Tag: Commodities

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)

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.

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)

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.

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)

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.

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.

Woodside is unique among Australian energy companies in that it has successfully managed the development of LNG projects for more than 25 years–unparalleled domestic experience at a complicated and expensive task. Adding to Woodside’s competitive advantages are the long-term 20-year off-take agreements with the who’s who of Asia’s blue chip energy utilities, such as Tokyo Electric, Kansai Electric, Chubu Electric, and Osaka Gas. These help ensure sufficient project financing during development and should bring stability to Woodside’s cash flows once projects are complete. Woodside also enjoys first-mover advantages. The NWS/JV has invested more than AUD 27 billion since the 1980s, building infrastructure at a fraction of the cost of today’s developments.

Woodside’s development pipeline is deep, enabling it to leverage the tried and trusted project-delivery platform as a template for other world-class gas accumulations off the north-west coast of Australia. Woodside is well suited to the development challenge. With extensive experience, it remains a stand-out energy investment at the right price. Gas is the fastest growing primary energy market behind coal, and the seaborne-traded LNG portion of that gas market grows faster still. China is building several import terminals, and so demand is likely to pick up, helping to move LNG pricing toward oil parity on an energy-equivalent basis.

Financial Strength

Balance sheet strength remains a key appeal of Woodside. The company’s net debt/EBITDA of just 0.9 affords it the luxury of seriously pursuing growth counter cyclically, where others necessarily focus on survival alone. Woodside’s net debt increased 60% to USD 2.6 billion at December 2020 versus one year prior, though for still modest 17% leverage (ND/ND+E). And despite expansionary capital expenditure programs, strong cash flows and a healthy balance sheet should regardless support ongoing dividend payments. We project peak net debt of around USD 9.7 billion in 2026, but net debt/EBITDA of just 1.8, and falling to sub-1.0 by 2030. This includes a sustained 80% payout ratio and a five-year average dividend of AUD 1.40 per share or 5.5% fully franked yield at the current share price. Expansionary expenditure on the Scarborough/Pluto T2 project, and potentially later on the Browse project, could see first expanded production in 2025. We model Woodside’s share of the combined capital cost at circa USD 14.0 billion, relatively the most capital-onerous of all four E&P companies, but driving a 25% increase in equity production to 125 mmboe, by 2026, and these are long-life additions.

Bull Says

• Woodside is a beneficiary of continued increase in demand for energy. Behind coal, gas has been the fastest-growing primary energy segment globally. Woodside is favorably located on Asia’s doorstep.

• Woodside’s cash flow base is comparatively diversified, with LNG making it less susceptible to the vagaries of pure oil producers. Gas is a primary component of Asian base-load power generation.

• Gas has around half the carbon intensity of coal and it stands to gain market share in the generation segment and elsewhere if carbon taxes are instituted, as some predict.

Company Profile

Incorporated in 1954 and named after the small Victorian town of Woodside, Woodside’s early exploration focus moved from Victoria’s Gippsland Basin to Western Australia’s Carnarvon Basin. First LNG production from the North West Shelf came in 1984. BHP Billiton and Shell each had 40% shareholdings before BHP sold out in 1994 and Shell sold down to 34%. In 2010, Shell further decreased its shareholding to 24%. Woodside has the potential to become the most LNG-leveraged company globally.

(Source: Factset)

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.

We expect high-single-digit growth in utility earnings over the next five years, driven in large part by grid investment at DTE Electric and replacing aging infrastructure at DTE Gas. DTE Electric is also investing heavily in gas power generation and renewable energy to replace its aging coal fleet. We estimate DTE will invest $18.5 billion at its utilities during the next five years in a Michigan regulatory framework that is constructive for investors.

We are less bullish about the earnings contribution from the power and industrial segment as reduced emissions fuel, or REF, earnings decline from the expiration of tax credits. However, we believe new industrial cogeneration projects and renewable natural gas from landfill projects should, for the most part, offset the REF decline. We estimate flat earnings will reduce the segment’s contribution to consolidated earnings from almost 13% in 2021, following the separation of DTM, to less than 10% by 2025.

Financial Strength

DTE’s book debt/capital ratio rose to 61% at 2020 year-end, a significant increase from five years ago when it averaged in the low-50% range. A stable interest coverage ratio during the next five years is expected, with EBITDA/ interest expense over 4 times. On June 24, DTE declared a $0.825 per-share quarterly dividend ($3.30 per-share annualized) on its common stock payable on Oct. 15, 2021, for shareholders of record at the close on Sept. 20, 2021. DTE management has indicated that the DTE dividend plus the DT Midstream dividend will total $4.70-$4.80 per-share annualized starting in the third quarter of 2021. The midpoint of this guidance would represent a 9.4% increase over the previous DTE dividend before the separation of DTM. The current    annual DTE dividend of $3.30 per share represents a payout ratio of approximately 60% on our 2021 EPS estimate of $5.51

Bull Says

• Shareholders will receive a dividend increase when the DTE Energy and DT Midstream dividend are combined. It is estimated a 9.4% combined dividend increase, followed by 6% annual increases for DTE from 2022 to 2025.

• Michigan’s aging utility infrastructure needs investment, which will mean regulated growth opportunities for DTE.

• Over the past 10 years, Michigan regulation has been constructive for shareholders and is expected to remain favorable.

Company Profile

DTE Energy owns two regulated utilities in Michigan. DTE Electric serves approximately 2.2 million customers in southeastern Michigan including Detroit. DTE Gas serves 1.3 million customers throughout the state. In addition, DTE has nonutility businesses and investments including energy marketing and trading, renewable natural gas facilities, and on-site industrial energy projects.

(Source: Factset)

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.