Tag: Commodities

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Commodities Trading Ideas & Charts

Mineral Resources Ltd through Lockyer Deep will get a unique opportunity to secure its own energy supply

Investment Thesis

  • Strong competitive position with the company being one of world’s top five lithium producers, Australia’s fifth largest iron ore producer, largest landholder of onshore gas acreage in the Perth and Carnarvon Basins and world’s largest crushing contractor. 
  • Strong and solid fundamentals with robust lithium and iron ore demand and prices to persist.
  • High quality assets operated by a solid management team with appropriate expertise. 
  • Strong track record since 2006 ASX listing with the company growing total assets 50x to $7.8bn (+30% p.a. growth), delivering 21% p.a. ROIC, generating $7.5bn in underlying EBITDA (+25% p.a. growth) and not undertaking any dilutive capital raise. 
  • Strong shareholder returns with the company delivering 31% p.a. total shareholder returns since 2006 including +20% p.a. dividend growth. 
  • Solid balance sheet. 
  • Improved efficiency amid successful restructuring of the company into four operating pillars, Mining Services, Iron Ore, Lithium and Energy, with each operating as a separate business under separate management. 

Key Risks

  • Commodity price volatility. 
  • Deterioration in global iron ore supply & demand equation.
  • Unfavorable movements in AUD/USD.
  • Adverse weather impacting operations and earnings.
  • Lack of exploration success.
  • Metal processing issues due to issues with the metallurgical processing equipment.
  • Production delay or unscheduled site shutdown.

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

  • Revenue declined -8% y/y to $3.42bn, with Iron Ore down – 35% y/y as record iron ore exports of 19.2Mt were more than offset by lower realised prices amid sharpest fall in iron ore price in history, Mining Services up +22% y/y driven by record production volumes of 274Mt (up +10% y/y) and strong business momentum with five new contracts awarded and three contracts renewed, and Lithium up +509% y/y driven by higher prices. 
  • Underlying EBITDA declined -46% y/y to $1bn, with earnings negatively impacted in 1H22 by the steep decline in iron ore prices and widening discounts before stabilising in 2H22, however, with record lithium prices, first earnings from conversion of Mt Marion spodumene concentrate into lithium hydroxide and record growth in the Mining Services division, 2H22 performance remained strong. Controllable underlying EBITDA was up +9% y/y (refer to Figure 2)
  •  Operating cash flow declined -79% y/y to $344m, impacted by an increase in working capital relating to the restart of Wodgina, the increase in lithium pricing causing receivables to increase, and first earnings from conversion of the company’s spodumene concentrate into lithium hydroxide. 
  • Capex increased +7% y/y to $800m with 54% being growth capex, 40% sustaining capex and 6% exploration. 

Company Description

Mineral Resources Ltd (MIN), based out of Perth is focused on contractor crushing, mining services, iron ore and lithium operations. The company is the world’s largest crushing contractor with crushing contracts with some of the world’s largest mining companies in iron ore, gold and lithium operations, as well as its own operating assets.

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

The Sinclair acquisition furthers HFs push into renewable diesel, adding a production facility and pre-treatment project

Business Strategy & Outlook

After the acquisition of Sinclair Oil, HollyFrontier, now HF Sinclair, is a fully integrated independent company composed of refining, marketing, renewables, specialty lubricants, and midstream businesses. Its refining footprint has grown to seven refineries totaling 678 mbd in total capacity, including the recently acquired Puget Sound refinery. The latter deal extends the company’s footprint to the West Coast, beyond its historical midcontinent and Rockies roots and into a more difficult refining market with less competitive advantages. However, the foothold in the West Coast should help with the growing renewable diesel business given the region’s growing biofuel mandates. The Sinclair acquisition furthers HF’s push into renewable diesel, adding a production facility and pre-treatment project. Combined with HF’s existing projects (two RD units and a pre-treatment unit), it expects to produce 380 million gallons annually once complete in 2022. 

