Tag: Commodities

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Ameren’s Renewable Energy Transition and Improving Regulation Support Long-Term Growth

With improving regulatory environments come significant investment opportunities, as seen with the company’s most recent $17.1 billion five-year plan. Ameren has its sights set on $23 billion of opportunities during the next decade, providing a long runway of growth for the company. Management is to be applauded for attaining constructive utility legislation in Missouri. Its patient yet persistent years-long efforts resulted in increased investment opportunities across the territory, a stark change from the past. Numerous trackers are in place for fuel adjustments, pension, and tax positions.

With an improved regulatory framework in Missouri, management is keeping its promise to invest in jurisdictions that support investment. Ameren is allocating $8.5 billion of its investment plan to Missouri. Projects will focus on renewable energy, upgrading aging and underperforming assets, and employing smart grids and connected grid services. Ameren has build-to-transfer agreements for 700 megawatts of wind generation in Missouri. The $1.2 billion investment complies with Missouri’s renewable energy standard. Ameren is also looking to install 100 MW of solar by 2027. Ameren will close roughly 3 gigawatts of coal generation by 2036 and expects to have no coal generation by 2045. Regulation for Ameren in Illinois is constructive. Allowed returns on equity are 580 basis points above the average 30-year U.S. Treasury yield. Ameren continues to advocate for the Illinois Downstate Clean Energy Affordability Act, which would improve allowed returns and extend performance ratemaking.

Ameren’s Future Outlook 

We assume Ameren will have $17.1 billion of capital expenditures between 2021 and 2025. We expect the company to issue debt in line with its current capital structure and refinance its debt as it comes due. Ameren’s dividend is up 10% from the year-ago period. We expect future dividend growth to be more in line with earnings growth. Ameren has tended to be at the lower end of its 55%-70% dividend payout target. We view Ameren’s current financial health as sound. The firm’s 56% debt/capitalization ratio is in line with its utility peers. Interest coverage is a healthy 6.0 times, and current debt/EBITDA is near 5.0.

Bulls Say’s 

  • Ameren’s regulated utilities provide a stable source of earnings. The company’s large capital expenditure plan should drive above-average rate base and earnings growth for the next several years.
  • Ameren’s regulatory relationships have improved significantly in Missouri.
  • Ameren’s management team has proved to be bestin- class operators, having diligently worked to improve regulatory relationships and execute on substantial growth projects.

Company Profile 

Ameren owns rate-regulated generation, transmission, and distribution networks that deliver electricity and natural gas in Missouri and Illinois. It serves nearly 2.5 million electricity customers and roughly 1.0 million natural gas customers.

(Source: Morningstar)

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

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Murphy Prioritizing Balance Sheet Strengthening While Commodity Prices Are Support

which was 10% higher sequentially and 1% higher year over year. Net production, excluding non controlling interest volumes from the firm’s Gulf of Mexico assets, was 171 mboe/d. This exceeded the high end of the guidance range of 160-168 mboe/d. Management attributed the outperformance to its Eagle Ford and Tupper Montney assets, which contributed 3.7 mboe/d and 2 mboe/ d, respectively, of upside relative to guidance.

The firm’s outlook for full-year volumes was nudged up by 0.5 mboe/ d, and the budget range was tightened, but the midpoint was unchanged. The firm’s financial results were similarly strong, with adjusted EBITDA and adjusted EPS coming in at $391 million and $0.59, respectively. 

Company’s Future Outlook

The estimates were $321 million and $0.17. Like many of its peers, Murphy is using the windfall from currently high commodity prices to strengthen its balance sheet. The firm has repaid its revolver in full and is now aiming for a further $200 million in net debt reduction by the end of the year. It is planned to incorporate these operating and financial results in our model shortly, but after this first look, our fair value estimate and no-moat rating remain unchanged.

Company Profile

Murphy Oil Corporation (NYSE: MUR) is an independent exploration and production company developing unconventional resources in the United States and Canada. At the end of 2020, the company reported net proven reserves of 715 million barrels of oil equivalent. Consolidated production averaged 174.5 thousand barrels of oil equivalent per day in 2020, at a ratio of 66% oil and natural gas liquids and 34% natural gas.

