Tag: Commodities

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Commodities Trading Ideas & Charts

Origin Energy Ltd signals to exit coal-fired power generation; Replacing the plant with a large-scale battery

Investment Thesis

  • Higher oil prices benefit ORG’s APLNG project (higher revenues).
  • Balance sheet position is being restored with management focused on getting the debt covenants back to an investment grade level.
  • Achieving milestones within the APLNG project.
  • On-going focus on operating cost and capital expenditure reduction.
  • Increasing dividend profile and with a restored balance sheet the Company can also consider other capital management initiatives. 
  • Rationalization of asset portfolio, including asset sales and the IPO of its conventional upstream business should help improve the balance sheet position.  

Key Risks

  • Exploration and production risks.
  • Lower energy prices, particularly oil prices (for its APLNG project). 
  • Structural change in energy markets & increased competition.  
  • Not meeting cost-out targets. 
  • Highly geared balance sheet, with the company not being able to reduce debt fast enough. 

1H22 Key Highlights

  • Underlying EBITDA declined -4.8% over pcp to $1,099m, as increased earnings from Australia Pacific LNG amid higher oil and gas prices were more than offset by expected lower earnings in Energy Markets reflecting lower retail tariffs (set in FY21 when wholesale electricity prices were at lows due to subdued economic activity and increased renewables penetration) and higher energy procurement costs. 
  • Underlying profit increased +18% over pcp to $268m, driven by strong commodity prices, however, the Company recorded statutory loss of $131m, reflecting the one-off impairment and net capital gains tax expense associated with the $2bn sale of its 10% interest in Australia Pacific LNG. 
  •  Operating cash flow was an outflow of $79m vs inflow of $669m in pcp, amid lower earnings from Energy markets, higher working capital primarily due to timing of LNG cargo delivery and oil hedging and LNG trading losses. FCF (including major growth projects of Octopus equity investment of $260m and Kraken licence implementation costs of $37m) was an outflow of $112m vs inflow of $594m in pcp. 
  • Adjusted net debt increased +10.6% over 2H21 to $5.133bn, driven by the consideration associated with the investment in Octopus and higher working capital associated with the payment for an LNG cargo partially offset by APLNG cash distributions. (5) The Board declared an unfranked interim dividend of 12.5cps, representing 66% of FCF (excluding major growth projects), with partial franking expected to be restored in FY23.

Sale of 10% interest in APLNG – expected to restore balance sheet flexibility

Management executed an agreement to sell 10% of APLNG for net proceeds of $2.12bn (ORG retains 27.5% of shareholding, existing two APLNG board seats and upstream operatorship), with sale expected to be completed in 3Q22 (first half of CY22) and proceeds used to restore balance sheet flexibility with post sale adjusted Net Debt/adjusted Underlying EBITDA and gearing ratio declining to lower end of the target ranges of 2-3x and 20-30% from current levels of 3.9x and 34%, respectively. It will also provide FY22 net interest saving of $45-65m

Coal-fired generation

Management has submitted notice to AEMO for the potential early retirement of Eraring Power Station in August 2025 (vs prior targeted closure in 2032) and plans to install a large-scale battery of up to 700 MW at the site.

Company Profile

Origin Energy (ORG) is an integrated energy company with operations in exploration, production, generation and the sale of energy to millions of households and businesses across Australia. The Company has extensive operations across Australia and New Zealand and pursuing opportunities in the fast-growing energy markets of Asia and South America. The Company has two main segments: (1) Energy Markets – retail sales of electricity, gas and other customer solutions; electricity generation; and wholesale trading of electricity and gas. (2) Integrated Gas – consists of upstream exploration, development and production; the segment also holds the 37.5% ownership in Asia Pacific LNG project (APLNG). 

  • Sale of 10% inte(Sourc                    (Source: Banyantree)

General Advice Warning

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

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Commodities Trading Ideas & Charts

EOG Resources scale and double premium drilling strategy support its narrow economic moat

Business Strategy and Outlook

EOG Resources is one of the largest independent oil exploration and production companies. It derives almost all of its production from shale fields in the U.S., with a small incremental contribution from Trinidad. The firm differentiates itself by attempting to identify prospective areas before most peers catch on, enabling it to secure leasehold at attractive rates (rather than overpaying for land after the market overheats). It has only one large-scale M&A deal under its belt, related to its 2016 entry to the Permian Basin. Nevertheless, the firm is also active in most other name-brand shale plays, including the Bakken and Eagle Ford. Additionally, the focus now includes the Powder River Basin (Wyoming) and a new natural gas play in southern Texas that the firm has christened “Dorado.”