Adding Sinclair’s marketing group of over 300 distributors, 1,300 wholesale brand sites, and 2 billion gallons a year of branded sales adds a stable earnings stream HF previously lacked as a merchant refiner. In addition, it offers the ability to generate RINs whose high costs have put HF at a disadvantage in the recent past. HF had already begun to diversify its earnings when it acquired the Petro-Canada lubricants business, Red Giant Oil, and Sonneborn to diversify its earnings stream. It expects the segment to generate $250 million EBITDA annually while also serving as a platform for future growth. At the same time, HF’s MLP Holly Energy Partners acquired Sinclair’s midstream assets including 1,200 miles of pipelines, eight product terminals with 4.5 mmbbl of storage, and interests in three pipeline joint ventures. The incremental EBITDA of $70 million-$80 million will increase HEP’s annual EBITDA to about $450 million while opening up future organic and external transaction growth opportunities.

Financial Strengths

HF Sinclair’s debt increased amid the difficult market conditions and acquisitions in the last few years. However, with completion of the Sinclair acquisition, net debt was only 16% at the end of the third quarter, including Holly Energy Partners’ debt, among the lowest of its peer group. To fund the Puget Sound acquisition with cash, management suspended the dividend but reinstated it in the first quarter 2022, earlier than expected. The Sinclair acquisition was done with equity. By first-quarter 2023, management planned to have returned $1 billion to shareholders through dividends and repurchases, but did so by third-quarter 2022 given the strong market conditions. It has already authorized another $1 billion in repurchases as part of its guidance of an ongoing 50% payout ratio of adjusted net income through dividends and repurchases. Capital spending doubled in 2021 to $1.2 billion primarily driven by planned investments in renewable diesel, with the remainder earmarked for refining and lubricants. Spending should fall in 2022 as renewable diesel projects are completed but increase slightly in 2023. Management has set the minimum cash balance target at $500 million.

Bulls Say

  • HF Sinclair stands to benefit from continued discount of light and heavy mid continent crude. Also, its Navajo refinery is well positioned to capitalize on growing Permian production. 
  • The Sinclair acquisition adds refining assets complementary to HF’s legacy footprint while adding a marketing business that its portfolio lacked, improving competitiveness. 
  • Investments in renewable diesel should deliver free cash flow and high returns while offering diversification from petroleum, reducing carbon intensity, and generating valuable RINs.

Company Description

HF Sinclair is an integrated petroleum refiner that owns and operates seven refineries serving the Rockies, midcontinent, Southwest, and Pacific Northwest, with a total crude oil throughput capacity of 678,000 barrels per day. It is investing to produce 380 million gallons of renewable diesel annually. It holds a marketing business with over 300 distributors and 1,300 wholesale branded sites across 30 states. It also has a 47% ownership stake in Holly Energy Partners, which owns and operates petroleum product pipelines and terminals principally in the southwestern US.

(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

Phillips 66 holds its chemical assets in CPChem as a 5050 joint venture with Chevron

Business Strategy & Outlook

Phillips 66 remains the most diversified independent refiner with greater interests in marketing, chemical, and midstream assets than peers. While the performance of its refining segment will be the primary determinant of earnings in the near term, the midstream segment will increasingly be the value driver over time as Phillips 66 aims to grow its potential midcycle EBITDA by $3 billion to $13 billion by 2025. With an increased interest in DCP midstream, and planned buyout of the remaining public units, Phillips 66 increased its midstream NGL business size and scale which now stretches across the entire value chain from wellhead to market. With this larger platform, management plans to deliver $1.1 billion of its targeted midcycle EBITDA growth. Refining will remain a critical segment as performance is set to improve. Its midcontinent refineries are some of the firm’s best positioned, given their access to discount domestic and Canadian crudes. Its two Gulf Coast refineries benefit from pipelines that provide access to discount light and heavy crude, while the coastal location affords access to valuable export markets. Projects designed to increase utilization and capture rates and reduce costs are expected to improve the segment’s positioning and performance.

Total cost savings across the entire organization, including headcount reduction are expected to deliver $800 million by year-end 2023, plus a $200 million reduction in sustaining capital requirements. Phillips 66’s two California refineries and one East Coast refinery are the least competitive of its U.S. portfolio. As a result, it is converting its San Francisco area refinery to produce 800 million gallons of renewable fuels by 2024, which it expects to deliver $700 million of its EBITDA growth. Phillips 66 holds its chemical assets in CPChem as a 50/50 joint venture with Chevron. Production capacity is primarily concentrated in the United States (80%) and the Middle East, where CPChem can take advantage of low-cost feedstock like ethane. Future growth will come from projects in the Gulf Coast and Qatar toward the end of the decade, with little contribution from this segment toward the 2025 goals.

