Tag: Commodities

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Mineral Resources Ltd (ASX: MIN) Continue To Be Expensive, But There Are Still Pockets Of Value To Be Found.

 Revenue, profit, and market capitalization all grew significantly, but are expected to rely more heavily on lithium production going forward. Management has significantly improved disclosure, earnings streams have been materially diversified and the investment strategy has consistently generated high returns on invested capital. We expect a well-supplied lithium market in the longer term, coupled with weaker demand growth for steel, particularly from China, to drive lower prices and reduce the pool of available contracting work. Despite this, we think Mineral Resources can drive EPS growth on volume.

Key Investment Considerations

Management has significantly improved disclosure, earnings streams have been materially diversified and the investment strategy has consistently generated high returns on invested capital. We think the business model is demonstrably sustainable, centering on Mining Services around Australian bulk commodities. Mineral Resources will selectively own and develop its own mining operations, though with the aim of subsequent sell-down while retaining core processing and screening rights.

Financial Strength

Mineral Resources is in strong financial health. Albemarle’s acquisition of a 60% stake in Wodgina lithium instantly expunged net debt in first-half fiscal 2020.From a net debt position of AUD 872 million at end June 2019. Lithium project construction expenditure was at the core of the cash drain. The current circumstance is a return to the usual territory for Mineral Resources, which operated in a position of little to no net debt for at least the eight years to fiscal 2018; a sensible position for a company operating in the volatile mining services space. Mineral Resources had faced the key question of what it should do with its cash, with a shrinking pool of growth and investment opportunities in a lower iron ore price environment. 

Bull Says

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

Company Profile

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

 (Source: Morningstar)

General Advice Warning

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

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Energy Transfer LP (NYSE: ET) on Track for Blockbuster 2021, but Capital Allocation Is a Risk

Management reaffirmed its full-year $12.9 billion to $13.3 billion adjusted EBITDA guidance, and our estimate remains at the high end of that range. This includes the $2.4 billion EBITDA benefit from the mid-February winter storm. Energy Transfer’s limited partner unit’s trade at a 50% discount to our fair value estimate as of Aug. 3, making it one of the cheapest companies in the energy sector.

Earnings growth in the natural gas liquids and refined products segment continues to lead the way, making that segment the largest earnings contributor on a run-rate basis. This is in line with our expectations as volumes ramp up from favorable market conditions and new projects online. Second-quarter earnings in Energy Transfer’s other segments rebounded from last year when energy market shit a bottom at the height of the COVID pandemic. Capital allocation remains a key variable after Energy Transfer achieved investment-grade credit ratings with $5.2 billion of debt reduction this year. 

Company’s Future Outlook

We expect little growth in these segments going forward due to unfavorable reconstructing prices and lack of organic investment potential. Management reaffirmed their plan for $500 million to $700 million annual growth investment in 2022 and 2023, in line with our estimate. We think Energy Transfer is inclined to make more acquisitions like its $7 billion Enable deal that should close by year-end. Management has discussed midstream consolidation and downstream investments. We believe unit buybacks would be the most value-accretive use of capital. The board maintained its $0.61 annualized distribution, as we expected.

Company Profile

Energy Transfer LP (NYSE: ET)  owns a large platform of crude oil, natural gas, and natural gas liquid assets primarily in Texas and the U.S. midcontinent region. Its pipeline network transports about 22 trillion British thermal unit per day of natural gas and 4.3 million barrels per day of crude oil. It also has gathering and processing facilities, one of the largest fractionation facilities in the U.S., and fuel distribution. Energy Transfer also owns the Lake Charles gas liquefaction facility. It combined its publicly traded limited and general partnerships in October 2018.

(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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Santos and Oil Search Agree Merger Terms

Well-timed East Australian coal seam gas purchases and subsequent partial sell-downs bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia’s largest coal seam gas producers and continues to prove additional reserves. It is the country’s largest domestic gas supplier.

Coal seam gas purchases increased reserves, and partial sell-downs generated cash profits, putting Santos on solid ground to improve performance. Group proven and probable, or 2P, reserves doubled to 1,400 mmboe, primarily East Australian coal seam gas. Coal seam gas has grown to represent more than 40% of group 2P reserves, despite partial equity sell-downs. A degree of confidence can be drawn from project partners. U.S. energy supermajor ExxonMobil, the world’s largest publicly traded oil and gas company, is 42% owner and the operator of the PNG LNG project.

The Gladstone LNG project was built and is operated by GLNG Operations, a joint venture of owners Santos (30%), Petronas (27.5%), Total (27.5%), and Kogas (15%). Petronas is Malaysia’s national oil and gas company and the world’s second-largest LNG exporter. The company increasingly enjoys export pricing on its gas. In addition to Santos’ Gladstone LNG, several other third-party east-coast LNG projects conspire to drive domestic gas prices higher. As the largest domestic gas supplier, Santos can expect significant bang for its buck, with limited additional capital or operating cost required to capture enhanced prices.

