in a better competitive position in the long term. 
  • Current repurchase plans amount to 20% of the current market cap, with potentially more coming if market conditions remain strong.

Company Profile 

Marathon Petroleum is an independent refiner with 13 refineries in the midcontinent, West Coast, and Gulf Coast of the United States with total throughput capacity of 2.9 million barrels per day. The firm also owns and operates midstream assets primarily through its listed MLP, MPLX.

(Source: Morningstar)

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

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India to Launch its own digital currency in 2022-23

The Reserve Bank of India (RBI) intimated in October 2021 that it had got approval for a modification to the Reserve Bank of India Act 1934 that would broaden the definition of bank note to include CBDCs. The central government has emphasised the potential benefits of CBDCs, claiming that they will lessen reliance on fiat currencies.

In another major announcement, Sitharaman said that all income from the transfer of virtual digital assets will be taxed at 30%. This will impact gains from cryptocurrencies and NFTs.

She further highlighted that no deduction will be allowed for expenditure undertaken on its acquisition. The loss from transfer of virtual digital assets cannot be set off against any other income.

The Finance Minister also proposed to provide for TDS on payment made in relation to transfer of virtual digital assets at the rate of 1 percent of such consideration above a monetary threshold. Gift of virtual digital assets has also been proposed to be taxed in the hands of the recipient.

India’s crypto industry had several demands, including that the government classify cryptocurrencies, provide clarity on taxation and establish a self-regulatory framework shaped by the crypto industry.

Many countries have rolled out their CBDCs recently. Nigeria launched eNaira in October last year. The Bahamas and five other islands in the East Caribbean have also rolled out their digital currencies.

(Source: The Financial Express)

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

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Soaring Steel Spreads Expected to Normalise, Maintaining BlueScope’s FVE at AUD 15.50

Business Strategy and Outlook

BlueScope’s strategy appropriately plays to its strengths and attempts to neutralise its weaknesses within its portfolio of legacy assets. Steel manufacturers produce largely undifferentiated products and have limited pricing power. Sustainable 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.

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.

Expecting a Normalisation in Steel Spreads at BlueScope; Maintaining FVE at AUD 15.50

A combination of supply side disruptions and large fiscal and monetary stimulus programs enacted in major economies in response to the pandemic have pushed steel prices and steelmaking spreads to unsustainably high levels. Indicative steelmaking spreads exceeded USD 1,000 at North Star and USD 500 at Port Kembla during 2021, well above long-term averages. Morningstar analysts expect BlueScope will benefit handsomely from these conditions over the next couple of years, particularly during fiscal 2022. However, Morningstar analyst longer-term view for steelmaking spreads is more subdued and expects a gradual return to historical spread levels largely beginning in fiscal 2023. 

Morningstar analysts maintain a fair value estimate for BlueScope Steel at AUD 15.50 per share following transition to a new covering analyst. While Morningstar analysts have maintained its fair value estimate, but have adjusted its near-term earnings estimates for the latest steelmaking futures curve. As a result, the prediction for fiscal 2023, 2024 and 2025 EBIT forecasts have increased 30%, 122%, and 32% to AUD 1.8, AUD 1.3 and AUD 0.9 billion, respectively. Offsetting a positive outlook for earnings is a slight reduction in implied underlying EV/EBITDA terminal multiple to 5.0 times from 5.6 times, aligning with recent historical levels.  Morningstar analysts maintain very high uncertainty, Standard capital allocation, and stable no-moat ratings. BlueScope currently screens at an 18% premium to Morningstar analyst fair value estimate

Financial Strength 

BlueScope has a strong balance sheet. As at the end of fiscal 2021, BlueScope’s net cash position was AUD 798 million (including operating leases) and had approximately AUD 3 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, and the U.S. buildings segment. 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

  • Incremental electric arc furnace capacity expansion within the U.S. will dampen North Star’s margins.
  • Investors may apply a risk premium to BlueScope’s relatively emissions intensive business. 
  • The removal of import tariffs on steel from the European Union has the potential to reduce U.S. domestic steel prices and lower North Star’s margins. The removal of tariffs on other countries’ steel has the potential to have a similar effect.

