Stock Research - Investor Desk

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

Post author By lvc-admin
Post date January 28, 2022
No Comments on 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
1300 528 376 (1300LAVERNE) 1
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.

Tags Commodities, Energy

Technology Stocks

PTC Continues Aggressive SaaS Transition to Fuel Future Growth; Raising FVE to $105

Post author By lvc-admin
Post date January 28, 2022
No Comments on PTC Continues Aggressive SaaS Transition to Fuel Future Growth; Raising FVE to $105

Business Strategy and Outlook

PTC operates in the high-end computer-assisted design software market, but Morningstar analyst view this market as mature and don’t foresee significant top-line growth in this area. PTC’s foray into growth areas such as “Internet of Things,” AR, and midmarket CAD, on the other hand, will significantly add growth to the top line, and as per Morningstar analysts view, PTC’s revenue mix to shift significantly to these areas over the next 10 years.

PTC’s Creo software is considered a staple among many large assembly and complex product engineer teams, whether it’s in designing the efficient transportation of fluids or cabling. The small high-end CAD market compared with the mid-market has safeguarded PTC from new entrants to some extent. However, Morningstar analysts think the firm has largely been able to maintain its claim in the CAD industry based on its high switching costs, which as per Morningstar analysts apply not only to its core CAD offering but also its product lifecycle management software and new growth areas–like its Internet of Things and AR platforms. Still, switching costs alone aren’t enough to drive hefty growth in high-end CAD.

While Morningstar analysts expect a mix shift in the future for PTC, a shift to a subscription model from a license-based model is largely in the recent past. PTC has suffered only temporary declines in revenue, margins, and returns on invested capital, as per Morningstar analysts view. As per Morningstar analyst’s perspective, the company will be able to recover well from the transition as its converted subscribers mature.

With this expected recovery, PTC’s growth areas will be able to contribute to a much greater portion of PTC’s business due to strong partnerships. While PTC’s mid-market SaaS CAD software, Onshape, is within the company’s growth segment, and Internet of Things will see better success as entering the mid-market will be a tough task. In contrast, partnering with Microsoft and Rockwell Automation, PTC’s Internet of Things platform, Thingworx, has been able to gain greater traction for its solution that is widely known as among the best of breed.

PTC Continues Aggressive SaaS Transition to Fuel Future Growth; Raising FVE to $105

Narrow-moat PTC kicked off its fiscal year 2022 by posting results slightly below Morningstar analyst top- and bottom-line expectations. Nonetheless, results weren’t discouraging, as PTC is accelerating its SaaS transition, which brings with it short-term growth headwinds–but worthwhile benefits in the long term. Despite slight earnings misses, Morningstar analysts are raising its fair value estimate to $105 per share from $97, in most part due to rosier long-term corporate tax rates that Morningstar analysts have baked in after updating in-house estimates. Shares remained flat after hours, trading around $113 per share, leaving PTC fairly valued.

Financial Strength

PTC to be in good financial health. As of fiscal 2021, PTC had a balance of cash and cash equivalents of $327 million and long-term debt at $1.4 billion. This leaves PTC with a debt/EBITDA ratio of 2.77 at fiscal year-end 2021. We estimate PTC’s growing base of cash and cash equivalents will be more than enough to support mild acquisition spend going forward, at an average of $50 million per year. Despite the company’s financial health, we do not foresee the company starting to issue dividends given the relatively significant transition PTC will undergo over the next 10 years, as per Morningstar analysts view, and the consequent possibility of additional cash needs as a result.

Bulls Say

PTC’s revenue should be able to grow significantly as its Internet of Things solutions take off.
PTC’s Onshape platform makes headway in the midmarket as Autodesk and Dassault Systèmes are slow to move to a fully SaaS-based model.
PTC should be able to improve gross margins as its low-margin services business comes down as a percentage of total revenue

Company Profile

PTC offers high-end computer-assisted design (Creo) and product lifecycle management (Windchill) software as well as Internet of Things and AR industrial solutions. Founded in 1985, PTC has 28,000 customers, with revenue stemming mostly from North America (45%) and Europe (40%).

(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.

Tags US Market

Global stocks

Company books multiple records which results in increase of its fair value estimate

Post author By lvc-admin
Post date January 28, 2022
No Comments on Company books multiple records which results in increase of its fair value estimate

investment stockbroker risk analysis. Financial analysis using phone app and laptop. Market trading profit.

Business Strategy and Outlook:

Stifel Financial, along with other investment banks, had relatively strong revenue in 2020 that has been sustained in 2021 as economic uncertainty led to strong trading volume. Additionally, an initial need for capital in the recession and then low interest rates and a strong stock market led to high capital-raising activity.

Stifel Financial has a long history of being an active acquirer. The company ended 2020 with a Tier 1 leverage ratio of about 12% compared with a previously targeted 10%. With several hundred million dollars of arguably excess capital, the company could make some decent-size acquisitions. Barring growth through acquisitions, as valuations may be too high for most investment banks and investment managers, the company may see some growth from a renewed commitment to its independent advisor business.

Financial Strength:

Stifel’s financial health is fairly good. At the end of 2020, the company had approximately $1.1 billion of corporate debt and over $2 billion of cash on its balance sheet. Its next large debt maturity is $500 million in 2024.The company’s total leverage is less than 8, which is fair considering the mix of its investment banking and traditional banking operations. At the end of 2020, Stifel was at its disclosed target of a 11.9% Tier 1 leverage ratio. Given that its Tier 1 leverage ratio is above management’s previously stated target of 10%, the company should resume more material share repurchases or pursue acquisitions. Stifel has a history of making opportunistic acquisitions.