The firm’s acreage contains over 10,000 potential drilling locations that management designates as “premium.” These are expected to generate internal rates of return of at least 30% (assuming $40/bbl WTI and $2.50/mcf natural gas). However, management is now prioritizing a sizable subset, 6,000-plus locations, designated “double premium.” These are expected to deliver twice the returns at the same commodity prices. Opportunities that don’t currently satisfy this criteria may be upgraded later, if the company can reduce the expected development cost or boost the likely flow rate of the well. During the past several years, EOG added more premium locations than it drilled, resulting in a net increase to its premium drilling opportunities, and the firm expects to do the same with its double premium inventory.

Financial Strength

Overall, EOG’s financial health is excellent compared with peers, giving it the ability to tolerate prolonged periods of weak commodity prices, if necessary. It has more cash than debt, generates substantial free cash under a wide range of commodity scenarios, and aims to retain a substantial cash cushion to enable it to take advantage of downcycles by repurchasing stock without unduly stressing the balance sheet at an inopportune time.The firm holds about $5.1 billion of debt, resulting in very low leverage ratios. At the end of the most recent reporting period, debt/capital was 19% and net debt/EBITDA was slightly negative. Furthermore, the firm also has a comfortable liquidity stockpile, with $5 billion cash and another $2 billion available on its undrawn revolver (though a portion of this will be used to fund the firm’s $600 million special dividend payable March).

Bulls Say’s

  • EOG is among the most technically proficient operators in the business. Initial production rates from its shale wells consistently exceed industry averages. 
  • EOG’s vast inventory of premium drilling locations provides a long runway of low-cost resources. 
  • EOG often adds new premium drilling opportunities to its queue via exploration or by using improved knowhow and technology to “upgrade” opportunities that did not previously qualify.

Company Profile 

EOG Resources is an oil and gas producer with acreage in several U.S. shale plays, including the Permian Basin, the Eagle Ford, and the Bakken. At the end of 2021, it reported net proved reserves of 3.7 billion barrels of oil equivalent. Net production averaged 829 thousand barrels of oil equivalent per day in 2021 at a ratio of 72% oil and natural gas liquids and 28% natural gas.

(Source: Morningstar)

General Advice Warning

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

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Commodities Trading Ideas & Charts

Woodside Petroleum delivered strong FY21 results

Investment Thesis

  • Since our Buy recommendation in our last report, WPL’s share price has appreciated 43.1% – We acknowledge our positive view on oil and gas prices across 2022, and the quality of WPL and BHP’s assets but recommend investors take profits and downgrade our recommendation as we yield on the side of caution, before we see how the WPL/BHP’s combined entity trades and its first year of audited financials.   
  • Quality assets (NWS, Pluto, Australia Oil, Browse, Wheatstone) with superior free cash flow breakeven price relative to peers. 
  • On-going focus on cost reduction and positioning of the business for a lower oil price environment.
  • Improving oil and gas prices, which should see earnings improve. 
  • Increasing LNG demand, with WPL well positioned to fulfill this. 
  • Solid balance sheet position.
  • Strong free cash flow generation.
  • Potential exploration success in Myanmar, Senegal, Gabon. However, we have not factored any success into our forecasts + valuation.
  • Whilst the change in CEO could result in some uncertainty around future strategy, it could also be an opportunity to refresh the strategy with a “fresh” set of eyes. The Board has reiterated that current growth plans will be retained. 

Key Risks 

  • Supply and demand imbalance in global oil/gas markets.
  • Lower oil / LNG prices.
  • Not meeting cost-out targets (e.g. reducing breakeven oil cash price).
  • Production disruptions.

