Tag: Commodities

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Commodities Trading Ideas & Charts

Soaring Refiner Margin Launch No-Moat Ampols Q2 2022. FVE Increases to AUD 34.50

Business Strategy & Outlook:   

Ampol owns and operates a major refined petroleum product import terminal at Kurnell in Sydney and a refinery at Lytton in Brisbane. Annual refining capacity fell by half to 6.0 billion liters, about one third of company marketed volumes, when Kurnell closed. Kurnell refinery was shut in 2014 because of operational issues and unfavorable demand for the product mix. Refineries and finished product import terminals are integrated with pipelines, distribution, and marketing. The national service station network exceeds 2,000, including 350 jointly branded Ampol/Woolworths (ASX: WOW) sites. Strong growth in transport fuels reflects favorable market attributes. Australia’s relatively sparse rail network and low population density favor trucks for distribution of goods. Pandemics notwithstanding, volumes in the Australian liquid fuels market grow at close to growth rates in gross domestic product, with solid increases in diesel and jet fuel consumption offsetting a slow decline in petrol. 

Ampol’s extensive network and comprehensive product offerings provide some competitive advantage. A very efficient supply chain makes Ampol an effective competitor. Still don’t see this as sufficient to justify a moat rating other than none. The closure of refining sees Ampol’s business rest largely on fuel distribution. In this space, it wrestles with expert competition in BP, Shell, and Mobil. Potential long-term threats include substitution of diesel for alternative fuels such as liquid natural gas, or LNG, and electricity. In the case of LNG in particular, Ampol is likely to participate in any shift via its logistics network and filling stations. Ampol maintains a market-leading 35% share of all transport fuels sold. Ampol substantially rests on its competitive supply chain now that Kurnell has been converted into an import terminal. Competitive pressures in the refining segment meant Ampol could not earn its cost of capital on Kurnell. The highly profitable and fast-growing marketing segment can enjoy increased investment that was previously wasted in laggard refining. Ampol successfully completed an NZD 2.0 billion bid for New Zealand peer Z Energy in first-half 2022.

Financial Strengths:  

Ampol completed a NZD 2.0 billion or NZD 3.78 per share cash offer for Z Energy via scheme of arrangement in first-half 2022. Company viewed this as a sound move on its part given compelling value. Ampol funded the acquisition in accordance with its existing capital allocation framework, including an adjusted net debt/EBITDA target of 2.0-2.5 times. Ampol will have to sell down some New Zealand assets to meet NZ competition guidelines. This includes the Gull network. Z Energy had NZD 608 million net debt at end March 2021, net debt/EBITDA of 2.67 quite high versus Ampol’s AUD 724 million at end December 2021, but this in the context of a low growth company focused on yield. Ampol’s standalone leverage was conservative at 18.6% (ND/(ND+E)) and annualized net debt/EBITDA is just 0.8. Company expected Ampol’s post acquisition gearing to temporarily increase to around 35%, ignoring potential for an equity raise or asset sell down. While this is manageable and within Ampol’s target net debt/EBITDA range of 2.0-2.5, current strong cash flows courtesy of refiner margins will be more than welcome. The balance sheet is in reasonable shape to fund a minimum AUD 100 million investment in new energy and decarbonization projects.

Bulls Say: 

  • Ampol is well placed, with a leading market share in transport fuels. This position is backed by an extensive distribution network. 
  • Australia’s demand for transport fuels is growing at close to GDP rates. 
  • Closing the highest-cost Kurnell refining operations materially improved return on invested capital.

Company Description:  

Ampol (nee Caltex) is the largest and only Australian-listed petroleum refiner and distributor, with operations in all states and territories. It was a major international brand of Chevron’s until that 50% owner sold out in 2015. Caltex transitioned to Ampol branding due to Chevron terminating its license to use the Caltex brand in Australia. Ampol has operated for more than 100 years. It owns and operates a refinery at Lytton in Brisbane, but closed Sydney’s Kurnell refinery to focus on the more profitable distribution/retail segment. It successfully completed a NZD 2.0 billion bid for New Zealand peer Z Energy in first-half 2022. 