Bulls Say:

Stifel’s string of acquisitions has increased operational scale and expertise.
Stifel is an experienced acquirer and integrator. A recession could provide ample acquisition opportunities.
Net interest income growth over the previous several years at the company’s bank materially expanded wealth management operating margins, and the increased size of the bank and wealth management business provides diversification with its institutional securities business.

Company Profile:

Stifel Financial is a middle-market-focused investment bank that produces more than 90% of its revenue in the United States. Approximately 60% of the company’s net revenue is derived from its global wealth management division, which supports over 2,000 financial advisors, with the remainder coming from its institutional securities business. Stifel has a history of being an active acquirer of other financial service firms.

(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.

Tags US Market

Dividend Stocks

J.B. Hunt’s Intermodal Rate Backdrop Holding Strong, Comfortably Offsetting Volume Constraints

Post author By lvc-admin
Post date January 28, 2022
No Comments on J.B. Hunt’s Intermodal Rate Backdrop Holding Strong, Comfortably Offsetting Volume Constraints

Business Strategy and Outlook

At its core, J.B. Hunt is an intermodal marketing company; it contracts with the Class I railroads for the line-haul movement of its domestic containers. It was one of the first for-hire truckload carriers to venture into intermodal shipping, forming a partnership with Burlington Northern Santa Fe in the West in 1990. Years later, it struck an agreement with Norfolk Southern in the East. Hunt has established a clear leadership position in intermodal shipping, with a 20%-plus share of a $22 billion-plus industry. The next-largest competitor is Hub Group, followed by Schneider National’s intermodal division and XPO Logistics’ intermodal unit. Intermodal made up slightly less than half of Hunt’s total revenue in 2021.

Hunt isn’t immune to downturns, but over the past decade-plus it’s reduced its exposure to the more capital-intensive truckload-shipping sector, which represents about 28% of sales (including for-hire and dedicated-contract business) versus 60% in 2005. Hunt is also shifting its for-hire truckload division to more of an asset-light model via its drop-trailer offering while investing meaningfully in asset-light truck brokerage and final-mile delivery.

Rates in the competing truckload market corrected in 2019, driving down intermodal’s value proposition relative to trucking. Thus, 2019 was a hangover year and fallout from pandemic lockdowns pressured container volume into early 2020. However, truckload capacity has since tightened drastically, contract pricing is rising nicely across all modes, and underlying intermodal demand has rebounded sharply on the spike in retail goods consumption (intermodal cargo is mostly consumer goods) and heavy retailer restocking. Hunt is grappling with near-term rail network congestion that’s constraining volume growth, but the firm is working diligently with the rails and customers to minimize the issue. It is expected that 2.5%-3.0% U.S. retail sales growth and conversion trends to support 3.0%-3.5% industry container volume expansion longer term, with 2.0%-2.5% pricing gains on average, though Hunt’s intermodal unit should modestly outperform those trends given its favorable competitive positioning.

Financial Strength

J.B. Hunt enjoys a strong balance sheet and is not highly leveraged. It had total debt near $1.3 billion and debt/EBITDA of about 1 times at the end of 2021, roughly in line with the five-year average. EBITDA covered interest expense by a very comfortable 35 times in 2021, and we expect Hunt will have no problems making interest or principal payments during our forecast period. Hunt posted more than $350 million in cash at the end of 2021, up from $313 million at the end of 2020. Historically, Hunt has held modest levels of cash, in part because of share-repurchase activity and its preference for organic growth (including investment in new containers and chassis, for example) over acquisitions. For reference, it posted $7.6 million in cash and equivalents at the end of 2018 and $14.5 million in 2017. The company generates consistent cash flow, which has historically been more than sufficient to fund capital expenditures for equipment and dividends, as well as a portion of share-repurchase activity. It is expected that the trend will persist. Net capital expenditures will jump to $1.5 billion in 2022 as the firm completes its intermodal container expansion efforts, but after that it should also have ample room for debt reduction in the years ahead, depending on its preference for share buybacks. Overall, Hunt will mostly deploy cash to grow organically, while taking advantage of opportunistic tuck-in acquisitions (a deal in dedicated or truck brokerage isn’t out of the question, but it is suspected that the final mile delivery niche is most likely near term).

Bulls Say’s

Intermodal shipping enjoys favorable long-term trends, including secular constraints on truckload capacity growth and shippers’ efforts to minimize transportation costs through mode conversions (truck to rail).
It is believed intermodal market share in the Eastern U. S. still has room for expansion, suggesting growth potential via share gains from shorter-haul trucking.
J.B. Hunt’s asset-light truck brokerage unit is benefiting from strong execution, deep capacity access, and tight market capacity. It’s also moved quickly in terms of boosting back-office and carrier sourcing automation.

Company Profile

J.B. Hunt Transport Services ranks among the top surface transportation companies in North America by revenue. Its primary operating segments are intermodal delivery, which uses the Class I rail carriers for the underlying line-haul movement of its owned containers (45% of sales in 2021); dedicated trucking services that provide customer-specific fleet needs (21%); for-hire truckload (7%); heavy goods final-mile delivery (6%), and asset-light truck brokerage (21%).

(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.