FY21 Result Highlights

  • Operating revenue of $6,962m, up +93%, driven by annual sales volume 111.6MMboe at realised price of $60.30 per boe, up +86%.
  • NPAT of $1,983m, up +149%. Underlying NPAT of $1,620m, up +262%. Unit production cost of $5.30 per boe.
  • Operating cash flow of $3,792m, up +105%.
  • Free cash flow of $851m.
  • At FY21-end, WPL had cash on hand of $3,025m and liquidity of $6,125m. Net debt at year-end was $3,772m and gearing of 21.9% (at the lower end of targeted 15-35% gearing).

Company Profile 

Woodside Petroleum Ltd (WPL) explores for and produces natural gas, liquefied natural gas, crude oil, condensate, naptha and liquid petroleum gas. WPL owns producing assets in the North-West Shelf (NWS) project, Pluto LNG and Australian Oil. WPL is currently developing Browse, Sunrise, Wheatstone, Grassy Point and Kitimat LNG. WPL is currently undertaking exploration activities in Myanmar, Senegal, Morocco, Gabon, Ireland, NZ and Peru.

(Source: BanyanTree)

General Advice Warning

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

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Commodities Financial Markets

Santos reported strong FY21 results with underlying profit up by 230%

Investment Thesis:

  • Leveraged to the oil price.
  • High quality assets which offer a number of core assets within its portfolio (no single asset risk).  
  • On-going focus on cost reduction and positioning of the business for a lower oil price environment.
  • Strong balance sheet position. 
  • High quality management team who are able to operate assets and extract synergistic value from the recent merger with Oil Search.

Key Risks:

  • Supply and demand imbalance in global oil/gas markets.
  • Lower oil / LNG prices.
  • Not meeting cost-out targets (e.g. reducing breakeven oil cash price).
  • Production disruptions (not meeting GLNG ramp up targets).
  • Strategic investors sell down their stake or block any potential M&A activity.

Key highlights:

  • Management highlighted lower unit costs, our focus on safe, low-cost and efficient operations delivered a free cash flow breakeven of $21 per barrel in 2021. 
  • EBITDAX was up 48% to $2.8bn driven by higher oil prices and lower unit costs. Underlying profit was up 230% to a record $946m.
  • Production was up +3% to of 92.1mmboe. Sales volume of 107.1mmboe, down -3%
  • Product sales revenue of US$4.71bn, up +39%
  • Record free cash flow of US$1.5bn and underlying profit of US$946m, driven by higher oil and LNG prices vs pcp due to a recovery in global energy demand and supply constraints across the industry due to lower capital investment through the pandemic
  • Reported NPAT of US$658m includes losses on commodity hedging and costs associated with acquisitions and one-off tax adjustments and is significantly higher relative to the pcp due to impairments included in FY20
  • Reported NPAT of US$658m includes losses on commodity hedging and costs associated with acquisitions and one-off tax adjustments and is significantly higher relative to the pcp due to impairments included in FY20

Company Description: 

Santos Limited (STO) explores for and produces natural gas, liquefied natural gas, crude oil, condensate, naptha and liquid petroleum gas. STO conducts major onshore and offshore petroleum exploration and production activities in Australia, Papua New Guinea, Indonesia, Vietnam. The company also transports crude oil by pipeline.  

(Source: Banyantree)

General Advice Warning

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

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Commodities Trading Ideas & Charts

Santos reported strong FY21 results with underlying profit up by 230%

Investment Thesis:

  • Leveraged to the oil price.
  • High quality assets which offer a number of core assets within its portfolio (no single asset risk).  
  • On-going focus on cost reduction and positioning of the business for a lower oil price environment.
  • Strong balance sheet position. 
  • High quality management team who are able to operate assets and extract synergistic value from the recent merger with Oil Search.

Key Risks:

  • Supply and demand imbalance in global oil/gas markets.
  • Lower oil / LNG prices.
  • Not meeting cost-out targets (e.g. reducing breakeven oil cash price).
  • Production disruptions (not meeting GLNG ramp up targets).
  • Strategic investors sell down their stake or block any potential M&A activity.