(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

OGE Energy completed its long transition to a fully regulated utility in 2021

Business Strategy & Outlook

OGE Energy completed its long transition to a fully regulated utility in 2021 when it divested its midstream energy business through a swap transaction with Energy Transfer. Typical utilities investors should be more comfortable with OGE now that it has no direct exposure to energy commodity markets. OGE’s elimination of its midstream energy exposure along with improving regulation at its core Oklahoma operations puts it on track to produce more stable, growing earnings in 2022 and beyond than it has in many years. OGE management has said it plans on selling the 95 million limited partner units of Energy Transfer worth some $950 million acquired as part of the deal for OGE’s Enable. OGE had formed Enable with two other firms in 2013, contributing all its interstate pipelines and field services business. The OGE will realize after-tax proceeds exceeding $500 million that it can use to fund its planned growth investments at the electric utility.

Improving rate regulation in Oklahoma is a key part of OGE’s growth plan. In 2020, subsidiary Oklahoma Gas & Electric proposed an $810 million grid modernization plan that includes a rate tracker cost recovery mechanism. A settlement established a partial rate tracker with the remainder of the investments recovered in a general rate case. The modified framework reduces regulatory lag and will improve cash flow available for dividends and growth. In 2019, the Oklahoma Corporation Commission approved a settlement for environmental upgrades at the Sooner coal-fired plant and natural gas conversions of coal units at the Muskogee coal plant. OG&E had been seeking approval for these investments for a decade. Exiting the midstream business will reduce earnings and will increase the payout ratio on OGE’s common dividend to over 85% by as per estimates. Even though the earnings grow 6% annually, the dividend likely will grow around 2% during the next four years until OGE’s payout ratio reaches the mid-70% range.

Financial Strengths

Between 2022 and 2025, the OGE will invest nearly $4 billion in 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 once it exits its Energy Transfer position and issues 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 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 return on equity. 
  • Although the expected 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 is again exceeding 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.

Categories
Commodities Trading Ideas & Charts

China is BHP’s largest customer, accounting for more than 65% of total sales in fiscal 2021

Business Strategy and Outlook 

BHP Group is the world’s largest publicly traded mining conglomerate and positioned at the centre of the China boom. The company correctly values a strong balance sheet to provide some stability through the inevitable cycles and derives some modest benefit from commodity and geographic diversification, relative to its mining peers. BHP produces a range of commodities and is a major producer of iron ore, copper, and metallurgical coal. Exposure to conventional oil and gas ended with the spinoff and subsequent merger with Woodside in 2022. The onshore U.S. shale assets were divested in 2018. Much of the company’s operations are in Australia, particularly the low-cost iron ore business. Many of BHP’s assets are located close to key Asian markets, particularly iron ore and metallurgical coal, which provides a modest freight cost advantage relative to peers. 

Commodity demand is tied to global economic growth, China in particular. China is BHP’s largest customer, accounting for more than 65% of total sales in fiscal 2021. With demand for most products likely to soften with the end of the China boom, and BHP’s fiscal 2021-22 earnings back near the fiscal 2011-12 peak, the outlook is for earnings to materially decline, with iron ore the likely key driver. The good times saw significant capital expenditure, notably on iron ore and onshore U.S. shale gas and oil. Overinvestment in the boom diluted returns to the point where long-term excess returns are unlikely. Structurally lower earnings with the demise of the China boom peaks means it is expected that midcycle returns on adjusted invested capital, after adding back the impairments and write-downs, to be close to the cost of capital. Ignoring the cumulative impairments and write-downs, returns to modestly excess the cost of capital by mid cycle.

Financial Strength

BHP is in a strong financial position. With ongoing debt repayment, modest near-term capital requirements and the fortuitous bounce in commodity prices since 2016, BHP’s financial position is strong. For the five years ended fiscal 2026, the net debt/EBITDA remains to be below 0.5 and EBIT/net interest to average more than 30. Net debt at end-June 2021 was about USD 4 billion, below BHP’s net debt target range of USD 12 billion to USD 17 billion. Given the limited capital expenditure requirements, with only modest commitments to new expenditure in the lower demand growth environment, BHP’s balance sheet remains strong with excess cash flow to be returned to shareholders. Share buybacks and special dividends are possible, depending on the level of commodity prices, given the relatively modest outlook for capital expenditure. The likelihood of special dividends and buybacks would decline if BHP chose to pursue acquisitions.

