Tag: Energy

in line with our expectations and in the middle of the guidance range. Earnings are expected to fall again in fiscal 2022 as management has been flagging for some time. Guidance is for underlying NPAT of AUD 220 million to AUD 340 million, with the midpoint down 48% in 2021. AGL’s cheap coal supply underpins its competitive advantage.

Competitors with shorter dated coal supply contracts should start to be hurt by high coal prices in coming years, potentially forcing them out of the market and pushing electricity prices higher. EBITDA fell 21% to AUD 1.6 billion in fiscal 2021 on lower electricity prices and higher gas supply costs. Headwinds from low electricity prices continue into fiscal 2022, and management is focused on reducing operating costs and maintenance capital expenditure through efficiency initiatives.

EBITDA rose 16% to AUD 337 million on cost savings and higher retail gas prices. The retail business has made a few interesting acquisitions recently to expand its geographic footprint to the West Coast, widen its service offering to include telecommunications and solar installations, and benefit from economies of scale. This should generate good returns.

Company’s Future Outlook

It is estimated that NPAT bottoms in fiscal 2023 at AUD 231 million before recovering back to AUD 442 million by 2026. The stock materially undervalued on a long-term view. Based on the current share price, it is forecasted to have a PE ratio of about 10 by 2026. Far more important is the expected recovery in electricity prices, given AGL is a huge producer of electricity through its three coal-fired power stations. It is expected that AGL’s financial position is sound; though there is modest risk given, banks are making life difficult by trying to reduce lending to coal power stations.

Company Profile

AGL Energy Ltd (ASX: AGL) 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)

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.

With improving regulatory environments come significant investment opportunities, as seen with the company’s most recent $17.1 billion five-year plan. Ameren has its sights set on $23 billion of opportunities during the next decade, providing a long runway of growth for the company. Management is to be applauded for attaining constructive utility legislation in Missouri. Its patient yet persistent years-long efforts resulted in increased investment opportunities across the territory, a stark change from the past. Numerous trackers are in place for fuel adjustments, pension, and tax positions.

With an improved regulatory framework in Missouri, management is keeping its promise to invest in jurisdictions that support investment. Ameren is allocating $8.5 billion of its investment plan to Missouri. Projects will focus on renewable energy, upgrading aging and underperforming assets, and employing smart grids and connected grid services. Ameren has build-to-transfer agreements for 700 megawatts of wind generation in Missouri. The $1.2 billion investment complies with Missouri’s renewable energy standard. Ameren is also looking to install 100 MW of solar by 2027. Ameren will close roughly 3 gigawatts of coal generation by 2036 and expects to have no coal generation by 2045. Regulation for Ameren in Illinois is constructive. Allowed returns on equity are 580 basis points above the average 30-year U.S. Treasury yield. Ameren continues to advocate for the Illinois Downstate Clean Energy Affordability Act, which would improve allowed returns and extend performance ratemaking.

Ameren’s Future Outlook 

We assume Ameren will have $17.1 billion of capital expenditures between 2021 and 2025. We expect the company to issue debt in line with its current capital structure and refinance its debt as it comes due. Ameren’s dividend is up 10% from the year-ago period. We expect future dividend growth to be more in line with earnings growth. Ameren has tended to be at the lower end of its 55%-70% dividend payout target. We view Ameren’s current financial health as sound. The firm’s 56% debt/capitalization ratio is in line with its utility peers. Interest coverage is a healthy 6.0 times, and current debt/EBITDA is near 5.0.

Bulls Say’s 

• Ameren’s regulated utilities provide a stable source of earnings. The company’s large capital expenditure plan should drive above-average rate base and earnings growth for the next several years.
• Ameren’s regulatory relationships have improved significantly in Missouri.
• Ameren’s management team has proved to be bestin- class operators, having diligently worked to improve regulatory relationships and execute on substantial growth projects.