Key highlights:

  • Management highlighted lower unit costs, our focus on safe, low-cost and efficient operations delivered a free cash flow breakeven of $21 per barrel in 2021. 
  • EBITDAX was up 48% to $2.8bn driven by higher oil prices and lower unit costs. Underlying profit was up 230% to a record $946m.
  • Production was up +3% to of 92.1mmboe. Sales volume of 107.1mmboe, down -3%
  • Product sales revenue of US$4.71bn, up +39%
  • Record free cash flow of US$1.5bn and underlying profit of US$946m, driven by higher oil and LNG prices vs pcp due to a recovery in global energy demand and supply constraints across the industry due to lower capital investment through the pandemic
  • Reported NPAT of US$658m includes losses on commodity hedging and costs associated with acquisitions and one-off tax adjustments and is significantly higher relative to the pcp due to impairments included in FY20
  • Reported NPAT of US$658m includes losses on commodity hedging and costs associated with acquisitions and one-off tax adjustments and is significantly higher relative to the pcp due to impairments included in FY20

Company Description: 

Santos Limited (STO) explores for and produces natural gas, liquefied natural gas, crude oil, condensate, naptha and liquid petroleum gas. STO conducts major onshore and offshore petroleum exploration and production activities in Australia, Papua New Guinea, Indonesia, Vietnam. The company also transports crude oil by pipeline.  

(Source: Banyantree)

General Advice Warning

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

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Commodities Trading Ideas & Charts

Northern Star Resources reported solid 1H22 results;Aims to become a 2Mozpa gold producer by FY26

85215903 - attractive businessman using mobile phone while having lunch

Investment Thesis

  • On track to achieve FY22 production and operational guidance.
  • Commodities price (Gold) surprises on the upside especially due to geopolitical tensions.
  • Leveraged to changes in theUSD.
  • Solid assets with reserve/resource. 
  • New acquisitions provide upside (resource and operational improvement). 
  • Strong management team with significant mining expertise.
  • Strong balance sheet.
  • Company has a good track record on shareholder return

Key Risk

  • Further deterioration in global macroeconomic conditions.
  • Deterioration in global gold supply & demand equation.
  • Deterioration in gold prices.
  • Production issues, delay or unscheduled mine shutdown.
  • Adverse movements in AUD/USD.

1H22 Results Key Highlights:  Relative to the pcp:

  • Revenue of A$1,807m was up +63%, mainly driven by higher gold volumes, with gold sales 289,786 ounces higher. Reported NPAT of A$261m, was up +43% (or Underlying NPAT of A$108m, excluding significant items of A$153m) was driven by higher production. 
  • Underlying EBITDA of A$699m, was up +47%, on a margin of 39%. Cost of sales were higher than the pcp due to increased activity with the inclusion of the Saracen Minerals Holdings’ merger assets in the current half (107% increase period on period), higher average cash costs per ounce (H1 2022: A$1,256/oz vs H1 2021: A$1,196/oz) and the increase in D&A unit costs (increase of A$291/solid oz), due to the required non-cash uplift to fair value of the merger assets, compared to the historic cash cost of those same assets. 
  • NST saw cash earnings of A$430m. 
  • NST retained a strong balance sheet with cash and bullion of A$588m; net cash of A$288m. 
  • The Board declared a fully franked interim dividend of 10cps, up +5%. 
  • NST remains on track with its key growth projects progressing as expected to become a 2Mozpa producer by FY26, including KCGM open pit development (Kalgoorlie) and Thunderbox mill expansion (Yandal). 
  • In 1H22, NST made net repayment of A$361m of corporate bank debt, completed its acquisition of Newmont’s power business for A$130m and made a A$170m investment in a Convertible Debenture with Osisko Mining Inc. NST also sold Kundana Assets realising A$402m (and contributing a pre-tax gain of A$242m).

Company Profile

Northern Star Resources Limited (Northern Star) is a gold production and exploration company with a Mineral Resource base of 10.2 million ounces and Ore Reserves of 3.5 million ounces, located in highly prospective regions of Western Australia and the Northern Territory. NST is the third largest gold producer in Australia. The Company also recently acquired a gold mine in Alaska. 

(Source: Banyantree)

General Advice Warning

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

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Commodities Trading Ideas & Charts

First-Half Earnings Evaporate for No-Moat Mineral Resources. Despite This, FVE Upped to AUD 47.30

Business Strategy and Outlook

Mineral Resources grew significantly following listing on the Australian Securities Exchange in 2006. Demand for crushing and screening services grew strongly with iron ore output from the major Western Australian iron ore miners. Cost inflation encouraged large mining companies to outsource capital-intensive, lower-returning processes. Mineral Resources also rapidly expanded its own iron ore mining business, though lacking the integrated rail and port infrastructure of major competitors and at a competitive disadvantage. More recent diversification into lithium production at Mt Marion and the Wodgina mine has sustained earnings momentum. 