Financial Strengths

Management has been focused on reducing debt accumulated during 2020. At year-end 2021, it had largely succeeded in bringing debt back down to pre pandemic levels with the net debt/capital ratio falling to 29%, compared with 27% in 2019. It plans to maintain the ratio in the range of 25% to 30%.

With leverage targets achieved, management has revised its shareholder return targets along with its earnings growth guidance. It plans for $10 billion-$12 billion of shareholder distributions by year-end 2024. At its mid-cycle estimate of $10 billion in operating cash flow by 2025, it expects to direct at least 40% to shareholder returns. Capital spending will remain at $2 billion through 2024 but likely increase modestly thereafter given the growth in the business. At this level, management has suggested up to $7 billion could go toward shareholder returns at midcycle operating cash flow levels.

Bulls Say

  • Phillips 66 is expanding its midstream and chemical segments so that refining will eventually represent a minority of total earnings and help mitigate the risk of falling refined product demand.
  • Phillips 66 stands to benefit from higher crude oil prices, which could benefit the NGL fractionation operations in its midstream business.
  • With one of the highest distillates yields among its peers, Phillips 66 is well positioned for the long term, where the growth outlook for distillate is more favorable than gasoline.

Company Description

Phillips 66 is an independent refiner with 12 refineries that have a total crude throughput capacity of 2.0 million barrels per day, or mmb/d, after converting its 255 mb/d Alliance refinery to a terminal. The midstream segment comprises extensive transportation and NGL processing assets. It also includes its DCP Midstream joint venture, which holds 45 natural gas processing facilities, 11 NGL fractionation plants, and a natural gas pipeline system with 58,000 miles of pipeline. Its CPChem chemical joint venture operates facilities in the United States and the Middle East and primarily produces olefins and polyolefins.

(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

Viva is Australia’s second-largest vertically integrated refined transport fuel supplier, delivering over 14.5 billion litres of refined product annually

Business Strategy & Outlook

Viva, along with Ampol, BP and Mobil, is a rare breed of vertically integrated Australian refined fuel supplier. The Australian downstream petroleum industry runs from sourcing, transporting and storing crude oil, refining that crude into marketable products or directly sourcing imported refined product, and then transporting refined products for sale to retail and commercial customers. Refined products are mostly used in the transport sector, including commercial and private motoring, aviation, marine, and other transport demand. The Australian market equates to approximately 60 billion litres of product, with road use the largest segment at over 50%, followed by aviation at 14% and industry at 12%. Coronavirus notwithstanding, volumes in the Australian fuels market grow at close to rates in GDP, with solid increases in diesel and jet fuel consumption offsetting a slow decline in petrol.  There’s a comparatively steady Australian refined fuels demand growth of 1.5% per year.

Viva is Australia’s second-largest vertically integrated refined transport fuel supplier, delivering over 14.5 billion litres of refined product annually or approximately 24% of national requirement. Viva is vertically integrated because it refines, supplies and markets fuel to customers. Few companies refine fuel locally with much of Australia’s refining capacity shut in recent decades, unable to compete with Asian mega-refineries. There are only four refineries remaining including Viva’s Geelong in Victoria. Geelong converts imported and locally sourced crude oil into gasoline, diesel, jet fuel and lubricants. These are then distributed, along with directly imported products, into the retail channel via supply channels. The Geelong refinery is one of the most complex in the country due to its greater ability to produce higher value products. Against the sanguine outlook for the refined fuels industry, there are a number of concerns. These include the potential for heightened competition, driving lower margins given the entrance of new players. Further, investing in older and far smaller refineries than Asian mega-cousins is a potential money pit.