Bulls Say’s

  • BHP is a beneficiary of continued global economic growth and demand for the commodities it produces. 
  • The company’s cash flow base is diversified and is less susceptible to the vagaries of the market than single-commodity producers. 
  • BHP’s iron ore assets are industry-leading. The company remains well placed to continue low-cost production and increase output with minimal expenditure and an efficiency focus.

Company Profile 

BHP is a leading global diversified miner supplying iron ore, copper, oil, gas, and metallurgical. The merger of BHP Limited (now BHP Ltd.) and Billiton PLC (now BHP PLC) created the present-day BHP. Shareholders in each company have equivalent economic and voting rights in BHP as a whole and in 2022 voted to reunify the dual listed structure. Major assets include Pilbara iron ore, Queensland coking coal, Escondida copper and conventional petroleum assets, principally in Australia and the Gulf of Mexico. Onshore U.S. oil and gas assets were sold in 2018 and the remaining Petroleum assets are likely to be spun off and merged with Woodside.

(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 is 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

Constructive Regulatory Outcomes Power CMS Energy’s Growth

Business Strategy & Outlook:   

CMS Energy’s decade-long transformation into a high-quality regulated utility positions it for a long runway of growth. CMS Energy’s work with Michigan regulators and politicians has turned the state into one of the most constructive areas for utility investment. These constructive relationships will be critical as CMS pursues an aggressive clean energy growth plan. With regulatory and political backing, CMS Energy plans more than $14 billion of investment during the next five years. That investment plan could expand if the firm receives regulatory backing for new projects. Its goal to reach net-zero carbon emissions by 2040 is a key part of its growth plan, supporting 6%-8% annual earnings growth for many years. Michigan’s 2008 energy legislation and additional reforms in the state’s 2016 Energy Law transformed the state’s utility regulation. As a result of those changes, CMS Energy has achieved a series of constructive settlements and regulatory decisions. 

CMS has secured regulatory approval for almost all of its near-term capital investment as part of the state’s integrated resource plan framework. In June, regulators approved updates to CMS’ 20-year clean energy plan. If CMS can keep rate increases modest by controlling operating costs, the company expects it will continue to get regulatory support and could even add as much as $5 billion of investment on top of its current plan. CMS’ growth strategy focuses on investment in electric and gas distribution and renewable energy, which aligns with Michigan’s clean energy policies and is likely to earn regulatory support. CMS plans to retire its entire coal fleet by 2025, keeping it on track to cut carbon emissions 60% by 2025 and reach net-zero carbon emissions by 2040. Proceeds from its EnerBank sale in 2021 will help finance growth investment. CMS carries an unusually large amount of parent debt, which has helped boost consolidated returns on equity, but investors should consider the refinancing risk if credit markets tighten.

Financial Strengths:  

Although CMS has trimmed its balance sheet substantially, its 65% consolidated debt/capital ratio remains high primarily because of $4 billion of parent debt. Accordingly, the company’s EBITDA/interest coverage ratio is lower than peers, near 5 times. Low interest rates and easy access to capital have allowed management to maintain the current balance sheet leverage and support its investment-grade credit ratings with earnings growth. The company  expects CMS’ consolidated returns on equity to top 13% for the next few years, among the best in the industry due to this extra leverage. But with interest rates rising, management might be less eager to refinance parent-level debt, potentially leading to lower returns on equity in the future. CMS has taken advantage of favorable bond markets in recent years to reduce its refinancing risk and extend its debt maturities, including issuing three series of 60-year notes in 2018 and 2019. CMS now has $1.1 billion of parent notes due in 2078-79 at a weighted-average interest rate near 5.8%. CMS also has been able to issue 40- and 50-year debt at the utility subsidiary. Regulators thus far have not imputed CMS’ parent debt to the utilities, but that’s a risk that could lead to lower allowed returns, customer rates and earnings. Apart from financing the large Covert power plant acquisition in 2023, the management doesn’t expect CMS to issue large amounts of equity after pricing a $250 million forward sale at an average $51 per share in 2019 and issuing $230 million of preferred stock in 2021 at a 4.2% yield. The company  expects the $930 million after tax cash proceeds from the EnerBank sale will offset new equity needs through 2024. With constructive regulation, CMS will be able to use its operating cash flow to fund most of its investment plan during the next five years.