The financial record to now is impressive and the balance sheet is unleveraged. Mineral Resources has diversified its earnings streams and improved financial disclosure. In fiscal 2010, the company was a mining service provider and minerals producer as now. But disclosure extended to just iron ore production tonnage, and segment earnings. Mining Services and Processing contributed 96% of group EBIT. Step forward to fiscal 2020 and Mineral Resources has materially improved its level of financial disclosure, and the greater depth of clients and number of project sites also reduces risk. We think the business model is demonstrably sustainable. The volume-linked crushing and screening business should be somewhat more resilient to commodity price weakness.

Mineral Resources’ mining services business builds, owns, and operates crushing and screening plants on behalf of mining customers. Despite contributing only 40% of group EBIT, Mining Services is core. Twelve 5 to 15 million tonne per year crushing and screening plants are owned and operated on 12 sites. Clients substantially include the largest mining companies and contract books have been renewed over time leading to volume growth. Power is supplied by mining companies and margins are comparatively stable. Bolstering growth in the core business centred on mining services around Australian bulk commodities, Mineral Resources will selectively own and develop its own mining operations, with the aim of subsequent sell-down while retaining core processing and screening rights.

First-Half Earnings Evaporate for No-Moat Mineral Resources. Despite This, FVE Upped to AUD 47.30

Group revenue fell 12% to AUD 1.4 billion reflecting a sharp 40% drop in realised iron ore price, only partially countered by improved lithium pricing and higher mining services volumes and revenue.Underlying first-half NPAT collapsed to a loss of AUD 36 million against a previous corresponding period, or pcp, profit of AUD 430 million. Despite this, Morningstar analyst increased its fair value to A$47.30 as they don’t think the drivers behind the first-half earnings miss affect the longer-term outlook, and time value of money is an ever present tailwind.

Financial Strength

Mineral Resources is in reasonable financial health. Albemarle’s acquisition of a 60% stake in Wodgina lithium instantly expunged net debt in first-half fiscal 2020, from a net debt position of AUD 872 million at end June 2019. But strong net cash outflows in first-half fiscal 2022, including high costs associated with COVID-19, see the net cash balance deteriorate to an AUD 583 million net debt position as of December 2021 . The current circumstance is unusual and a return to the normal territory is expected for Mineral Resources, which operated in a position of little to no net debt for at least the eight years to fiscal 2018; a sensible position for a company operating in the volatile mining services space. Mineral Resources had faced the key question of what it should do with its cash, with a shrinking pool of growth and investment opportunities in a lower iron ore price environment. A failed investment in Aquila Resources in 2014 attempted to leverage Mineral Resources into Aquila’s West Pilbara Iron Ore Project, and was symptomatic of where Mineral Resources found itself. Booming lithium markets directed the investment decision.

Bulls Say 

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

Company Profile

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

(Source: Morningstar)

General Advice Warning

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

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Commodities Trading Ideas & Charts

Onsemi’s Sales Growth Above That Of The Broader Semiconductor Industry

Business Strategy and Outlook

It is seen Onsemi is a power chipmaker aligning itself to the differentiated parts of its portfolio in order to accelerate growth and margin expansion. It is probable Onsemi to outpace the growth of its underlying markets over the next five years as it tailors its portfolio of transistors, analog chips, and sensors to pursue secular trends toward electrification and connectivity that allow it to sell into new sockets. Specifically, Onsemi is the top supplier of image sensors to automotive applications like advanced driver-assist systems, or ADAS, and its semiconductors enable power management and conversion in electric vehicles, or EVs, and renewable energy–all of which is likely to keep Onsemi’s sales growth above that of the broader semiconductor industry. 

It is viewed onsemi will be vulnerable to modest cyclicality in the short term, but think its portfolio realignment will lend itself to more durable returns through a cycle. The firm’s increased focus on sticky verticals, as well as its differentiated sensor and silicon carbide technologies, contribute to Analysts narrow economic moat rating. Onsemi’s bread and butter historically was in more commodity like discrete power chips, but it is probable for it to focus on higher-value applications in the automotive and industrial end markets going forward and in turn earn more consistent returns on invested capital. 