Financial Strengths

First-half net operating cash flow increased 173% to AUD 678 million, with strong cash generation across the segments though inclusive of favorable inventory drawdown. This supports future investment and dividend payments, with the balance sheet moving to an AUD 324 million net cash position at end-June 2022 versus AUD 95 million net debt at end-December 2021. Viva to retain a relatively ungeared balance sheet. Viva intends to buy Coles Express for AUD 300 million in the first half of 2023. The consideration will be funded entirely out of existing cash reserves and debt facilities. Viva is to retain a modestly leveraged balance sheet even after the acquisition, sub-20% gearing and maximum sub-0.5 net debt/EBITDA, assuming a 65% payout ratio. The strong status is despite returning AUD 680 million in aftertax Viva Energy REIT sale proceeds in full to shareholders in 2020 and making a AUD 100 million capital return in 2021. The solid free cash flows in the foreseeable future, growing to over AUD 350 million by 2025, which should comfortably support Viva’s target dividend payout ratio of between 50% and 70% of underlying distributable NPAT.

Bulls Say

  • Viva boasts significant refined fuel distribution, supplying around 24% of Australia’s national requirement; second only to Ampol.
  • Australia’s fuel demand continues to grow at low single digits as population growth and rising aviation use offset increasing vehicle fuel efficiency gains.
  • While not sufficient to warrant awarding an economic moat, Viva’s pipeline and terminal infrastructure furnish competitive advantages–notably the efficient scale with its jet fuel pipeline supplying Sydney Airport.

Company Description

Viva is Australia’s second-largest vertically integrated refined transport fuel supplier. Viva is the second-most-significant pipeline owner, and at approximately 1,155 locations, Viva supplies the third-largest number of retail sites in Australia behind Ampol at approximately 1,985 and BP at 1,400. Vitol bought Shell’s Australian downstream operations in 2014, and renamed them Viva Energy. Viva subsequently bought Shell’s Australian aviation operations and a 50% investment in Liberty Oil. In 2016, Viva sold (and leased back) a portfolio of its retail sites to Viva Energy REIT and listed Viva Energy REIT on the ASX. It has since sold its entire REIT stake for AUD 734 million.

(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

TC Energy’s Bruce Power business to be a critical area of investment going forward

Business Strategy & Outlook

TC Energy faces many of the same challenges as Canadian pipeline peer Enbridge but also offers important contrasts. Both firms offer a 5%-7% growth profile and a utility like 95%-98% of earnings that are highly regulated or contracted, with several years of project backlog, despite Enbridge largely focusing on oil assets, while TC’s focus is natural gas. However, 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 to energy transition, though TC Energy has made good progress here in 2022. 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. These taxes potentially increase costs for Canadian pipes compared with U.S. pipes but also make hydrogen a viable alternative to gas-powered electricity generation by 2030 in Canada, presenting an emerging threat. 

TC Energy recently introduced targets to reduce its Scope 1 and 2 intensity by 30% by 2030 and reach net zero by 2050, which is a start. 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. While the renewables business lacks an economic moat today, it is an important area of investment for TC Energy that it needs to pursue. The renewables investments can compete for capital across the rest of the portfolio, generating reasonable returns on capital, allowing the overall enterprise to adapt to the markets as they evolve. As a result, TC Energy’s Bruce Power business to be a critical area of investment going forward.

Financial Strengths

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 3-4 times. Still, the high degree of leverage is supported by the highly protected nature of its earnings stream. As capital spending declines over the next few years to around CAD 3.7 billion in 2026, TC Energy to currently reach the low 5s, not quite reaching its target. A planned asset sale program of CAD 5 billion-plus is now in place to achieve 4.75 times leverage ratio by 2024, but it is likely that more asset sales will be needed if the leverage ratio is to reach the high 4s. Lower capital spending would move this date forward materially. Beyond the high leverage, TC Energy is also unusual in that it will continue to rely on the capital markets to meet about 20% of its expected capital expenditures over the next few years or potentially asset sales, meaning that some projects on a regular basis will depend on the health of the capital markets. Midstream peers are largely transitioning to generating free cash flow after distributions or dividends, and in some cases, it considered the shift to be permanent. TC Energy has outlined plans to spend about CAD 9.6 billion in 2023, though another CAD 1 billion to allow for additional Coastal GasLink overruns. About CAD 1.5 billion-CAD 2 billion is maintenance spending on its pipelines, and 85% of this is recoverable due to being invested in the rate base. ESG-related opportunities such as using renewable power to power its own operations or seeking carbon capture efforts would be on top of this spending. TC’s dividend growth remains prized by its investors, and 3%-4% growth going forward is easily supportable under the firm’s 60/40 framework.