Bulls Say: 

  • Regulation in Michigan has improved since landmark reforms in 2008 and 2016. Support from policymakers and regulators is critical to realizing earnings and dividend growth. 
  • CMS’ back-to-basics strategy has focused on investment in regulated businesses, leading to a healthier balance sheet and more reliable cash flow. 
  • CMS’ board has more than doubled the dividend since 2011. The company expects 7% annual dividend increases going forward even if the payout ratio remains above management’s 60% target.

Company Description:  

CMS Energy is an energy holding company with three principal businesses. Its regulated utility, Consumers Energy, provides regulated natural gas service to 1.8 million customers and electric service to 1.9 million customers in Michigan. CMS Enterprises is engaged in wholesale power generation, including contracted renewable energy. CMS sold EnerBank in October 2021. 

(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

NextEra Well Positioned for Renewable Energy Growth

Business Strategy & Outlook:   

NextEra Energy’s high-quality regulated utility in Florida and fast-growing renewable energy business give investors the best of both worlds: a secure dividend and industry-leading renewable energy growth potential. NextEra’s regulated utility, Florida Power & Light, benefits from constructive regulation that offers high allowed returns, little regulatory lag, and low customer rates. Florida’s strong economy and population growth through 2026. The utility plans to invest $32 billion to $34 billion from 2022-25, supporting 9% rate base growth. Growth opportunities include continued solar generation build out, storm hardening investments, and transmission and distribution infrastructure. The recent Florida rate case outcome supports our view that FP&L enjoys industry-leading constructive regulation. The outcome allows for a target 10.6% allowed return on equity, one of the highest among its peer group, with a range of 9.7%-11.7%. The rate case outcome also supports hydrogen, electric vehicle programs and storm hardening.

The company’s highly contracted competitive energy business, NextEra Energy Resources, has proved to be a best-in-class renewable energy operator and developer. The company was an early adopter of wind generation, building a competitive advantage by securing some of the country’s most desirable locations and locking in 20-year contracts with price escalator clauses. NextEra’s current plans shift the focus to solar. Roughly half its planned renewable energy growth through 2026 will be solar, with the remaining a mix of wind and energy storage. Higher costs could threaten near-term renewable energy development, but high fossil fuel costs have helped maintain renewable energy’s relative economic advantage. Management’s continued execution on its NEER development program gives us confidence that NextEra will deliver on its 28 gigawatts to 37 GW development target range in 2022-25. Investments in green hydrogen, transmission, and water utilities present additional growth opportunities.

Financial Strengths:  

We forecast that NextEra will invest over $90 billion through 2026, requiring it to be a frequent debt issuer. We expect NextEra to continue to tap project financing, including tax equity, to build out its renewable energy fleet. The company has manageable long-term debt maturities, and we anticipate that it will be able to refinance its debt as it comes due and maintain its debt/capital ratio. We expect the firm to tap the equity markets in line with its current capital structure. We expect total debt/EBITDA to remain near 5.0 times. Even with its large capital expenditure program, NextEra maintains a strong balance sheet, particularly for an integrated electric utility, and an investment-grade credit rating. We expect debt/capital to average 60% through our 2026 forecast. Interest coverage should average over 5.5 times. NextEra has ample cash liquidity and borrowing capacity available under its master revolving credit facility. We believe NextEra’s dividend is well covered with its regulated utilities’ earnings. We forecast 9% average dividend increases through 2026 with the payout ratio remaining around 60%.

Bulls Say:

  • FP&L operates in one of the most constructive regulatory environments with numerous capital investment opportunities.
  • NEER has benefited from renewable energy federal tax credits, but state renewable portfolio standards, corporate purchases, and attractive economics are now driving investments in renewable energy.
  • Management’s long runway of capital investment opportunities support our industry-leading 9% annual earnings growth outlook from 2022-26.

Company Description:  

NextEra Energy’s regulated utility, Florida Power & Light, distributes power to more than 5 million customers in Florida. FP&L contributes more than 60% of the group’s operating earnings. The renewable energy segment generates and sells power throughout the United States and Canada. Consolidated generation capacity totals more than 50 gigawatts and includes natural gas, nuclear, wind, and solar assets.

