Tag: Commodities

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Commodities Trading Ideas & Charts

Hess’ track record for efficiently allocating capital and generating value has been steadily improving for several years

Business Strategy & 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 substantially more competitive, but the development cost requirements are heavily front-loading. Currently, Hess is one of the largest producers in the Bakken Shale. This includes a large portion in the highly productive area near the Mountrail-McKenzie county line in North Dakota.

Management believes this acreage still contains at least 2,000 incremental drilling opportunities and hopes to develop this asset with a four-rig program in the long run (giving it well over 10 years of potential drilling inventory). Four rigs would optimize the usage of its infrastructure and keep production flat at around 200 mboe/d. 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 has been a game changer for the company, due to its large scale and exceptional economics. Current guidance indicates six development phases will come online by 2027, culminating in gross volumes of over 1 mmb/d. But with over 20 confirmed discoveries already, this feels very conservative. Four developments have been sanctioned to date, with a fifth expected shortly, and two of them are already producing at full capacity. Management has hinted at 10 phases in the ultimate development. Total gross recoverable resources in the region are a moving target, but the latest estimate is over 11 billion barrels of oil equivalent.

Financial Strengths

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-loading. As a result, capital spending has significantly exceeded cash flows in the last few years. However, the firm has made the best of very strong commodity prices recently, while enjoying peer-leading revenue growth due to its ongoing expansion in Guyana. As a result, the firm’s leverage ratios are already below historical norms, and are likely to decline further given that all of Hess’ assets are now generating net cash flows. At the end of the last reporting period, debt/capital was 48%, while net debt/EBITDA was 0.9 times. In addition, the firm’s liquidity backstop is very strong. 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. The firm does have a covenant requiring it to keep debt/capital above 0.65, though it isn’t expected to get close to that level even in a downturn scenario, because in the associated debt agreement capital is defined to exclude impairments.

Bulls Say

  • The Stabroek block (Guyana), in which Hess has a 30% stake, is a huge resource, with at least 10 billion barrels of oil equivalent recoverable. 
  • The first phase of the Liza development is profitable at around $30/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 anti fracking regulations).

Company Description

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 2021, the company reported net proved reserves of 1.3 billion barrels of oil equivalent. Net production averaged 315 thousand barrels of oil equivalent per day in 2021, at a ratio of 69% oil and natural gas liquids and 31% 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

Compass makes most of its SOP directly from salt brines at a lower cost

Business Strategy & Outlook

Compass Minerals holds an enviable portfolio of cost-advantaged assets. Its Goderich rock salt mine in Ontario benefits from unique geology, and with access to a deep-water port, it can deliver deicing salt to customers at a lower cost than competitors. Additionally, the company controls one of only three naturally occurring brine sources that produces the specialty fertilizer sulfate of potash, or SOP. These operations at the Great Salt Lake in Utah can produce SOP at a lower cost than marginal cost producers who convert standard potash. The majority of Compass’ salt sales are to highway deicing customers. Sales volumes are determined during the winter months and are strongly linked to the number of snow days per season. As such, weather has a big impact on Compass’ year-to-year results. The deicing salt business also exposes Compass to climate change risk. One effect of climate change is increased snowfall volatility from year to year, which affects Compass’ annual results. However, winter weather has shown mean reversion tendencies over longer periods of time.

Pricing for deicing salt is also linked to winter weather. However, prices have historically been relatively stable compared with other commodities. Deicing salt has a low value/weight ratio, creating regional markets, and transportation costs make up a significant portion of total costs to the customer. With mines close to waterways like the Great Lakes and the Mississippi River, Compass has a transportation cost advantage over its competitors. Compass also produces SOP, which is used for high-value crops that are sensitive to the chloride in standard potash (muriate of potash). While marginal producers use MOP and sulfuric acid to produce SOP, Compass makes most of its SOP directly from salt brines at a lower cost. Compass also plans to produce magnesium chloride, used for fire retardants to combat wildfires, and lithium as byproducts from the brine after extracting SOP. Compass will enter the fire-retardant market in the Western U.S. through its 45% equity investment in Fortress. Lithium demand will grow over 6 times during this decade due to higher electric vehicle adoption.