 (Source: Morningstar)

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

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Boosting Our Oneok Fair Value Estimate to $49 Following Second-Quarter Results

our fair value estimate to $49 per share. Oneok’s second quarter clearly shows the firm benefiting from a recovery in volumes across its footprint after the COVID-19- driven decline last year as well as numerous new assets placed in service.

Given the strong results, Oneok boosted its 2021 EBITDA guidance to above its earlier midpoint of $3.2 billion, and toward our current forecast of $3.3 billion. Second-quarter EBITDA was $802 million, a 50% increase from last year’s levels. The largest contributor to its earnings improvement is a recovery in Rockies volumes, as well as higher realized commodity pricing on its gathering contracts with a percentage of proceeds component. Rockies volumes across its footprint have recovered over 85% since the second quarter of 2020 to nearly 300,000 barrels per day, or bpd, and Oneok still has 440,000 bpd of capacity, expandable to 540,000 bpd with minimal capital spending.

Every 25,000 bpd of Rockies volumes is worth another $100 million in Oneok EBITDA. Oneok remains well positioned to capture new opportunities in the Williston basin. The gas/oil ratio has improved 80% over the last year in the Williston basin, leading to a substantial recovery in gas production. Oneok’s second-quarter gas processing volumes were about 1.25 billion cubic feet per day, and the firm expects to connect more than 300 wells to its footprint this year.

The increased connections point to incremental upside of about 150 million cubic feet per day of processing volumes. Reducing flaring to zero across Oneok’s footprint adds another 100 million cubic feet per day. Beyond that, simply holding the current oil rig count flat in the Williston basin suggests another 1 billion cubic feet per day of upside in overall gas volumes over the next decade per Oneok estimates.

Company Profile 

ONEOK, Inc. is an energy midstream service provider in the United States. The Company owns and operates natural gas liquids (NGL) systems, and is engaged in the gathering, processing, storage and transportation of natural gas. THe Company’s operations include a 38,000-mile integrated network of NGL and natural gas pipelines, processing plants, fractionators and storage facilities in the Mid-Continent, Williston, Permian and Rocky Mountain regions. The Company operates through three business segments. The Natural Gas Gathering and Processing segment provides midstream services to contracted producers in North Dakota, Montana, Wyoming, Kansas and Oklahoma.

(Source: Morningstar)

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

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Consolidated Edison Reports Weak Q2 Due to Adverse Weather Events but Reaffirms Earnings Guidance

Adjusted EPS in the recently ended quarter were $0.53 versus $0.60 in the same period last year. Earnings in the second quarter were negatively impacted by several heat waves in June. Con Ed mobilizes crews in anticipation of weather events, resulting in significant extra costs even when the weather events end up not being as serious as anticipated.

Our 2021 adjusted EPS estimate of $4.25 is unchanged and at the midpoint of management’s $4.15-$4.35 EPS guidance range. Management increased its 2023 rate base guidance by $135 million due to the approval of a new transmission line. The increase in projected rate base would result in about a $0.01 increase in our 2023 EPS estimate but would not have a material impact on our fair value estimate.

Con Ed’s regulatory allowed returns are lower than industry average, but the overall regulatory rate structures in New York remain constructive. Multi-year rate cases provide forward-looking estimates of capital expenditures and rate base, swallowing Consolidated Edison Company of New York, Con Ed’s largest subsidiary, to consistently earn near or above its 8.8% allowed return on equity.

Company Profile 

Con Ed is a holding company for Consolidated Edison Company 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 generate roughly 90% of Con Ed’s earnings. The other 10% of earnings comes from investments in renewable energy projects and gas and electric transmission. These investments have resulted in Con Ed becoming the second-largest owner of utility-scale PV solar capacity in the U.S.

(Source: Morningstar)

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

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Hess Corporation (NYSE: HES) Fair Value Up to $72 after Commodity Price Refresh

It is now assumed that oil (West Texas Intermediate) prices in 2021 and 2022 will average $57 per barrel and $67/bbl respectively (previously $55 and $57). That makes the stock look more or less fairly valued at the current price.

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.

The valuation of the firm’s Guyana assets continues to assume 10 total phases of development, consistent with management commentary. However, we risk the sixth and seventh phases at 75% and the final three at 50% in our base case. Likewise, 220 mb/d capacities for stages 4 and 5, with 180 mb/d peak output for developments 6-10. To give some indication of the upside if Hess and its partner Exxon can continue to execute and deliver the full 10 phases, we also model a scenario with no risk on the later-stage developments, and assume 220 mb/d capacities throughout. In that scenario fair value would be $89 per share.