It is seen Onsemi will focus on expanding margins over the medium term. Management invested heavily in pruning and improving its manufacturing efficiency in 2018 and 2019, and it is alleged it see the fruits of these efforts after 2022 when Onsemi fully acquires its first 12-inch fab. It is also alleged the firm will focus its investments on the automotive and industrial markets–higher growth and higher margin than its legacy consumer and smartphone markets. It is seen management faces execution risk in hitting its lofty goal of 48%-50% adjusted gross margin, but expect both a focus on higher-margin verticals and an improved manufacturing footprint to get it to the high-40% range in the next five years–from a previous midcycle margin below 38%.

Financial Strength

It is probable Onsemi’s primary financial focus in the medium term will be generating free cash flow and paying down debt after hefty investments over the last five years. Onsemi took on more than $2 billion debt for its 2016 Fairchild acquisition, and also committed over $1 billion in capital expenditures between 2018 and 2019 to improve its manufacturing footprint (shuttering inefficient fabs and purchasing equipment for its new 12-inch fab). Management has a stated goal of holding off on new share repurchases until the firm meets its 2:1 net leverage goal (net debt/adjusted EBITDA). As of the end of fiscal 2021, Onsemi held $1.4 billion in cash compared with $3.1 billion in total debt, putting its year-end net leverage at 0.88 times. It is projected Onsemi to generate an average of $2 billion in free cash flow through 2026-even while committing roughly 10% of sales to capital expenditures-and seen the firm can use its extra cash to resume repurchases. If Onsemi were to come into a liquidity crunch, it has $1.3 billion available (as of end-fiscal 2021) under its $2 billion revolving credit facility.

Bulls Say’s

  • Onsemi’s image sensors are best of breed in the automotive market, with a leading market share in high-growth, mission-critical applications like ADAS. 
  • It is viewed Onsemi will continue to outgrow its underlying markets and the broader semiconductor industry by selling greater dollar content into applications like cars and servers, which also helps stave off its vulnerability to market cycles. 
  • Onsemi is focusing its portfolio on the automotive, industrial, and cloud markets, which is seen, will expand margins and create stickier customer relationships.

Company Profile 

Onsemi is a leading supplier of power and analog semiconductors, as well as sensors. Onsemi is the second-largest global supplier of discrete transistors like insulated gate bipolar transistors, or IGBTs, and metal oxide semiconductor field-effect transistors, or MOSFETs, and also has a significant integrated power chip business. Onsemi is also the largest supplier of image sensors to the automotive market, targeting autonomous driving applications. The firm is concentrated in and focused on the automotive, industrial, and communications markets, and is reducing its exposure to the consumer and computing markets.

(Source: MorningStar)

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

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Commodities Trading Ideas & Charts

Murphy Oil Sees Major Gulf Projects Nearing Fruition, Plans Long-Term Harvest

Business Strategy and Outlook

Murphy Oil repositioned itself as a pure-play exploration and production company in 2013, spinning off its retail gas and refinery businesses.The firm is a top-five producer in the Gulf of Mexico, and the region accounts for almost half of its production. Murphy has a number of expansion projects lined up there that should offset legacy declines and enable it to hold production flat in the next few years. There is regulatory risk, though: after entering office, U.S. President Joe Biden has pledged to halt offshore oil and gas permitting activity (to demonstrate his climate credentials). Murphy already holds valid leases for its upcoming projects and is ahead of schedule on permitting but will eventually require further approvals if it wants to continue its development plans. Thus far, the Biden administration has taken little action, leaving Murphy unencumbered. But we would not rule out a more comprehensive ban.

The firm has made considerable progress cutting costs and boosting productivity since the post-2014 downturn. However, while the firm still has over 1,400 drillable locations in inventory.When this portion is exhausted, well performance, and thus returns, could deteriorate. And in Canada, the firm is currently prioritizing the Tupper Montney gas play while natural gas prices in the region are more stable after a period of steep discounts caused by takeaway constraints that have now cleared.