Financial Strengths

As of Sept. 30, Compass Minerals had roughly $900 million in net debt. A net debt/adjusted EBITDA ratio of 4.4, well above management’s long-term target of 2.5 times. The company’s leverage has been elevated since adding about $600 million in debt in 2016 to help fund the Produquimica acquisition that has since been divested. Leverage ratios have remained high even after Compass completed the divestiture of two noncore assets in order to pay down debt due to cost inflation weighing on salt profits. the company’s leverage ratio will decline in fiscal 2023 as salt prices increase and costs inflation stabilizes, restoring EBITDA and increasing free cash flow. This should allow the company pay down debt over the next couple of years. Additionally, management cut its annual dividend to $0.60 per share from $2.88, which should save the company an estimated $80 million a year. Much of the future savings will go toward paying down debt over the next several years. Finally, Compass raised $252 million in equity from Koch Industries. Of the proceeds, $200 million will be used to fund the majority of the initial phase of the company’s lithium project, while the remainder will be used to pay down debt. As Compass generates higher EBITDA and cash flows and pays down debt, Compass’ net leverage ratio will fall closer to management’s long-term target of 2.5 times over the next several years. While headline credit metrics will fluctuate in the coming years according to variations in winter weather and fertilizer prices, leverage is to remain, on average, at manageable but elevated levels.

Bulls Say

  • Compass holds a portfolio of cost-advantaged assets, including the Ontario rock salt mine and brine operations at the Great Salt Lake in Utah.
  • Highway deicing salt prices are relatively stable, and Compass’ average selling prices in this area have increased over time.
  • Compass’ plans to enter the lithium and fire-retardant markets will create long-term value as strong demand growth in these industries should lead to incremental profit growth.

Company Description

Compass Minerals currently produces two primary products: salt and specialty potash fertilizer. The company’s main assets include rock salt mines in Ontario, Louisiana, and the United Kingdom and a salt brine operation at the Great Salt Lake in Utah. Compass’ salt products are used for deicing and also by industrial and consumer end markets. The firm also sells sulfate of potash, which is used by growers of high-value crops that are sensitive to standard potash. Compass is expanding its portfolio and plans to enter the fire-retardant market, with its magnesium chloride-based product used to combat forest fires. The company also plans to enter the lithium market. Compass will produce magnesium chloride and lithium as byproducts from its sulfate of potash operation in Utah.

(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

AGL’s FY22 underlying NPAT declined -58% YoY primarily due to coal plant outages

Investment Thesis:

  • Energy margins bottom out and could potentially start to improve (higher customer and volume numbers).
  • Strong cash flow business which provided flexibility to deploy cash in growth opportunities and capital management. 
  • On-going focus on costs and digitalization should support margins. 
  • Potential capital management initiatives (e.g., buyback).
  • Demerger into AGL Australia and Accel may unlock shareholder value.
  • Potential favorable changes to the regulatory environment.
  • Potential M&A – AGL has already received a takeover bid at $7.50 per share which was rejected by the AGL Board. 

Key Risks:

  • Competitive pressures leading to margin erosion. 
  • Cost pressure and fuel supply issues lead to margin erosion. 
  • Increase in supply leading to depressed prices.
  • Regulatory risk (policy uncertainty), such recent regulation in electricity markets [ Victorian Default Offer (VDO) and Default Market Offer (DMO)].
  • Unscheduled shutdowns impacting earnings. 

Key Highlights:

  • Underlying EBITDA declined -27% YoY to $1.22bn and underlying NPAT declined -58% YoY to $225m, reflecting the expected step down in Trading and Origination Electricity earnings due to lower realized contracted and wholesale customer prices, increased costs of capacity to cover periods of peak electricity demand, absence of the Loy Yang Unit 2 insurance proceeds recognized in FY21, increased residential solar volumes and margin compression via customer switching.
  • Net cash from operations declined -2% YoY to $1.227bn with lower underlying EBITDA partially offset by a strong working capital outcome which saw cash conversion improve +27% YoY to 123%, however, management warned of a hit to cash conversion rate in FY23.
  • Capital management. Strong balance sheet with net debt declining -11.2% to $2,662m, reducing gearing by -590bps to 29.2%, giving company significant headroom to debt covenant of gearing <50%.
  • Board declared a final unfranked dividend of 10cps, equating to total FY22 dividends of 26cps, down -65% YoY and equating to a payout ratio of 75% vs 87% pcp.
  • Opex savings target exceeded. The Company saw opex (excluding D&A) decline -7.6% YoY as management delivered FY22 recurring savings of ~$158m (vs target of $150m), including initial benefits from structural review and reduction in corporate costs. However, management warned that it expects a small step up in operating costs for FY23, albeit being lower than CPI after adjusting for the non-recurring benefits in FY22.
  • Outlook. Management announced it will provide FY23 guidance in late-September in conjunction with the initial outcomes of the review of strategic direction, however, expects FY23 earnings to remain resilient amidst the current challenging in the energy industry and market conditions, underscored by the strength of AGL’s large and diversified customer base, low-cost baseload generation position supported by strong fuel supply arrangements, robust risk management, with prudent margin management ensuring retail strength and stability in a highly volatile market, with the Company largely hedged for FY23 and well positioned from FY24 to benefit from sustained higher wholesale electricity pricing (Refer to Figure 4 for forward pricing curve) as historical hedge positions progressively roll-off. 

Company Description:

AGL Energy Limited (AGL) is one of Australia’s leading integrated energy companies and the largest ASX listed owner, operator and developer of renewable energy generation in Australia. The company sells and distributes gas and electricity. Further, it also retails and wholesales energy and fuel products to customers throughout Australia. The business operates four main segments: Energy Markets, Group Operations, New Energy and Investments.

(Source: Banyantree)

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

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

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

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

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

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

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

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Commodities Trading Ideas & Charts

Dominion has accelerated its capital expenditure growth program

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

Business Strategy & Outlook

After exiting its oil and gas exploration and production business, selling and retiring its no-moat merchant generation, and selling its Questar assets, Dominion’s investors are left with a predominantly regulated utility, which has been in the best interests of investors. Like its peers, Dominion has accelerated its capital expenditure growth program. Over the next five years, management plans to invest $37 billion of growth capital, with nearly 90% focused on decarbonization. Favorable regulatory mechanisms mean that over 75% of Dominion’s investments are eligible for timely cost recovery from customers, reducing regulatory lag and improving free cash flow. In Virginia, the company’s most important jurisdiction, over 90% of its planned investments are eligible for rate riders at higher allowed returns on equity. 

Over the next 15 years, Dominion forecasts $73 billion of capital investment opportunities, including up to $21 billion for offshore wind farms in the U.S. Unlike other offshore wind projects, Dominion’s will be rate-regulated, mitigating investor risk for a project with greater execution risk than onshore renewable energy development. Investors must carefully watch for cost increases at its offshore project. While costs will rise for the project, there remains significant headroom for the $125 per megawatt hour allowed regulated cost cap. Costs over the cap would require regulatory approval. A recent settlement with key counterparties should help resolve a proposed capacity factor guarantee, if approved. Roughly 90% of earnings will be from regulated electric and gas utilities with constructive state regulation in Virginia, Utah, Ohio, and the Carolinas. The balance of earnings will come from contracted assets with long-term agreements with mostly investment-grade counterparties that provide steady, regulated-like returns. In November, management unexpectedly announced a strategic review of the company’s current business mix and capital allocation. Management did not indicate a potential outcome or direction of the review, creating what is unnecessary investor uncertainty.

Financial Strengths

Even with its large capital expenditure program, Dominion maintains a strong balance sheet and an investment grade credit rating. Dominion is to maintain a capital structure in line with regulatory requirements at its utility subsidiaries. Total debt/capital was 58% at year-end 2021, and it expects to remain below 60%. With $37 billion in expected growth capital expenditures over the next five years, Dominion will be a frequent debt issuer. Exclude $3 billion of growth capital from the estimate as management will look to mitigate customer bill impacts while potentially lengthening the trajectory of its capital investment program. Dominion’s debt maturity schedule is manageable, and Dominion will be able to refinance its debt as it comes due. Dominion surprised investors with a 33% dividend cut in late 2020 after the company abandoned the Atlantic Coast Pipeline and decided to exit its gas pipeline business. Its current 65% payout ratio is in line with peers, and 6% dividend is to grow. 