Company Profile

Hess Corporation (NYSE: HES) is an independent oil and gas producer with key assets in the Bakken Shale, Guyana, the Gulf of Mexico, and Southeast Asia. Hess Corporation is a mining and exploration firm. The Company is involved in the exploration, development, production, transportation, procurement, and sale of crude oil, natural gas liquids (NGL), and natural gas, with operations in the United States, Guyana, the Malaysia/Thailand Joint Development Area, Malaysia, and Denmark. Exploration and Production and Midstream are the Company’s segments. It’s Exploration and Production sector searches for, develops, produces, buys, and sells crude oil, natural gas, and NGLs. The Midstream business provides fee-based services such as crude oil and natural gas gathering, natural gas processing and fractionation of NGLs, crude oil transportation by rail car, terminating and loading crude oil and NGLs.

(Source: Morningstar)

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

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Duke Energy Corp’s (NYSE: DUK) Increase in FVE to $99 per share After 2nd Quarters Earnings

In North Carolina, Duke’s largest service territory, we view the regulatory framework as average and continue to expect Duke will receive support for its investments in the state. In early 2021, regulators approved Duke’s settlement agreement that resolves historical recovery of coal ash costs and provides clarity on future recovery.  Indiana remains constructive. Regulators approved a peer-average allowed return on equity. The subsidiary is allowed recovery for investments for renewable energy and recovery on and of investments for coal ash remediation, with a forward-looking test year. 

Management recently entered into an agreement to sell 19.9% of the entity at an attractive valuation. Duke’s $60 billion, five-year capital investment plan is focused on clean energy, as the company works toward net-zero carbon emissions by 2050 and net-zero methane emissions by 2030. Management notes growth opportunities beyond its five-year forecast, noting expectations for $65 billion to $75 billion of capital expenditures helping to support 7% annual rate base growth. Management is transitioning Duke away from coal generation. The company, which has among the largest coal fleets in the industry, aims to reduce its coal fleet by up to 70% and install up to 20 gig watts of renewable energy by 2030, depending on the outcome of its Carolina Integrated Resource Plan.

Financial Strength

Duke Energy Corp’s (NYSE: DUK) Increase in FVE to $99 per share after 2nd quarter earnings. We expect $60 billion of capital investment over the next five years. The company has manageable long-term debt maturities. Plans to sell a minority interest in Duke Energy Indiana helps reduce equity needs to fund this plan.  Duke has ample cash liquidity and borrowing capacity available under its master revolving credit facility. We believe Duke’s dividend is well covered with its regulated utilities’ earnings. Our expectations for 3.5% average annual dividend growth will represent a 70% payout based on our 2025 earnings estimate. Duke’s liquidity position and cash flow generation should give investors confidence that it can maintain and grow its dividend.

Bull Says

  • Duke’s regulated utilities provide a stable source of earnings. The company’s large capital expenditure plan should drive rate base and earnings growth for the next several years. We think management’s 5% to 7% earnings growth target from 2021 to 2025 is achievable. 
  • The company operates in mostly constructive regulatory jurisdictions, which account for most of the company’s revenue. 
  • Duke’s management team has focused on core regulated operations and growth investments.

Company Profile

Duke Energy Corp (NYSE: DUK) is one of the largest U.S. utilities, with regulated utilities in the Carolinas, Indiana, Florida, Ohio, and Kentucky that deliver electricity and gas to more than 7 million customers. Duke operates in three major segments: electric utilities and infrastructure; gas utilities and infrastructure; and commercial renewable.

 (Source: Morningstar)

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Viper Energy Partners (NASDAQ: VNOM) Acquires Attractive Acreage for $500 Million from Swallowtail

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

The deal is a $500 million cash and stock (55% stock, 45% cash) purchase of 2,302 net royalty acres in the Midland basin from Swallowtail Royalties, a private mineral rights firm where its acreage deals are financed by Blackstone funds. The price on a per acre basis is at over $200,000 per acre, roughly 80% higher than historical pricing and 40% higher than its last significant deal activity in May 2020.