Bulls Say

  • TC Energy has strong growth opportunities in Mexican natural gas as well as liquefied natural gas. 
  • 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 U.S.

Company Description

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)

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

Genesis hedges its gas requirements by holding a 46% stake in New Zealand’s Kupe gas field

Business Strategy & Outlook

Genesis operates a mix of thermal (coal and gas) and hydro generation, with total annual production of approximately 7,000 GWh. The company’s hydro generation provides it with low-cost generation during times when there is sufficient rainfall and/or snowmelt. Conversely hydro generation can fall sharply when inflow to the firm’s lakes recedes because of insufficient rainfall. During such times, production from its thermal power plants can be ramped up to make up for the shortfall in hydro generation. Spot prices can increase dramatically during periods of low rainfall, reflecting the demand-supply mismatch caused because of lower nationwide energy output. Such times tend to favor Genesis as the excess generation is sold at higher prices. Consequently, Genesis’ profitability and margins can increase during periods of low rainfall and high electricity prices. 

Genesis hedges its gas requirements by holding a 46% stake in New Zealand’s Kupe gas field. Under the current contract, Genesis is obligated to purchase the entire natural gas output from Kupe. This provides the firm with a reliable supply of gas to power its thermal plants and also underpins Genesis’ dual-fuel offering to its customer base. Genesis is also entitled to its share of LPG and oil from Kupe. The oil is exported, while LPG is on-sold to its residential and commercial customers. Kupe introduces oil price risk, though hedging helps in the near term. The main concern is that Kupe earnings will end in 10-15 years, depending on the extent to which its life can be extended through new oil and gas discoveries. This is a risk to Genesis’ earnings, cash flow, and dividends over the long term. As transmission lines are upgraded and more renewable energy is developed, Genesis will likely close some of its aging thermal generation units in the medium term.

Financial Strengths

Genesis Energy’s financial leverage increased following recent acquisitions, however, one can be comfortable given expectations for solid earnings growth, long average debt maturity profile and the ongoing dividend reinvestment plan. As of June 2022, gearing (as measured by debt/capital) was 36%, down slightly on last year. Net debt/EBITDA (adjusted for equity credit on subordinated debt and excluding one-off costs) was 2.7 times in fiscal 2022, within management’s target of 2.4-3.0 times. There’s a forecasted unadjusted net debt/EBITDA, which is the better way to judge financial strength, of 2.5 times in the next few years, which is reasonable. Guidance is for capital expenditure of up to NZD 80 million in fiscal 2023. The elevated capital expenditure for a few years before falling back to typical levels of below NZD 70 million per year. Nonetheless, free cash flow should remain strong.

Bulls Say

  • Persistently high wholesale electricity prices are flowing through to customer tariffs, supporting earnings growth.
  • A mix of thermal and hydro generation assets allows Genesis Energy to take advantage of high electricity prices during periods of low rainfall and low hydro storage.
  • The Pole 3 cable, linking the South Island to the North Island, reduces price disparity between the two islands and reduces location cost risk for all generators.

Company Description

Genesis Energy is one of New Zealand’s leading producers of electricity, accounting for more than 15% of the country’s total generation. The firm enjoys a strong retail presence, with the highest retail market share, at over 25%. The company has a mix of renewable and thermal assets, with the latter accounting for about 55%-60% of the firm’s overall production. The company has a 46% interest in the Kupe oil and gas field.

(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

FirstEnergy To Look Externally for New CEO

Business Strategy & Outlook

FirstEnergy is moving past the scandal that linked the company with funds used in the former Ohio House speaker’s bribery scheme benefiting two nuclear plants FirstEnergy once owned as part of its former subsidiary, FirstEnergy Solutions. In 2021, FirstEnergy reached an agreement with the Department of Justice that required FirstEnergy to pay $230 million. The company recently entered into a RICO settlement for $37.5 million. An SEC investigation remains ongoing. Management has noted a loss is probable but can’t be reasonably estimated. One doesn’t expect the outcome to be material to the fair value estimate. The company also recently settled with intervening parties to resolve numerous open regulatory proceedings. Its three Ohio distribution utilities represent less than 20% of operating earnings. FirstEnergy’s underlying businesses are solid. The company’s regulated utilities are focused on accelerating investments that should result in solid earnings growth. The company’s $17 billion capital investment plan supports management’s 6% to 8% annual earnings growth target after incorporating moves to shore up the company’s balance sheet. 