(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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Favorable Energy Markets Lift Vistra’s Near-Term Outlook

Business Strategy & Outlook:   

Vistra Energy’s emergence from the Energy Future Holdings bankruptcy in 2016 has been a success for the most part. The company has produced solid returns through volatile commodity markets while shifting its business mix toward retail and clean energy. The only significant bump in the road has been winter storm Uri that hit Texas in February 2021, causing more than $2 billion of gross losses. As an independent power producer and retail energy supplier, Vistra has a much different risk profile than most utilities. Vistra is subject to the whims of the U.S. electricity and natural gas markets. Energy market volatility and excessive leverage led EFH into bankruptcy just seven years after several high-profile investors closed a $45 billion leveraged buyout, the largest ever at the time. Even Warren Buffett reportedly lost nearly $900 million in the deal. Vistra’s clean post-bankruptcy balance sheet allowed it to acquire Dynegy in 2018 for $2.27 billion, more than tripling the size of its generation fleet and introducing Vistra to power markets outside Texas, notably the Midwest and Northeast. The rock-bottom price Vistra paid and cost synergies have made the deal value-accretive.

 Vistra produces substantial free cash flow before growth, given minimal core investment needs. Management is expanding the retail energy business to hedge its wholesale generation market exposure and is investing in clean energy projects like utility-scale solar and batteries. We expect this strategy to continue as Vistra tries to dilute its fossil fuel exposure. Retail supply earnings could climb to one third of consolidated earnings on a normalized basis after Vistra’s recent acquisitions and continued customer growth. This could result in more stable cash flows, a durable dividend, and regular share buybacks if management executes its strategy. Vistra’s largest shareholders, notably Brookfield and Apollo, were creditors as Vistra went through bankruptcy. Both started exiting their positions in 2018 and 2019, and we expect that selling to continue.

Financial Strengths:  

After the setback from the Texas winter storm losses in February 2021, Vistra’s quest to earn investment-grade credit ratings and reach 2.5 net debt/EBITDA stalled. However, the company remains in a solid financial position with plenty of liquidity. Management has shifted its focus toward returning capital to shareholders through stock buybacks and dividends rather than achieving investment-grade credit ratings immediately. Vistra’s $2 billion preferred issuance in 2021 with an 8% dividend floor all but ensures it will take several more years to earn investment-grade ratings. We think Vistra generates enough cash flow to execute management’s five-year, $6 billion stock-repurchase plan and dedicate $300 million annually for the dividend. However, we consider this a base plan that could change if Vistra sees small acquisition opportunities or needs financial flexibility to handle a downturn. The board authorized a $2 billion share-repurchase plan in late 2021, replacing a largely unused $1.5 billion plan from 2020. We also expect Vistra to invest nearly $2 billion in clean energy projects during the next few years. The combination of stock buybacks and a $300 million annual allocation to the dividend means the dividend could top $1.00 per share by 2025, up from $0.50 when the board initiated the dividend in 2019 and surpassing management’s initial 6%-8% annual growth target. Vistra exited bankruptcy in 2016 with just $4.5 billion of medium-term debt. Consolidated debt grew to $11 billion after the 2018 Dynegy acquisition before Vistra began reducing its leverage.

Bulls Say: 

  • Vistra’s debt reduction in 2019-20 gives it financial flexibility to repurchase stock, raise the dividend, and invest in growth projects in 2022 and beyond. 
  • Despite a recent surge in gas prices, Vistra’s relatively new, efficient gas fleet allows it to earn higher margins than its peers with older, less-efficient power plants. 
  • The retail-wholesale integrated business model reduces risk and market transaction costs, allowing Vistra to be a low-cost provider, especially in its primary Texas market.

Company Description:  

Vistra Energy emerged from the Energy Future Holdings bankruptcy as a stand-alone entity in 2016. Vistra is one of the largest power producers and retail energy providers in the U.S. It owns and operates 38 gigawatts of nuclear, coal, and natural gas generation in its wholesale generation segment after acquiring Dynegy in 2018. Its retail electricity segment serves 4.3 million customers in 20 states. Vistra’s retail business serves almost one third of all Texas electricity consumers. 

 (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

Littelfuse is a differentiated supplier of electrical protection into cars and industrial applications.

Business Strategy & Outlook

Lithium Americas aims to become a low-cost pure-play lithium producer. The company has no current lithium sales volumes but is developing three resources that should eventually enter production, with the first project to enter production by the end of 2022. Cauchari-Olaroz and Pastos Grandes are brine resources located in northwestern Argentina. Thacker Pass is the company’s clay resource in the U.S. state of Nevada. As electric vehicle adoption increases, the maintained double-digit annual growth for lithium demand. Lithium Americas should benefit as there should be more than enough demand for company’s three resources to enter production and expand capacity over time.