Morningstar analysts have increased its fair value estimate for Murphy to $33 from $26, after taking a second look at Murphy’s fourth quarter operating and financial results. 

Financial Strength 

The COVID-19-related collapse in crude prices during 2020 impacted the balance sheets of most upstream oil firms, and Murphy saw its leverage ratios tick higher as well. But management has engineered a rapid recovery, aided by strengthening commodity prices. At the end of the last reporting period, debt/capital was 37% and net debt/EBITDA was 1.5 times. That’s about average for the peer group. However, the firm is generating substantial free cash, and management intends to prioritize further debt repayments.The firm currently holds about $2.5 billion of debt, and has roughly $2 billion in liquidity ($500 million cash and about $1.5 billion undrawn bank credit). The term structure of the firm’s debt is reasonably well spread out, and nothing is due before 2024. The firm should have no issues covering its obligations with cash from operations, unless oil prices fall significantly below our midcycle forecast ($60 Brent) for a significant period.

Bulls Say

  • The joint venture with Petrobras is accretive to Murphy’s production and generates cash flows that can be redeployed in the Eagle Ford and offshore. 
  • The Karnes County portion of Murphy’s Eagle Ford acreage offers economics that are as good as or better than any other U.S. shale. 
  • Murphy’s diversified portfolio gives it access to oil and natural gas markets in several regions, insulating it to a degree from commodity price fluctuations or regulatory risks.

Company Profile

Murphy Oil is an independent exploration and production company developing unconventional resources in the United States and Canada. At the end of 2021, the company reported net proved reserves of 699 million barrels of oil equivalent. Consolidated production averaged 167.4 thousand barrels of oil equivalent per day in 2021, at a ratio of 63% oil and natural gas liquids and 37% natural gas.

(Source: Morningstar)

General Advice Warning

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

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Commodities Trading Ideas & Charts

Marathon Petroleum’s Strong Performance Leads to Greater Shareholder Returns, Increased FVE

Business Strategy and Outlook

The combination of Marathon and Andeavor created the U.S.’ largest refiner with facilities in the Midcontinent, Gulf Coast, and West Coast. Through the combination, Marathon planned to leverage this geographically diverse footprint to optimize its crude supply from North America to reduce feedstock cost, while also improving its operating cost structure. It delivered $1.1 billion of a planned $1.4 billion in synergies by year-end 2019, but its focus shifted to capital and cost reductions in 2020 when the pandemic hit. These efforts proved successful with the company delivering over $1 billion in operating expense reductions. In the near term, its focus remains on delivering more cost and capital improvements.

Financial Strength

Cash flow has been sufficient to cover capital spending while allowing for share repurchases and dividend increases in recent years. Based on our current forecast, however, we expect operating cash flow to sufficiently cover capital spending and the dividend. Marathon received $17.2 billion in after-tax proceeds from sale of its Speedway segment in second-quarter 2021. As of the year 2021, it has retired $3.75 billion in debt and repurchased $4.5 billion shares. It plans to repurchase another $5.5 billion shares by year-end 2022 at the latest and repurchase another $5 billion of shares beyond then. 

The large amount of repurchases have reduced the dividend burden, and as such it is expected that  management to return to dividend growth at some point given the company’s strong cash flow. It’s possible management returns to its previous shareholder return target of 50% of discretionary free cash flow including dividend growth and share repurchases. Our fair value estimate to $79 from $68 per share after updating our near-term margin forecast with the latest market crack spreads and incorporating management’s guidance, and the latest financial results.

Bulls Say’s 

  • Marathon Petroleum’s high-complexity facilities in the midcontinent and Gulf Coast leave it well-positioned to capitalize on a variety of discount crude streams, endowing it with a feedstock cost advantage. 
  • Closure of lower-quality refineries and investment in renewable diesel leaves Marathon in a better competitive position in the long term. 
  • Current repurchase plans amount to 20% of the current market cap, with potentially more coming if market conditions remain strong.

Company Profile 

Marathon Petroleum is an independent refiner with 13 refineries in the midcontinent, West Coast, and Gulf Coast of the United States with total throughput capacity of 2.9 million barrels per day. The firm also owns and operates midstream assets primarily through its listed MLP, MPLX.

(Source: Morningstar)

General Advice Warning

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