Bulls Say

  • Dominion’s dividend yield and earnings growth could deliver high-single-digit total annual returns for conservative investors for the foreseeable future. 
  • Growth capital investments focused on renewable energy and carbon reduction are estimated to be $73 billion over the next 15 years and should provide solid earnings and dividend growth for the foreseeable future. 
  • Public support for renewable energy and Virginia legislation has resulted in Dominion planning to build the largest wind farm in the U.S.

Company Description

Based in Richmond, Virginia, Dominion Energy is an integrated energy company with over 30 gigawatts of electric generation capacity and more than 90,000 miles of electric transmission and distribution lines. Dominion owns a liquefied natural gas export facility in Maryland and is constructing a 5.2 GW wind farm off the Virginia Beach coast.

(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

ConocoPhillips stands to benefit from Concho’s expertise in the Permian while deriving $1 billion in synergies

Business Strategy & Outlook

Differentiating itself from peers big and small, ConocoPhillips has laid out a 10-year plan for restrained investment, steady growth, improving returns, and, importantly, returning cash to shareholders. Its strategy makes Conoco a compelling option in the energy sector, given its commitment to capital restraint and clear policy on return of cash to shareholders. Its low-cost portfolio gives it high return investment options to grow in a rising price environment while its strong financial position keeps the dividend safe in a downcycle. Central to its plan is a commitment to maintain capital spending at $8 billion on average annually while returning 30% of operating cash flow to shareholders per year through a three-tier capital return program consisting of buybacks, an ordinary annual dividend, and a variable component. Through high-grading and cost improvements, the company has reduced the oil price necessary to earn a 10% return on produced resources in its plan to $28/ barrel.

Its growth plan rests largely on its unconventional assets, specifically its Permian position, which became the company’s largest position with the acquisition of Concho Resources. Permian resources constitute over half of the planned produced resources in the 10-year plan. ConocoPhillips stands to benefit from Concho’s expertise in the Permian while deriving $1 billion in synergies. Conoco further tilted its portfolio to U.S. unconventional by acquiring Shell’s Permian shale assets in a highly accretive deal. While the company holds acreage in the Bakken and Eagle Ford, production growth in both these regions will likely be limited. Outside of the U.S. unconventional portfolio, volumes will remain flat with growth in Alaska and Canada offsetting declines internationally. Growth in Canada will come from the Montney, where Conoco plans to leverage its unconventional experience. New volumes in Alaska will come from the Willow project, dependent on a clarified regulatory environment.

Financial Strengths

During the last year, debt has fallen from the peak levels realized after the oil price decline in 2020 and the Concho acquisition. Total debt amounted to $17.0 billion in the third quarter of 2022, implying a net debt/capital ratio of 26%. Management will likely continue to reduce gross debt during the next five years and may refinance high-coupon debt as part of debt restructuring, depending on cost, as it aims to maintain an A rated balance sheet. The debt/EBITDA is to remain at or below 1.0 throughout the remainder of the forecast. ConocoPhillips maintains its plans to differentiate itself by focusing on shareholder returns. While it still aims to return 30% of operating cash flow to shareholders, management instated a three-tier capital return program to preserve flexibility in anticipation of oil price volatility. The first tier consists of an ordinary dividend that Conoco plans to increase annually in line with the broader market. The second tier is share repurchases, while the third tier is a variable dividend that is staggered, resulting in eight cash distributions per year when declared. In, 2022, Conoco expects to return $15 billion to shareholders. Capital spending in 2022 is expected to be $8.1 billion. Guidance is for capital spending to remain at about $8 billion through 2024 and over $8 billion by 2031.

Bulls Say

  • Large positions in the Permian, Eagle Ford, and Bakken offer low-cost liquids growth with wider margins, lower risk, and higher returns than international operations. 
  • ConocoPhillips has reduced its capital requirements so it can maintain its production and pay its dividend at less than $40/barrel oil. U
  •  Over the long term, management does not plan to increase activity with oil prices, instead directing excess cash flow toward repurchases with a payout target of 30% of cash flow.