Company Profile

BlueScope is an Australian-based steelmaking firm with five steel related business units. The Australian Steel Products segment predominantly specialises in a range of high-value coated and painted flat steel products for the Australian domestic market. North Star is the group’s U.S. mini-mill specialising 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, Fiji, New Caledonia, and Vanuatu. The Buildings North America segment specialises in non-residential building solutions.

 (Source: Morningstar)

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

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AGL Energy Ltd. gains strengthened by its low-cost coal-fired generation fleet.

Business Strategy and Outlook

AGL is one of Australia’s largest integrated energy companies. We believe it has a narrow economic moat, underpinned by its low-cost generation fleet, concentrated markets, and cost-advantages from vertical integration. Key attractions for shareholders include relatively defensive earnings, solid dividends, and relatively conservative gearing. Earnings are dominated by energy generation (wholesale markets), with energy retailing about half the size. Strategy is heavily influenced by government energy policy, such as the renewable energy target. 

AGL has proposed a structural separation into two businesses; a multi-product energy retailer focusing on carbon neutrality and an electricity generator that will own AGL’s large fleet of coal fired power stations among other assets. It is expected to be completed in mid-2022. 

AGL’s consumer market division services over 4 million electricity and gas customers in the eastern and southern Australian states, representing roughly a third of available customers. Retail electricity consumption has barely increased since 2008, reflecting the maturity of the Australian retail energy market and declining electricity consumption from the grid. Despite deregulation and increased competition, the market is still dominated by AGL Energy, Origin Energy, and Energy Australia, which collectively control three fourths of the retail market. 

AGL’s wholesale markets division generates, procures, and manages risk for the energy requirements of its retail business. The acquisition of Loy Yang A and Macquarie Generation means electricity production significantly outweighs consumption by its retail customers. Exposure to energy-price risks is mitigated by vertical integration, peaking generation plants and hedging. More than 85% of AGL’s electricity output is from coal-fired power stations. AGL Energy has the largest privately owned generation portfolio in the National Electricity Market, or NEM.

Financial Strength

AGL Energy is in reasonable financial health though banks are increasingly reluctant to lend to coal power stations. From 1.4 times in 2020, we forecast net debt/EBITDA rises to 2.1 times in fiscal 2022. Funds from operations interest cover was comfortable at 12.8 times in fiscal 2021, comfortably above the 2.5 times covenant limit. AGL Energy aims to maintain an investment-grade credit rating. To bolster the balance sheet amid falling earnings and one-off demerger costs, the dividend reinvestment plan will be underwritten until mid-2022. This should raise more than AUD 500 million in equity. Dividend pay-out ratio is 75% of EPS

Bulls Say’s

  • As AGL Energy is a provider of an essential product, earnings should prove somewhat defensive. 
  • Its balance sheet is in relatively good shape, positioning it well to cope with industry headwinds. 
  • Longer term, its low-cost coal-fired electricity generation fleet is likely to benefit from rising wholesale electricity prices.

Key Investment Considerations:

  • Fiscal 2022 will be tough but high wholesale gas and electricity prices bode well for earnings recovery from 2023. 
  • The proposed separation of AGL’s retail and generation businesses will likely be somewhat value destructive due to potential duplication of resources and loss of scale benefits. 
  • The Australian energy sector is heavily influenced by government energy policy, particularly over emissions and utility bill affordability.

Company Profile 

AGL Energy is one of Australia’s largest retailers of electricity and gas. It services 3.7 million retail electricity and gas accounts in the eastern and southern Australian states, or about one third of the market. Profit is dominated by energy generation, underpinned by its low-cost coal-fired generation fleet. Founded in 1837, it is the oldest company on the ASX. Generation capacity comprises a portfolio of peaking, intermediate, and base-load electricity generation plants, with a combined capacity of 10,500 megawatts.