The company raised $3.4 billion, including $2.4 billion from selling a minority stake in subsidiary FirstEnergy Transmission and $1 billion from new market equity issued last year. The company is looking to further monetize a minority interest in a transmission or distribution asset, with proceeds likely to be used to deleverage its balance sheet. The FirstEnergy’s transmission businesses have favorable federal regulatory frameworks providing consistent returns above the cost of capital. Due to accelerating investments in transmission, these businesses will compose nearly 40% of rate base by 2026. FirstEnergy is also accelerating its investment in states with constructive regulatory frameworks that are likely to produce consistent realized returns above their cost of capital. Given the recent bribery scandal, FirstEnergy didn’t increase its dividend in 2021, and one doesn’t expect an increase in 2022. As per forecast a dividend increase in 2023 and the company achieving the midpoint of its earnings guidance range.

Financial Strengths

Total debt/adjusted EBITDA was over 5 times in 2018 but should gradually fall. The total debt/capital to decline from 85% at 2017 year-end to about 65% by 2026, as management’s balance sheet initiatives slowly improve credit metrics. The company raised $3.4 billion of equity, including $2.4 billion from a minority sale in its FirstEnergy Transmission subsidiary and $1 billion from new market equity issued last year. This should meet near-term equity needs to support the company’s $17 billion capital investment plan. Management is looking to further monetize a minority interest in a transmission or distribution asset, with proceeds likely to be used to deleverage its balance sheet. FirstEnergy didn’t increase its dividend in 2021 and plans no increase in 2022. The dividend to increase in 2023, with annual dividend increases of 6% by 2026.

Bulls Say

  • FirstEnergy’s narrow-moat businesses support operating earnings and roughly $17 billion of investment growth opportunities. 
  • FirstEnergy is aggressively investing in electric transmission with most projects eligible to receive premium FERC-regulated returns. 
  • Management is moving past missteps, allowing it to focus on investing and earning fair returns at its regulated utilities.

Company Description

FirstEnergy is one of the largest investor-owned utilities in the United States with 10 regulated distribution companies across six mid-Atlantic and Midwestern states. FirstEnergy also owns and operates one of the nation’s largest electric transmission systems with 24,000 miles of lines.

(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

OGE Oklahoma Rate Settlement Approved, Supports Growth Plan

Business Strategy & Outlook

The fair value estimate for OGE Energy is $37 after Oklahoma regulators recently approved a $30 million annualized rate increase, in line with a settlement reached in June. One can reaffirm no-moat and stable moat trend ratings. One had assumed Oklahoma regulators would approve a rate increase in line with the settlement, supporting 6% average annual earnings-growth rate during the next four years. This is in line with management’s 5%-7% long-term earnings growth target. The $30 million increase is below OGE’s $163.5 million request primarily because regulators approved OGE’s current 9.5% allowed return on equity instead of OGE’s 10.2% request. The 9.5% allowed ROE is slightly below other utilities’ allowed ROE, but one can think it’s a positive that regulators did not cut it. One has incorporated the first-half earnings boost that OGE received from warmer-than-normal weather. The warm weather to boost third-quarter earnings also, likely resulting in 2022 EPS at the high end of management’s $1.87-$1.97 guidance range.

 The large weather reversal after a cooler-than-normal 2021 summer could lead to a more than 10% jump in earnings this year. However, normal weather in 2023 could lead to mostly flat earnings year over year. On a weather-normalized basis, one can assume earnings growth will depend on OGE’s execution of its $3.8 billion capital investment plan for 2022-25 and continued electricity demand growth.  The OGE has benefited from the recent rally in Energy Transfer’s limited partner units from $10 per unit in early July to $12 now. The OGE sells by the end of the year all of the 22.1 million units it held in late July. OGE’s deal to swap its Enable ownership stake for Energy Transfer units is turning out to be a win for OGE shareholders. Energy Transfer units are up about 40% since OGE closed the transaction in December 2021, resulting in about $300 million of pre tax proceeds, or about $1 per share after tax, above the initial deal value. 