Company Description

ConocoPhillips is a U.S.-based independent exploration and production firm. In 2021, it produced 1.0 million barrels per day of oil and natural gas liquids and 3.2 billion cubic feet per day of natural gas, primarily from Alaska and the Lower 48 in the United States and Norway in Europe and several countries in Asia-Pacific and the Middle East. Proven reserves at year-end 2021 were 6.1 billion barrels of oil equivalent.

(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

ConocoPhillips stands to benefit from Concho’s expertise in the Permian while deriving $1 billion in synergies

Business Strategy & Outlook

Differentiating itself from peers big and small, ConocoPhillips has laid out a 10-year plan for restrained investment, steady growth, improving returns, and, importantly, returning cash to shareholders. Its strategy makes Conoco a compelling option in the energy sector, given its commitment to capital restraint and clear policy on return of cash to shareholders. Its low-cost portfolio gives it high return investment options to grow in a rising price environment while its strong financial position keeps the dividend safe in a downcycle. Central to its plan is a commitment to maintain capital spending at $8 billion on average annually while returning 30% of operating cash flow to shareholders per year through a three-tier capital return program consisting of buybacks, an ordinary annual dividend, and a variable component. Through high-grading and cost improvements, the company has reduced the oil price necessary to earn a 10% return on produced resources in its plan to $28/ barrel.

Its growth plan rests largely on its unconventional assets, specifically its Permian position, which became the company’s largest position with the acquisition of Concho Resources. Permian resources constitute over half of the planned produced resources in the 10-year plan. ConocoPhillips stands to benefit from Concho’s expertise in the Permian while deriving $1 billion in synergies. Conoco further tilted its portfolio to U.S. unconventional by acquiring Shell’s Permian shale assets in a highly accretive deal. While the company holds acreage in the Bakken and Eagle Ford, production growth in both these regions will likely be limited. Outside of the U.S. unconventional portfolio, volumes will remain flat with growth in Alaska and Canada offsetting declines internationally. Growth in Canada will come from the Montney, where Conoco plans to leverage its unconventional experience. New volumes in Alaska will come from the Willow project, dependent on a clarified regulatory environment.

Financial Strengths

During the last year, debt has fallen from the peak levels realized after the oil price decline in 2020 and the Concho acquisition. Total debt amounted to $17.0 billion in the third quarter of 2022, implying a net debt/capital ratio of 26%. Management will likely continue to reduce gross debt during the next five years and may refinance high-coupon debt as part of debt restructuring, depending on cost, as it aims to maintain an A rated balance sheet. The debt/EBITDA is to remain at or below 1.0 throughout the remainder of the forecast. ConocoPhillips maintains its plans to differentiate itself by focusing on shareholder returns. While it still aims to return 30% of operating cash flow to shareholders, management instated a three-tier capital return program to preserve flexibility in anticipation of oil price volatility. The first tier consists of an ordinary dividend that Conoco plans to increase annually in line with the broader market. The second tier is share repurchases, while the third tier is a variable dividend that is staggered, resulting in eight cash distributions per year when declared. In, 2022, Conoco expects to return $15 billion to shareholders. Capital spending in 2022 is expected to be $8.1 billion. Guidance is for capital spending to remain at about $8 billion through 2024 and over $8 billion by 2031.

Bulls Say

  • Large positions in the Permian, Eagle Ford, and Bakken offer low-cost liquids growth with wider margins, lower risk, and higher returns than international operations. 
  • ConocoPhillips has reduced its capital requirements so it can maintain its production and pay its dividend at less than $40/barrel oil. U
  •  Over the long term, management does not plan to increase activity with oil prices, instead directing excess cash flow toward repurchases with a payout target of 30% of cash flow.

Company Description

ConocoPhillips is a U.S.-based independent exploration and production firm. In 2021, it produced 1.0 million barrels per day of oil and natural gas liquids and 3.2 billion cubic feet per day of natural gas, primarily from Alaska and the Lower 48 in the United States and Norway in Europe and several countries in Asia-Pacific and the Middle East. Proven reserves at year-end 2021 were 6.1 billion barrels of oil equivalent.

(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

Northern Star Resources reported solid 1H22 results – the first reported results since NST’s merger with Saracen

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 the USD. 
  • 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 of shareholder return.