At Cauchari-Olaroz, Lithium Americas owns 44.8% of the project, while Ganfeng, one of the world’s largest lithium producers, owns 46.7%. The remaining 8.5% stake is owned by JEMSE, an Argentina state-owned mining company. Once Cauchari-Olaroz enters production and begins ramping up volumes, the project should have a similar cost position as other Argentinean brines, such as the resources of narrow-moat Livent and Orocobre. The project plans to bring an initial 40,000 metric tons of capacity later this year, with plans for additional expansions. LAC owns 100% of the Pastos Grandes project. Located close to the Cauchari-Olaroz project in Argentina, Pastos Grandes is currently under development. The project aims to produce 24,000 metric tons per year. LAC also owns 100% of the Thacker Pass resource. The project faces legal opposition from environmental groups that could cause delays, however, the project will eventually enter production. Thacker Pass would be the first clay-based lithium resource to enter production globally. Currently, all lithium is produced from either brine (primarily in South America) or hard rock mining that produces spodumene (primarily in Australia) Thacker Pass plans on bringing on an initial 40,000 metric tons of capacity, with additional expansion plans.

Financial Strengths

Lithium Americas is in a solid financial position. As of March 31, Lithium Americas had $290 million in total debt and $492 million in cash on its balance sheet. While debt levels remain low, Lithium Americas will need to contribute nearly $67 million for its share of capital expenditures to finish construction of the Cauchari-Olaroz project. However, the company has sufficient cash to manage these payments. Lithium Americas can also access $75 million in undrawn cash from its loan and credit facilities. LAC has refinanced its construction facility into convertible long-term debt. With a conversion rate of $47.10 per share, which is slightly above the value estimate, the financing term as favorable for existing shareholders. As Cauchari-Olaroz enters production in 2022, the project should begin to generate positive cash flows in subsequent years, allowing the project to fund capacity expansions. LAC should also be able to use some of its share of profits to invest in the construction of the Thacker Pass project. Management is exploring bringing in a partner on the project and applied to secure low-cost debt financing from the U.S. Department of Energy for 50% to 60% of the Phase 1 capital expenditures. If the company decides to remain the sole owner of the project and secures low-cost debt, it could be funded through equity issuances. As LAC progresses on developing the Pastos Grandes project, the company will likely have to issue additional equity or debt, or find a partner, in order to fund construction. In February, LAC announced the company is considering a separation into two companies, with assets divided based on geography. One company would hold the Argentina-based Cauchari-Olaroz and Pastos Grandes assets. The other company would hold the U.S.-based Thacker Pass assets. 

Bulls Say

  • Through the ownership of three large lithium resources, Lithium Americas should be able to enter the lithium industry and become a major producer globally with one of the lowest-cost lithium carbonate resources and one of the largest rock-based resources globally. 
  • As a lithium pure play, Lithium Americas is well positioned to increase profits from EV growth through lithium batteries. 
  • Lithium prices will remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for Lithium Americas.

Company Description

Lithium Americas is developing three lithium production assets, two brine resources located in northwestern Argentina and a clay resource in Nevada, U.S. While the company has no current lithium production, the first Argentina resource, Cauchari-Olaroz, to enter production in late 2022. The Nevada project, Thacker Pass, to enter production in the middle of the 2020s and the second brine resource, Pastos Grandes, to enter production in the late-2020s. Lithium Americas plans for all three resources to be fully integrated, selling into the lithium chemical market. The company is also exploring separating into two companies, with assets divided by geography, an Argentina company and a U.S. company.

(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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Activists Sink AGL Energy’s Demerger

Business Strategy & Outlook:   

AGL is one of Australia’s largest integrated energy companies. We believe it has a narrow economic moat, underpinned by its low-cost generation fleet, concentrated markets, and cost-advantages from vertical integration. Earnings are dominated by energy generation (wholesale markets), with energy retailing about half the size. Strategy is heavily influenced by government energy policy, such as the renewable energy target. AGL has proposed a structural separation into two businesses; a multi-product energy retailer focusing on carbon neutrality and an electricity generator that will own AGL’s large fleet of coal fired power stations among other assets. It is expected to be completed in mid-2022. AGL’s consumer market division services over 4 million electricity and gas customers in the eastern and southern Australian states, representing roughly a third of available customers. Retail electricity consumption has barely increased since 2008, reflecting the maturity of the Australian retail energy market and declining electricity consumption from the grid. Despite deregulation and increased competition, the market is still dominated by AGL Energy, Origin Energy, and Energy Australia, which collectively control three fourths of the retail market.