Financial Strength

Santos has moderate leverage (ND/ND+E) of 28% and maintenance of strong net operating cash flow is reassuring. Santos’ debt covenants have adequate headroom and are not under threat at current oil prices. The weighted average term to maturity is around 5.5 years. Capital expenditure of USD 4.0 billion, beginning 2022 on the Dorado oil project and the Barossa to Darwin LNG upgrade. But this is excellent near-term bang-for-buck expenditure, increasing group production by 65% to 125mmboe by 2026. Capital efficient development and fast up-front cash flows from Dorado’s oil should combine to ensure Santos’ leverage ratios continue to decline from current levels despite outgoings.

Bull’s Say

  • Santos is a beneficiary of continued global economic growth and increased demand for energy. Aside from coal, gas has been the fastest-growing primary energy segment globally. The traded gas segment is expanding faster still.
  • Santos is in a strong position, with 0.9 billion barrels of oil equivalent proven and probable reserves, predominantly gas, conveniently located on the doorstep of key Asian markets.
  • Gas has about half the carbon intensity of coal, and stands to gain market share in the generation segment and elsewhere as carbon taxes are rolled out.

Company Profile

Santos was founded in 1954. The company’s name is an acronym for South Australia Northern Territory Oil Search. The first Cooper Basin gas discovery came in 1963, with initial supplies in 1969. Santos became a major enterprise, though over-reliance on the Cooper Basin, along with the Moomba field’s inexorable decline, saw it struggle to maintain relevance in the first decade of the 21st century. However, the stage has been set for a renaissance via conversion of coal seam gas into LNG in Queensland and conventional gas to LNG in PNG.

(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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TC Energy’s U.S. FVE Declines Modestly Due to Exchange Rates & Canadian FVE Remains Unchanged

with several years of project backlog, despite Enbridge largely focusing on oil assets, while TC’s focus is natural gas. However, we also anticipate that any major new pipeline project for either firm will face substantial stakeholder challenges from a legal, regulatory, or community perspective, raising the risks and costs.

The most critical differences between Enbridge and TC Energy arise from their approaches toward energy transition. Canadian carbon emissions taxes are expected to increase to CAD 170 a ton by 2030 from CAD 40 today, meaning it is critical that TC Energy, with its natural gas exposure, follow Enbridge’s approach to rapidly reduce its carbon emission profile and continue to pursue projects like the Alberta Carbon Grid, which will be able to transport more than 20 million tons of carbon dioxide.

In addition, Enbridge’s backlog is more diversified across its businesses already, and it already has a more material Renewables business, including hydrogen, renewable natural gas, and wind efforts. This shift is especially the case as a CAD 170 per ton carbon tax in Canada opens the door for potentially sizable investments to reduce carbon emissions.

Financial Strength

TC Energy carries significantly higher leverage than the typical U.S. midstream firm, with current debt/EBITDA well over 5 times. Its long-term target is in the high 4s, again materially higher than peers which are generally targeting leverage of 3 to 4 times. Lower capital spending would move this date forward materially. Midstream peers are largely transitioning to generating free cash flow after distributions or dividends, and in some cases, we consider the shift to be permanent.TC Energy has outlined plans to spend about CAD 5 billion annually on a sustainable basis. About CAD 1.5 billion to CAD 2 billion in maintenance spending on its pipelines and 85% of this is recoverable due to being invested in the rate base. Then, Bruce Power, the U.S. natural gas, and the Canadian natural gas pipelines will consume about CAD 1 billion each annually. TC’s dividend growth remains prized by its investors, and 5%-7% growth going forward is easily supportable under the firm’s 60/40 framework.

Bull Says

  • TC Energy has strong growth opportunities in Mexican natural gas, as well as LNG.
  • The company offers virtually identical growth prospects and a protected earnings profile to Enbridge but allows investors to bet more heavily on natural gas.
  • The Canadian regulatory structure allows for greater recovery of costs due to project cancelations or producers failing compared with the United States.

Company Profile

TC Energy operates natural gas, oil, and power generation assets in Canada and the United States. The firm operates more than 60,000 miles of oil and gas pipelines, more than 650 billion cubic feet of natural gas storage, and about 4,200 megawatts of electric power.

 (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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Range: A Natural Gas company has Ample Free Cash Flows to Devote to Debt Reduction

The downward trajectory of natural gas prices in the last few years has forced Range to focus on cost-cutting. It has been fairly successful at reducing costs over the last few years, and the firm also boasts best-in-class drilling and completion costs. It has not historically been able to generate free cash flow, but this should change in 2021 with higher oil and gas prices and Range shifting its stance to operating in maintenance mode. It has not been as explicit as peers with regards to capital allocation and production targets such as only spending 75% of operating cash flow in any given year.