Financial Strengths

Between 2022 and 2025, as per forecast, OGE will invest nearly $4 billion at its utility. The company should be able to finance these investments with cash flow from utility operations, proceeds from the sale of its Energy Transfer units, and roughly $600 million of additional debt. One cannot foresee any material equity issuances in the next five years. The company has maintained a conservative capital structure, and one doesn’t expect a sizable shift in that strategy based on its quick exit from Energy Transfer units and ability to issue securitized debt to cover its excess fuel costs related to Winter Storm Uri in February 2021. The OGE’s dividend growth slowed after losing the earnings and cash distributions from Enable following the Energy Transfer transaction. Cash distributions from Enable helped OGE average 10% annual dividend growth since forming Enable in 2013. However, a large drop in energy prices and the economic impact of COVID-19 led Enable to cut its distribution by 50% in 2020. Less cash flow from Enable required OGE’s board to slow dividend increases to 6.2% in 2019, 3.9% in 2020, and 2% in 2021. Without the Enable earnings the expected OGE’s payout ratio will climb above 80% for several years. The dividend increases will average 2% annually for the next few years until the payout ratio falls to within management’s 65%-70% target.

Bulls Say

  • OGE is making progress improving Oklahoma regulation so that it can execute its growth investment plan without creating a drag on its earned return on equity.
  • Although the dividend increases too slow to about 2% annually, investors still should benefit from growing earnings and minimal equity needs. 
  • The economy in OG&E’s service territory is healthy and annual customer growth exceeds 2%, higher than most electric utilities.

Company Description

OGE Energy is a holding company for Oklahoma Gas & Electric, a regulated utility offering electricity generation, transmission, and distribution to more than 800,000 customers in Oklahoma and western Arkansas. In December 2021, OGE closed a merger between Enable Midstream Partners and Energy Transfer. This resulted in OGE acquiring 95.4 million limited partner units of Energy Transfer in return for its 25.5% limited partner interest in Enable, a midstream services company it created in 2013.

(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

New Hope’s operational strategies at both assets have sought to expedite value creation

Business Strategy & Outlook

New Hope’s strategy seeks to create value for shareholders by remaining a pure-play coal miner and developing thermal coal assets at a time when major miners–including Rio Tinto and BHP–head for the exits. The strategy is entirely reliant on thermal coal demand remaining robust for decades. The purchase of a further 40% interest in the Bengalla coal mine in fiscal 2019 sees New Hope double down on thermal coal. While demand for coal has waned in Europe and North America, Asia will remain the relative bright spot for coal demand over the coming decades, according to the International Energy Agency. The IEA sees the possibility that coal demand in absolute tonnage terms could remain steady out to 2040 in Asia, as economic development supports demand. Nonetheless, the potential for greater action on climate change brings the distinct risk that demand could falter earlier.

On the operational front, the realization of value from New Hope’s assets, given thermal coals has an uncertain future. Bengalla has approval to produce up to 13.4 million run-of-mine, or ROM, metric tons annually, greater than the approximate 12.4 million ROM metric tons mined in fiscal 2020. Capital expenditures required to de-bottleneck the mine and expedite the mining of Bengalla’s reserves are currently being explored. Mining leases were approved in fiscal 2023 for New Acland Stage 3, but water licenses are required before the mine can operate. An approximate 9.2 million metric tons of ROM production is planned in Stage 3. While less successful at New Acland, New Hope’s operational strategies at both assets have sought to expedite value creation. Nonetheless, these actions need to be taken in context. With Bengalla and New Acland reserves supporting multi decade mine lives and with a further 40% stake in Bengalla taken in fiscal 2019, said operational developments work only at the margins to expedite value creation for New Hope’s shareholders. The firm acquired a 15% stake in the Malabar-Maxwell underground mine in fiscal 2022. The mine has probable reserves of 144 million tons and a mine life of greater than 25 years.