Despite the high per-acre price, Viper has advantages, as 65% of the acres are operated by Diamondback with a net royalty rate of 3.6%. The value of the deal is demonstrated by the fact that Viper was able to offer a clear long-term growth trajectory for its Diamondback acres, substantially reducing uncertainty around future cash flows, but it wasn’t able to do the same for its non-Diamondback acres. 

The Diamondback development plan is essentially minimal production today to 1,000 barrels of oil per day (bo/d) in 2022 to over 5000 bo/d by 2024. We expect this path to generate a solid amount of value for Viper. 

Company’s Future Outlook

 At first glance, it is expected some modest upside to our fair value estimate, while maintaining our narrow moat rating. The deal is expected to be completed by the early fourth quarter, and expected post-deal leverage will be about 2 times, which we consider reasonable. Based on Diamondback’s current development plan, average net oil production in 2022 is expected to be over 1000 bo/d and Production is expected to approach 5000 bo/d by 2024.

Company Profile

Viper Energy Partners (NASDAQ: VNOM) was formed by Diamondback Energy in 2014 to own mineral royalty interests in the Permian Basin. At the end of 2020, Viper owns 24,350 net royalty acres that produced 26,551 boe/d. Proved reserves are mostly oil, and at the end of 2019 stand at 99,392 mboe. Viper’s mineral and royalty interests give it significant exposure to perpetual ownership of high margin, primarily undeveloped assets with no capital requirements to generate its long-term free cash flow. Viper is a variable distribution partnership that is taxed like a corporation in the United States.

(Source: Morningstar)

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

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Alumina Ltd’s (ASX: AWC) Commodity Price Change

Alumina is effectively a forwarding office for AWAC profits. Its profits stem from its equity share in AWAC, less local head office and interest expenses. While AWAC enjoys a low operating cost position relative to its competitors, the cost curve is relatively flat, and competitive pressures exist via supply from China. Alumina was the result of a demerger of WMC’s aluminum assets in 2003. AWAC has substantial global bauxite reserves and alumina refining operations, many of which are in the lowest quartile of the cost curve.

Key Investment Consideration

We expect aluminum Ltd’s (ASX: AWC) demand to grow considerably in the future, with global consumption benefiting from transport’s electrification. Supply in China that is managed by state-owned enterprises will prove sticky, with little capacity being cut even if aluminums prices decrease considerably. Alumina’s production has declined over the past five years as it closed capacity in a bid to reduce costs. With no major expansions planned, the company will continue to operate in maintenance mode.

Financial strength

At end 2020, AWAC (Alcoa World Alumina and Chemicals) had USD 361 million in net cash, marginally improved on 2019’s USD 340 million. And at end June 2021, Alumina had just position of USD 5.7 million in net debt, also marginally improved. Historically, AWAC reinvested heavily in its operations at the expense of dividend growth. We expect the company to remain largely in maintenance mode, with no major projects planned over the foreseeable future. Therefore, AWAC should pay out most if not all of its operating cash flows in the form of a dividend to Alumina Ltd. and Alcoa. This will help to maintain Alumina Ltd’s strong financial health. We expect AWAC to remain unleveraged and Alumina to remain modestly leveraged at worst.

Bull Says

  • Alumina is a beneficiary of continued global economic growth and increased demand for aluminum via electrification of transport.
  • AWAC is a low-cost alumina producer. It has improved its position on the cost curve relative to peers through expansion of low-cost refineries and closure of high cost operations.
  • The amended AWAC agreement ensures that Alumina will be able to maximize value for shareholders and makes it a more attractive acquisition target.

Company Profile

Alumina Ltd. (ASX: AWC) is a forwarding office for Alcoa World Alumina and Chemicals’ distributions. Its profit is a 40% equity share of AWAC profit, less head office and interest expenses. Its cash flow consists of AWAC distributions. AWAC investments include substantial global bauxite reserves and alumina refining operations. Declining capital and operating costs and a lack of supply discipline from China are likely to result in competitive pressures, but Alumina’s position in the lowest quartile of the industry cost curve is defensive.