Financial Strength

Range’s balance sheet is a cause for concern. At the end of the last reporting period the firm had just over $3 billion in long-term debt, resulting in lofty leverage ratios. Debt/capital was 67%. We expect leverage to decline in 2021 with free cash flow generation, but Range needs to do more (asset sales, partnerships) to ensure its balance sheet remains in a prudent position on a more sustainable basis. We expect leverage to fall to below 1.5 times in late 2022 given expected free cash flows. We expect Range to generate free cash flow in 2021 with the recent increase in oil and gas prices. This should allow it to make progress on debt reduction. The firm also has about $1.9 billion available on its revolving credit facility for additional flexibility, so there is a reasonable liquidity buffer. But it would be unwise to heavily utilize this revolver, as it would leave the firm with nothing in reserve. Besides, the capacity of this revolver is subject to periodic redetermination and could come down if lenders get worried about the firm’s ability to service its obligations

Bull Says

  • As an early entrant into the Marcellus, Range has a big, blocky acreage position that allows for longer lateral drilling, decreasing capital costs per unit of production.
  • Range’s capacity on the Mariner East 2 pipeline gives it access to international NGL markets, supporting realized prices.
  • The firm enjoys peer-leading drilling and completion costs per thousand lateral feet.

Company Profile

Fort Worth-based Range Resources is an independent exploration and Production Company with that focuses entirely on its operations in the Marcellus Shale in Pennsylvania. At year-end 2020, Range’s proved reserves totaled 17.2 trillion cubic feet equivalent, with net production of 2.2 billion cubic feet equivalent per day. Natural gas accounted for 70% of production.

 (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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Soggy Outlook from Origin

Despite considerably higher power forward prices, operating earnings (EBITDA) are expected to drop -36-56 percent in FY22, according to the projection.

Credit Suisse believes the energy market downgrade cycle will be complete if consensus converges on the company’s FY23 guidance range, albeit it retains its lower-end predictions.

For the first time, guidance for FY22 and FY23 energy markets was issued alongside the June quarter report. FY22 EBITDA is expected to be $450-600 million, while FY23 is expected to be $600-850 million.

According to Goldman Sachs, FY22 was always going to be a low point for energy markets, but the outlook was worse than projected. While margins may be constrained in FY22, they should rebound in the following years.

The APLNG joint venture, which continues to succeed, was the only bright spot in the update for brokers. APLNG production in the June quarter was 173 PJ, bringing the year total to 701 PJ. The payout to Origin Energy for FY21 is $709 million, which is broadly in line with forecasts, but, as Macquarie points out, this is where the announcement’s good elements end.

Morgan feels that the downgrade to energy markets is more than offset by the higher projected prices obtained by APLNG in the short term, and so raises its oil price assumptions, resulting in an upgrade to integrated gas profits forecasts.

Retail prices and wholesale purchase costs have largely been determined, according to the broker, thus there is limited possibility for energy market earnings to rise in FY22. Higher market prices and volatility are expected to pass through to higher consumer pricing in FY23. Overall, Morgan feels the market undervalues the combination of electricity and LNG risk.

(Source: Fact Set)

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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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Vale’s Performance Has Been Boosted By Rising Iron Ore Prices Despite of Poor Operating Performance

Iron ore fines and pellets production surpassed the previous quarter by 11% to 84 million tones, supporting sales volumes to a total of 75 million tons, up 14% from the previous quarter. Elevated prices for Vale’s most important commodity more than offset a hit to cash costs from higher maintenance, equipment, and transportation costs. At our unchanged fair value estimate of USD 19, Vale’s shares trade at a 10% premium with the elevated iron ore price more than compensating for any residual concerns about their tailings dam disasters.

This quarter, Vale realized a sky-high average iron ore fines price of USD 183 per ton, up from USD 89 per ton at the same time last year. Vale is poised to ramp iron ore output in the second half with dry season and full capacity signaled from Serra Leste and Fábrica mines supporting the group’s unchanged full year target. Currently, production capacity is at 330 million tones and this is on track to increase to 400 million tons by the end of 2022, and to 450 million tones thereafter. This will ensure reliable supply is available, providing a buffer to unexpected operational challenges and swing capacity to meet strong demand.

Advancements have also been made in Vale’s base metals business. The Reid Brook deposit as part of the Voisey’s Bay Mine Expansion project has started production. The project represents a small step in the portfolio towards electrification and decarburization, but the investment is dwarfed by the importance of iron ore to Vale.