Key Risks

  • 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.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • 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/sold 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 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). 
  • Relative valuation. Relative to Australian peer group (NCM, RRL, SBM, EVN) average, NST is currently trading on a 2-yr forward EV / EBITDA multiple of 5.1x (vs peer avg 5.0x) and yield of 3.2% (vs peer avg 2.6%). On 2-yr forward PE-multiple, NST is currently trading on a multiple of 19.8x vs peer group average 14.8x.

Company Description

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.

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

On-going focus on cost reduction and positioning of the business

Investment Thesis:

  • Currently undertaking a review, with management highlighting on the conference call: “this year it will seek to further optimize the portfolio, reducing gearing and future CapEx, and conduct a review of the capital management framework including returns to shareholders. This will ensure one is in the best position to provide returns for shareholders, reduce debt, invest in growth and invest in the energy transition”.
  • 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:

  •  Relative to the pcp: Production was up +3% to 92.1mmboe. Sales volume of 107.1mmboe, down -3%.
  • Product sales revenue of US$4.71bn, up +39%.
  • EBITDAX (earnings before interest, tax, depreciation, depletion, exploration, evaluation and impairment) of US$2.81bn, up +48%.
  • 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.
  • STO was able to deliver a free cash flow breakeven of US$21 per barrel in 2021.
  • 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.
  • The Board declared a final dividend of US8.5 cents per share (franked 70%), up +70% relative to the pcp. This equates to 20% of full-year pro forma free cash flow for the merged entity less dividends paid in the first half by both companies and is in-line with STO’s sustainable dividend policy which targets a range of 10% to 30% payout of free cash flow. Management noted STO does not expect to generate franking credits for the next several years.

Company Description:

Santos Limited (STO) explores for and produces natural gas, liquefied natural gas, crude oil, condensate, naphtha 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)

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

Con Ed’s Clean Energy Transition Plan Boosts Growth but Requires Regulatory Support

Business Strategy & Outlook: 

To reaffirm the $86 per share fair value estimate for Con Ed after incorporating updates from the company’s annual environmental, social, and governance investor presentation. To reaffirm the no-moat and stable moat trend ratings. Management raised its 10-year capital investment outlook to $72 billion from $68 billion, supporting that Con Ed will continue to find attractive energy transition investments. To reaffirm the $15.7 billion capital investment forecast for 2022-24 and 6% average annual earnings growth estimate, in line with management’s budget. About one third of Con Ed’s investment plan is allocated to helping New York eliminate energy sector carbon emissions by 2040. This transition likely will result in rapid growth at its electric business but shrinking gas and steam demand. Management estimates by 2050 electricity demand on its system could climb 40% while gas demand falls 60% and steam demand falls 20%-40%. Decarbonizing buildings and transportation is the biggest immediate growth opportunity. The expected Con Ed will spend more than $7 billion on building electrification and EV charging by 2030. New York City recently banned gas service in new small buildings in 2024 and new large buildings in 2027. The state plans to ban new gasoline car sales by 2035.

Electric transmission and rate-regulated renewable energy projects could be incremental growth opportunities beyond 2025 but are too uncertain to incorporate now. Con Ed likely would have to win competitive bids and regulators would have to change ratemaking structures for Con Ed to benefit from the $40 billion of estimated capital investment that will be required for New York to reach its 70% renewable energy target by 2030. To think, management made a good capital allocation decision to sell its renewable energy business in October to eliminate near-term equity needs. The outcome of Con Ed’s 2023-25 electric rate review will be a key signal of regulatory support.

Financial Strengths: 

Total debt/EBITDA peaked at over 5 times in 2020, but expect it to decline to around 4 times by 2025. Although this ratio currently is somewhat elevated, I believe it is acceptable due to the favorable New York regulatory framework. The $6.8 billion clean energy business sale effectively pre-finances Con Ed’s utility growth investments, which support the 6% annual earnings growth forecast. This removes the risk that ConEd will have to issue large amounts of equity and debt in potentially volatile markets during the next few years. The clean energy business sale also eliminates the $400 million of annual capital expenditures the expected Con Ed to invest to develop its clean energy pipeline. The estimated ConEd can finance its $15 billion of planned utility investments in 2023-25 without issuing new equity. The expected Con Ed would have to issue around $1.5 billion of equity during the next three years to fund its utility and non-utility growth plan. It issued 10.1 million shares in July 2021.