(Source: Morningstar)

General Advice Warning

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

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Activity in Guyana provides Hess Corp. geographic diversification and shields it from domestic issues

Business Strategy and Outlook

Hess’ track record for efficiently allocating capital and generating value has been steadily improving for several
years. This had been a source of frustration for shareholders in the past. Before 2012, the firm was struggling
with persistent budget overruns and costly exploration failures, and the eventual collapse in its share price led
to a heated proxy fight with an activist investor (which it lost). Subsequently, the board was reshuffled, and
management began streamlining the company, selling midstream and downstream assets and rationalizing its
upstream portfolio. The current portfolio is more competitive, but the development cost requirements are
heavily front-loaded.
Currently, Hess is one of the largest producers in the Bakken Shale, with about 1,700 producing wells and about
530,000 net acres of leasehold. This includes a large portion in the highly productive area near the Mountrail-
McKenzie County line in North Dakota. Even with four rigs, it would take more than 10 years to develop this
position, and to conserve capital in the wake of the COVID-19 pandemic management is only running two rigs
(with a third to be added late 2021). Like peers, Hess has made huge strides with enhanced completions. It is
expected 180-day cumulative oil production to average 150 mbbls going forward (consistent with break-evens
of about $40/bbl. for West Texas Intermediate).
Hess also holds a 30% stake in the Exxon-operated Stabroek block in Guyana, which will be the firm’s core
growth engine going forward and is a game-changer for the company, due to its large scale and exceptional
economics. The block contains numerous confirmed discoveries already, including Liza, which came online in
late 2019. Economically, these projects appear around on par with the Bakken. But the up-front capital
demands are onerous–Hess’ share of the first development phase was over $1 billion. Six phases are currently
planned, culminating in gross volumes of about 1 mmb/d and management has suggested there is scope for as
many as 10 phases in the ultimate development. Total gross recoverable resources are a moving target, but the
latest estimate is over 9 billion barrels of oil equivalent.

Financial Strength

Hess’ Guyana assets are capital-intensive (it must pay 30% of the development costs, which run to $1 billion-$2
billion for each sanctioned phase of development; a total of six are currently planned and more than that are
likely eventually). And these commitments are heavily front-loaded. As a result, capital spending has
significantly exceeded cash flows in the last few years, leaving the firm with leverage ratios that are elevated
from the historical norm. At the end of the last reporting period, debt/capital was 57%, while net debt/EBITDA
was 1.8 times. The good news is that the firm’s liquidity backstop is very strong, as it prefunded a portion of its
Guyana commitment with noncore divestitures. The firm has a $2.4 billion cash war chest, and there is more
than $3 billion available on its credit facility as well. In addition, the term structure of the firm’s debt is fairly
well spread out, and there are no maturities before 2024 (other than a $1 billion term loan due 2023 and likely
to be paid in full with operating cash flows by the end of 2022).The firm does have a covenant requiring it to

Commodities – Energy
28 January 2022

Website: www.lavernefunds.com.au Email: info@laverne.com.au
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keep debt/capital above 0.65, though it isn’t expected to get close to that level (and if it does a violation would
still be unlikely because in the associated debt agreement capital is defined to exclude impairments).
Bulls Say’s
 The Stabroek block (Guyana), in which Hess has a 30% stake, is a huge resource, with at least 9
billion barrels of oil equivalent recoverable.
 The first phase of the Liza development is profitable at $35/bbl (Brent), making it competitive with
the best shale. Management expects similar economics from subsequent projects in Guyana.
 Hess’ activity in Guyana provides geographic diversification and insulates it from domestic issues
(like antifracking regulations).

Company Profile
Hess is an independent oil and gas producer with key assets in the Bakken Shale, Guyana, the Gulf of Mexico,
and Southeast Asia. At the end of 2020, the company reported net proved reserves of 1.2 billion barrels of oil
equivalent. Net production averaged 323 thousand barrels of oil equivalent per day in 2020, at a ratio of 70%
oil and natural gas liquids and 30% natural gas.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal
financial situation, objectives or needs of any particular person.