Company’s Future Outlook

We expect strong profitability to continue into the second half, principally a function of the still-lofty iron ore price. Nickel and copper suffered from the Sudbury labor disruptions causing stoppage expenses and softer production. Vale has put their nickel and copper guidance for the full year under review and we’ve reduced our full year group volume forecasts by 10% to 15%. However, with Returns and earnings from iron ore currently so strong, we View the impact as negligible.  The second part of the project, Eastern Deeps mine, is expected to start up in the second half of 2022. By 2025, the two mines are anticipated to contribute to an additional annual production of 40,000 tons of nickel, 20,000 tons of copper and 2,600 tons of cobalt as by-products

Company Profile

Vale is the world’s largest iron ore mine and one of the largest diversified miners, along with BHP and Rio Tinto. Earnings are dominated by the bulk materials division, primarily iron ore and iron ore pellets, with minor contributions from iron ore proxies, including manganese and coal. The base metals division is much smaller, primarily consisting of nickel mines and smelters with a small contribution from copper.

(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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Antero Resources Corp

The most material change was to the natural gas liquids pricing, as not only has natural gas liquids pricing increased materially recently, but Antero’s ability to extract wider differentials has improved due to tighter end markets.

The revised guidance now shifts to a midpoint of $0.20 per million cubic feet, or mcf, from an earlier midpoint of $0.15 per mcf.

Antero continues to generate substantial free cash flow in this environment. Net debt fell by over $150 million during the quarter, due in part to free cash flow of $77 million.

Total debt now stands at $2.4 billion, and leverage at a very reasonable 1.7 times. Antero’s expectations regarding being below $2 billion in absolute debt and 1 times leverage in 2022 align with our model, and are reasonable.

Company Profile

Antero Resources, based in Denver, engages in the exploration for and production of natural gas and natural gas liquids in the United States and Canada. At the end of 2020, the company reported proven reserves of 17.6 trillion cubic feet of natural gas equivalent. Production averaged approximately 3,578 million cubic feet of equivalent a day in 2020 at a ratio of 33% liquids and 67% 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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Fortescue sets a new record for exports and sets new goals for the future

Fortescue has broken an export record for the second year in a row, having delivered 178.2 million tonnes from Western Australia’s Pilbara region in fiscal 2020. The business stated on Thursday that it expects to have a triple trick of record years in fiscal 2022, with a goal of shipping up to 185 million tonnes.

Fortescue shares rose 2% to a new record high of $26.40 on Thursday morning, owing to the better-than-expected result and forward outlook.

The company’s remarkable operating performance indicates that it has taken advantage of a window of high iron ore prices generated by strong Chinese demand and inadequate supply from major competitors such as Rio Tinto and Vale.

Rio manager Jakob Stausholm admitted on Wednesday night that the team needed to improve as an operator and perform better in the future.

Iron ore benchmark prices hit a fresh high of $US233 per tonne in early May, and the commodity was still fetching $US201.25 per tonne on Wednesday evening, according to price supplier S&P Global Platts.

Fortescue announced last year that it would spend a maximum of $US3.4 billion on growth projects, with a slide presentation from August 2020 implying that growth spending would be closer to $US1 billion in fiscal 2022.

If spending by its clean energy subsidiary Fortescue Future Industries (FFI) is added, the total could reach $US3.8 billion. FFI will invest between $US400 million and $US600 million in the coming year, according to Fortescue.

Aside from increased expansion spending, Fortescue predicted that unit expenses in the coming year might be 11% higher than in fiscal 2021.

(Source: Fact Set)

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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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With the latest acquisition, WEC Energy Group’s Renewable Energy Portfolio Continues to Expand

The facility has long-term off take contracts for 100% of energy produced from investment-grade counterparties. The company’s infrastructure investment now comprises eight projects totaling more than 1.5 gig watts of generation.

The transaction is a continuation of WEC Energy’s plan to build out its renewable energy infrastructure portfolio, advantageously using its strong balance sheet to lock in returns higher than its regulated business. Management has targeted 8% unleveraged internal rates of return, which we view as attainable.

We continue to think the infrastructure investments, which have higher returns than in WEC’s regulated business with regulated utility type risks, are a positive for investors. The company has set aside $1.5 billion in its five-year capital investment program for renewable energy investments, nearly doubling the company’s current $2.2 billion portfolio. Capital investments drive our 6.5% earnings growth expectations, the upper end of management’s 5% to 7% guidance range. The company’s total capital investment plan is $16.1 billion over the next five years.

Management has previously increased its allocation to renewable energy infrastructure projects, and we wouldn’t be surprised if the company allocates additional resources to infrastructure investments. The Sapphire Sky Wind Energy investment represents nearly 30% of WEC’s five-year commitment to renewable energy infrastructure.

Company Profile

WEC Energy Group’s electric and gas utility businesses serve electric and gas customers in its Illinois, Michigan, Minnesota, and Wisconsin service territories. The company also owns a 60% stake in American Transmission Co. WEC’s asset mix is approximately 51% electric generation and distribution, 34% gas distribution, 13% electric transmission, and 2% unregulated renewable generation.

 (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.