Bulls Say:

  • Con Ed received a good price for its renewable energy business and now has the capital it needs to execute its three-year utility investment growth plan.
  • Con Ed has increased its dividend for 48 straight years. The expected dividend growth to accelerate from its 3% pace the last few years.
  • New York’s regulatory framework for electricity and natural gas provides for forward-looking rate cases and usage-decoupled customer rates, significantly reducing earnings and cash flow variability.

Company Description:

Con Ed is a holding company for Consolidated Edison of New York, or CECONY, and Orange & Rockland, or O&R. These utilities provide steam, natural gas, and electricity to customers in southeastern New York—including New York City—and small parts of New Jersey. The two utilities will generate nearly all of Con Ed’s earnings once it closes the sale of its clean energy business to RWE. Con Ed’s clean energy business owns the second-largest portfolio of utility-scale solar projects in the U.S. Following the sale, Con Ed’s only non-utility earnings will come from investments in gas and electric transmission.

(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

Enbridge’s 2023 Outlook Is a Modest Negative; Lowering Fair Value Estimates

Business Strategy & Outlook: 

Enbridge’s 2023 outlook was more mixed than anything else. 2023 EBITDA guidance of a midpoint of CAD 16.2 billion is close to the unchanged expectations of CAD 16.3 billion. However, interest expense is expected to increase to CAD 3.9 billion, materially above earlier forecast, and capital spending of CAD 6 billion is CAD 1 billion above the estimates. The higher spending is reducing near-term cash flows and thus caused us to modestly reduce the fair value estimates. The estimated value is now CAD 52 ($38) per share, down from CAD 53 ($39). The narrow moat rating is unchanged. Enbridge also increased the dividend 3% as expected. While Enbridge highlighted plans to buy back stock potentially, one doesn’t expect excess cash flow from the firm until 2026, implying buybacks are likely to increase debt levels. Growth in 2023 across the business is weighted heavily toward liquids pipelines, gas transmission, and gas distribution. The growth should allow Enbridge to come close to meeting its leverage guidance of below 4.75 times in 2023, as the model is about 4.8 times. Enbridge also announced that it is working toward developing a carbon dioxide sequestration hub in Corpus Christi with Oxy Low Carbon Ventures, which adds to its energy transition credentials.

Financial Strengths: 

Enbridge carries higher levels of leverage, at levels between 4.5 to 5 times, than most high-quality North American midstream firms, which are typically below 4 times. However, this higher degree of leverage is supported by the protected nature of its earnings stream. Further, it should also decline over the next few years and Enbridge’s core capital spending profile shifts to CAD 3 billion to CAD 4 billion in spending compared with prior years of CAD 6 billion-plus. Notably, Enbridge has outlined plans to spend up to an incremental CAD 2 billion annually on debt reduction or share buybacks. Enbridge’s dividend is prized by both investors and the management team. After averaging 14% annual growth from 2013-20, one only expects growth to be about 3% annually for the foreseeable future. The shift reflects a recognition of the slower growth across Enbridge’s business but also a preference by investors toward generating free cash flow after capital spending and dividends. Enbridge’s outlined capital spending plans already reflect substantial free cash flows available for higher capital returns to shareholders via buybacks or debt reduction with CAD 2 billion earmarked for this effort annually. This profile is markedly better than most U.S. midstream peers, which in many cases are still struggling to balance a large committed dividend or distribution payouts to shareholders alongside reasonable levels of capital spending.

Bulls Say:

  • Enbridge is the liquids-focused version of gas-oriented Williams in terms of an attractive, highly regulated utility like earnings profile.
  • Enbridge offers a highly secure dividend that can increase 3% annually for the foreseeable future.
  • The cancellation of Keystone XL puts Enbridge in a leading position to capture new organic pipeline expansions to serve the unmet need from producers.

Company Description:

Enbridge owns extensive midstream assets that transport hydrocarbons across the U.S. and Canada. Its pipeline network consists of the Canadian Mainline system, regional oil sands pipelines, and natural gas pipelines. The company also owns and operates a regulated natural gas utility and Canada’s largest natural gas distribution company. Finally, the firm has a small renewables portfolio primarily focused on onshore and offshore wind projects.

(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.

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