AGL’s wholesale markets division generates, procures, and manages risk for the energy requirements of its retail business. The acquisition of Loy Yang A and Macquarie Generation means electricity production significantly outweighs consumption by its retail customers. Exposure to energy-price risks are mitigated by vertical integration, peaking generation plants and hedging. More than 85% of AGL’s electricity output is from coal-fired power stations. AGL Energy has the largest privately-owned generation portfolio in the National Electricity Market, or NEM

Financial Strengths:  

AGL Energy is in reasonable financial health though banks are increasingly reluctant to lend to coal power stations. From 1.4 times in 2020, we forecast net debt/EBITDA rises to 2.1 times in fiscal 2022. Funds from operations interest cover was comfortable at 12.8 times in fiscal 2021, comfortably above the 2.5 times covenant limit. AGL Energy aims to maintain an investment-grade credit rating. To bolster the balance sheet amid falling earnings and one-off demerger costs, the dividend reinvestment plan will be underwritten until mid-2022. Dividend payout ratio is 75% of EPS.

Bulls Say: 

  • As AGL Energy is a provider of an essential product, earnings should prove somewhat defensive.
  •  Its balance sheet is in relatively good shape, positioning it well to cope with industry headwinds. 
  • Longer term, its low-cost coal-fired electricity generation fleet is likely to benefit from rising wholesale electricity prices.

Company Description:  

AGL Energy is one of Australia’s largest retailers of electricity and gas. It services 3.7 million retail electricity and gas accounts in the eastern and southern Australian states, or about one third of the market. Profit is dominated by energy generation, underpinned by its low-cost coal-fired generation fleet. Founded in 1837, it is the oldest company on the ASX. Generation capacity comprises a portfolio of peaking, intermediate, and base-load electricity generation plants, with a combined capacity of 10,500 megawatts. 

(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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Initiating Coverage of Plug Power With No-Moat Rating

Business Strategy & Outlook

Plug Power seeks to be a leader in the green hydrogen economy. The company’s strategy is centered on its vertical integration approach to provide customers a complete hydrogen solution— from fuel cell technology to green hydrogen fuel. Green hydrogen as a fuel to decarbonize is in its infancy. Customers face numerous challenges with adopting hydrogen technology, including economics and lack of green hydrogen production and infrastructure. Within this context, Plug’s efforts to provide customers a one-stop-shop solution of technology and fuel is considered as an endeavor to lower the barriers for customer adoption. While this strategy brings greater capital intensity, it positions Plug as the only all-in-one provider within the industry. The ambition of Plug’s strategy stands out relative to peers who focus on simply providing fuel cell or electrolyzer solutions. 

Plug’s primary end market historically has been material handling (forklifts). The company recognized material handling offered the nearest route to market to prove hydrogen’s value case and established relationships with large companies such as Amazon and Walmart. While material handling comprises the bulk of sales today, the company’s long-term end market focus also includes on-road transport, stationary power, electrolyzers, and green hydrogen fuel. Plug has pursued a partnership approach to target many of its end markets and has several joint ventures with leading companies. These include Renault (light commercial vehicles), Acciona (green hydrogen production), SK (stationary power/electrolyzers), and Fortescue (electrolyzers). A potential partnership for the heavy-duty truck market is still pending, given this represents a sizable market opportunity. Plug has a global approach to its end markets, but the U.S. and Europe are its largest focus areas, particularly for establishing its green hydrogen network.

Financial Strengths

Plug Power’s financial strength has greatly improved in recent years following large equity capital increases. For much of Plug’s history the company’s cash and investments balance has been around $100 million, but stood at north of $4 billion as of Dec. 31, 2021. Current debt outstanding consists of $200 million of convertible notes maturing June 2025 and approximately $100 million under a term loan maturing October 2025. In addition, the company has approximately $200 million of financing obligations associated with sale leaseback financings. Plug Power’s strategic decision to produce green hydrogen greatly increases its future capital requirements. Based on the company’s long-term target of 1,000 tons per day of green hydrogen capacity, a capital requirement of over $4 billion is estimated based on the company’s approximate capital expenditure per ton guidance. While this represents a large use of capital, Plug is expected to raise debt against this business area given its nature. Plug’s operating cash flow is expected to inflect into positive territory around 2025, driven by continued revenue growth and an improvement in fuel margins as it in-sources hydrogen production.