 (Source: Morningstar)

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

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Williams’ Deepwater Whale Project One of Several High-Return Growth Opportunities

 The 2018 consolidation of William Partners strengthened Williams’ financial position and lowered its cost of capital. With nearly half of its earnings and cash flow coming from rate-regulated gas pipelines, Williams increasingly looks more like a utility than an energy company. Williams delivered steady performance through turbulent energy markets the last two years, relying on its largely fee-based, long-term contracted revenue and strategically well-positioned assets.

Most of Williams’ growth investment will be directed toward Transco expansions and projects to reduce carbon emissions. Transco capacity will reach 20 bcf/d by 2023 from 10 bcf/d in 2014 and continue to grow as natural gas demand in the eastern U.S. grows. With more than 100 bcf/d in interconnects and regulatory hurdles for competing projects, Transco faces no major competitive threats.

Williams’ other businesses are demonstrating their favorable competitive positions with steady results through volatile energy markets. The Northeast gathering and processing business has a captive customer base in low-cost producing regions. The Northwest pipeline benefits from steady demand from utilities and supply from producers in the Western U.S. Williams is growing and improving the competitive position of its other assets through upstream partnerships.

Financial Strength

Williams has strengthened its balance sheet and dividend coverage in recent years. Its improved credit profile and long-term, fixed-fee contract structures gives Williams financial flexibility to pursue growth investment opportunities, grow the dividend, keep the balance sheet strong, and possibly repurchase shares starting in 2022. 

Williams has raised its dividend to $1.64 in 2021 from $1.20 in 2017 while strengthening its balance sheet. The 2018 consolidation of Williams Partners and elimination of incentive distribution rights resulted in a shadow dividend cut of about 17% for former Williams Partners unitholders.

The flip side was an improved credit profile, higher dividend coverage, and ability to invest in growth without issuing equity. Williams remains engaged in litigation with Energy Transfer over its $1.5 billion payment due to Energy Transfer for its alleged breach of the merger agreement. Williams is seeking damages from Energy Transfer as well and to date has not reserved anything for the $1.5 billion potential payment.

Bulls Say’s 

  • A large, well-positioned network allows Williams to invest in high-return growth projects with minimal regulatory hurdles.
  • After several years of structural and financial moves, Williams is positioned to maintain steady dividend growth for the foreseeable future.
  • Williams is leveraged to U.S. LNG exports via agreements with LNG terminals as a key supplier of gas.

Company Profile 

Williams is a midstream energy company that owns and operates the large Transco and Northwest pipeline systems and associated natural gas gathering, processing, and storage assets. In August 2018, the firm acquired the remaining 26% ownership of its limited partner, Williams Partners.

(Source: Morningstar)

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

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NRG Energy Continues Its Move towards Consumer Services Business Model

The company remains on track to meet our full-year outlook, which includes an estimated $1 billion gross negative impact from winter storm Uri in mid-February, in line with management’s guidance. Our fair value estimate includes a $2 per share reduction to reflect storm losses partially offset by near-term cost-savings benefits and long-term benefits from changes in Texas energy markets that should favor NRG.

After closing the $3.625 billion Direct Energy deal in January and several moves to shrink its power generation fleet, NRG is on a path toward becoming primarily a retail energy services company rather than an independent power producer. It already ranks among the largest retail electricity and natural gas companies in the U.S. and plans to expand its customer base in areas outside its core Texas market. Although this strategic shift changes NRG’s fundamental value drivers, we still don’t think it can establish a long-term competitive advantage that would warrant an economic moat.

Management reaffirmed its $2.4 billion-$2.6 billion EBITDA guidance excluding storm impacts for 2021, in line with our estimate. Management has pulled back substantially on its debt reduction plan and now targets $255 million of debt reduction this year, down from its pre-storm plan to retire $1.05 billion of debt this year. share buybacks and dividend growth will become top capital allocation options in 2022 as NRG pushes back its timeline for achieving investmentgrade credit ratings.

Company Profile 

NRG Energy is one of the largest retail energy providers in the U.S., with 7 million customers, including its 2021 acquisition of Direct Energy. It also is one of the largest U.S. independent power producers, with 22 gigawatts of nuclear, coal, gas, and oil power generation capacity primarily in Texas. Since 2018, NRG has divested its 47% stake in NRG Yield, among other renewable energy and conventional generation investments. NRG exited Chapter 11 bankruptcy as a stand-alone entity in December 2003.

(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.