Financial Strengths

New Hope’s balance sheet remains well positioned. New Hope’s bias toward a conservative balance sheet as appropriate. The volatile nature of coal prices makes the use of significant debt problematic. The balance sheet currently sits in a net cash position of approximately AUD 182 million at the end of fiscal 2022.

Bulls Say

  • Asia’s growth will see demand for coal in the region remain steady for decades to come.
  • New Hope’s operating assets enjoy decent positioning on the global thermal coal cost curve.
  • The ramp-up of production at Bengalla toward 13.4 million ROM metric tons per year could provide better unit costs.

Company Description

New Hope Corporation is an Australian pure-play thermal coal miner. Its two operating assets–the 100%-owned New Acland coal mine and its 80% interest in the Bengalla coal mine–produce more than 12 million metric tons of saleable thermal coal annually. The vast majority of New Hope’s production is sold into seaborne thermal coal export markets. Reserves at New Acland and Bengalla are sufficient to support multi-decade mine lives. New Hope’s undeveloped coal resources are extensive and include exploration status coal resources in excess of 1 billion metric tons in Queensland’s Surat basin.

(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

Origin planning to significantly expand its installed renewable capacity

Business Strategy & Outlook

Origin Energy offers exposure to relatively defensive Australian energy retailing and highly volatile liquefied natural gas exports. As a producer of commodities, Origin is a price-taker and has few competitive advantages. Capital and efficient scale are potential barriers to competition, but they’re not strong enough to justify an economic moat. Origin’s domestic energy retailing business grew quickly during the past decade, but strong acquisition-driven growth is unlikely to recur, with earnings growth largely dependent on Australia Pacific LNG. Acquisitions of government-owned energy assets were previously a key growth driver, but all state-owned retailers are now privatized. Origin, Energy Australia, and AGL Energy collectively control 80% of the market, and the Australian market regulator is unlikely to allow further consolidation among the majors. Future growth depends on energy demand growth, which is likely to remain modest. The price-based competition is to remain intense despite recent partial reregulation of electricity prices. A lack of competitive advantages means that a little more than tit-for-tat swapping of customers among the majors, which will allow them to largely maintain their market shares. The small new market entrants struggle to achieve scale.

In contrast to the retail market, the electricity generation market offers some growth opportunities. Substantial new renewable energy projects still need to be built to meet government targets and offset closing of aging thermal power stations, with Origin planning to significantly expand its installed renewable capacity. Domestic energy retailing is Origin’s core business and the cash cow that funds growth projects. Its relatively low-risk attributes are in stark contrast to APLNG. Concerns relate to exposure to volatile oil prices (given the link to LNG contract pricing) and high debt levels at Origin and APLNG. The long-term outlook assumes that significant Asian energy demand growth more than offsets increased supply and supports higher prices, though the global LNG market will remain oversupplied for a few more years after large recent supply additions.

Financial Strengths

Origin is in sound financial health following the APLNG sell-down, which netted AUD 2 billion in proceeds. Net debt/EBITDA (including cash distributions from APLNG) was 1.9 times in June 2022, at the bottom of management’s target range of 2.0-3.0 times. Earnings from the energy retailing business are falling because of weak wholesale electricity prices but should recover from fiscal 2023. The net debt/EBITDA stable at a little over 2 times for the medium term, supported by strong oil and LNG prices and a conservative dividend policy.

Bulls Say

  • The Australia Pacific LNG project is the largest coal seam gas to LNG project in Australia and could significantly increase earnings if oil prices strengthen.
  • Origin’s energy retail business is the market leader and should benefit from cost-saving initiatives.
  • Origin’s cash flow base is diversified, and the company is less susceptible to the vagaries of the market than a non-integrated energy provider.

Company Description

Origin Energy is a major vertically integrated Australian energy utility. Its energy retailing business is the largest in Australia, with about 4 million customers and a 33% market share. Its portfolio of base-load, intermediate, and peaking electricity plants is one of the largest in the national electricity market, with a capacity of 6,000 megawatts. Origin also operates and owns 27.5% of Australia Pacific LNG, which owns large coal seam gas fields and LNG export facilities in Queensland.

(Source: Morningstar)

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