Bulls Say

  • Plug’s partnerships with leading global companies provide validation of its differentiated strategy. 
  • By providing customers a bundled solution of technology and fuel Plug stands to capture a larger addressable market. 
  • Recent capital raises have dramatically improved the company’s financial strength; cash and investments totaled over $4 billion as of year-end 2021.

Company Description

Plug Power is building an end-to-end green hydrogen ecosystem – from production, storage and delivery to energy generation. The company plans to build and operate green hydrogen highways across North America and Europe. Plug will deliver its green hydrogen solutions directly to its customers and through joint venture partners into multiple end markets— including material handling, e-mobility, power generation, and industrial applications.

(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

Improving North Carolina Regulatory Environment Supports Clean Energy Transition

Business Strategy & Outlook

Duke Energy is one of the largest regulated utilities in the United States. Florida is Duke’s most constructive and attractive jurisdiction, with higher-than-average load growth and best-in-class regulation that allows for higher-than-average returns on equity, forward-looking rates, and automatic base-rate adjustments. The significant solar growth in the region and storm-hardening investments.

In North Carolina, Duke’s largest service territory, recent state legislation includes numerous provisions that improve the state’s regulatory ratemaking. The legislation allows multiyear rate plans up to three years, including increases for projected capital investments. Duke expects to file rate cases at both state subsidiaries later this year. Additionally, it allows for performance incentive mechanisms and usage-decoupled rates for residential customers, protecting utilities from underlying usage trends. The legislation also updates the state’s carbon-reduction targets, now aiming for a 70% reduction by 2030, and supports utilities’ efforts to play a critical role in the clean energy transition. Indiana remains constructive. Regulators approved a peer-average allowed return on equity. The subsidiary is allowed recovery for investments for renewable energy and future recovery on and of investments for coal ash remediation, with a forward-looking test year. The unit’s 20-year integrated resource plan calls for 7 gigawatts of renewables, 400 megawatts of energy storage, and 2.4 GW of natural gas generation. Duke’s $63 billion five-year capital investment plan is focused on clean energy, as the company works toward net-zero carbon emissions by 2050 and net-zero methane emissions by 2030. Management sees growth opportunities beyond its five-year forecast, with expectations for $70 billion-$75 billion of capital expenditures helping to support future rate base growth.

Management is transitioning Duke away from coal generation. The company, which has among the largest coal fleets in the industry, aims to reduce its coal fleet by up to 70% and install roughly 15 GW of renewable energy by 2030. The company plans to eliminate coal generation by 2035.

Financial Strengths

As per forecast $63 billion of capital investment over the next five years, which will require Duke to be a frequent debt issuer. The company has manageable long-term debt maturities. Duke will be able to refinance its debt as it comes due and maintain its debt/capital ratio by funding about half of its growth capital expenditures through debt issuance. The sale of a minority interest in Duke Energy Indiana helps reduce equity needs to fund this plan. The Duke’s total debt/EBITDA to remain around 5 times and its debt/capital ratio to remain in the mid-50s during the five-year forecast. Interest coverage should remain near 5 times. Duke has ample cash liquidity and borrowing capacity available under its master revolving credit facility. The Duke’s dividend is well covered with its regulated utilities’ earnings. There were always expected slower dividend growth for Duke. As per the expectations for 3.5% average annual dividend growth will represent a 64% payout based on 2026 earnings estimate. Duke’s liquidity position and cash flow generation should give investors’ confidence that it can maintain and increase its dividend.

Bulls Say

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

Company Description

Duke Energy is one of the largest U.S. utilities, with regulated utilities in the Carolinas, Indiana, Florida, Ohio, and Kentucky that deliver electricity to nearly 8 million customers. Its natural gas utilities serve more than 1.5 million customers. Duke operates in three major segments: electric utilities and infrastructure; gas utilities and infrastructure; and commercial renewables.

(Source: Morningstar)

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

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

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