Company Profile 

Ameren owns rate-regulated generation, transmission, and distribution networks that deliver electricity and natural gas in Missouri and Illinois. It serves nearly 2.5 million electricity customers and roughly 1.0 million natural gas customers.

(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.

In North Carolina, Duke’s largest service territory, we view the regulatory framework as average and continue to expect Duke will receive support for its investments in the state. In early 2021, regulators approved Duke’s settlement agreement that resolves historical recovery of coal ash costs and provides clarity on future recovery.  Indiana remains constructive. Regulators approved a peer-average allowed return on equity. The subsidiary is allowed recovery for investments for renewable energy and recovery on and of investments for coal ash remediation, with a forward-looking test year. 

Management recently entered into an agreement to sell 19.9% of the entity at an attractive valuation. Duke’s $60 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 notes growth opportunities beyond its five-year forecast, noting expectations for $65 billion to $75 billion of capital expenditures helping to support 7% annual 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 up to 20 gig watts of renewable energy by 2030, depending on the outcome of its Carolina Integrated Resource Plan.

Financial Strength

Duke Energy Corp’s (NYSE: DUK) Increase in FVE to $99 per share after 2^nd quarter earnings. We expect $60 billion of capital investment over the next five years. The company has manageable long-term debt maturities. Plans to sell a minority interest in Duke Energy Indiana helps reduce equity needs to fund this plan.  Duke has ample cash liquidity and borrowing capacity available under its master revolving credit facility. We believe Duke’s dividend is well covered with its regulated utilities’ earnings. Our expectations for 3.5% average annual dividend growth will represent a 70% payout based on our 2025 earnings estimate. Duke’s liquidity position and cash flow generation should give investors confidence that it can maintain and grow its dividend.

Bull Says

• 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. We think management’s 5% to 7% earnings growth target from 2021 to 2025 is achievable. 

• The company operates in mostly constructive regulatory jurisdictions, which account for most of the company’s revenue. 

• Duke’s management team has focused on core regulated operations and growth investments.

Company Profile

Duke Energy Corp (NYSE: DUK) is one of the largest U.S. utilities, with regulated utilities in the Carolinas, Indiana, Florida, Ohio, and Kentucky that deliver electricity and gas to more than 7 million customers. Duke operates in three major segments: electric utilities and infrastructure; gas utilities and infrastructure; and commercial renewable.

 (Source: Morningstar)

General Advice Warning

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

The deal is a $500 million cash and stock (55% stock, 45% cash) purchase of 2,302 net royalty acres in the Midland basin from Swallowtail Royalties, a private mineral rights firm where its acreage deals are financed by Blackstone funds. The price on a per acre basis is at over $200,000 per acre, roughly 80% higher than historical pricing and 40% higher than its last significant deal activity in May 2020.

Despite the high per-acre price, Viper has advantages, as 65% of the acres are operated by Diamondback with a net royalty rate of 3.6%. The value of the deal is demonstrated by the fact that Viper was able to offer a clear long-term growth trajectory for its Diamondback acres, substantially reducing uncertainty around future cash flows, but it wasn’t able to do the same for its non-Diamondback acres. 

The Diamondback development plan is essentially minimal production today to 1,000 barrels of oil per day (bo/d) in 2022 to over 5000 bo/d by 2024. We expect this path to generate a solid amount of value for Viper. 

Company’s Future Outlook

 At first glance, it is expected some modest upside to our fair value estimate, while maintaining our narrow moat rating. The deal is expected to be completed by the early fourth quarter, and expected post-deal leverage will be about 2 times, which we consider reasonable. Based on Diamondback’s current development plan, average net oil production in 2022 is expected to be over 1000 bo/d and Production is expected to approach 5000 bo/d by 2024.

Company Profile

Viper Energy Partners (NASDAQ: VNOM) was formed by Diamondback Energy in 2014 to own mineral royalty interests in the Permian Basin. At the end of 2020, Viper owns 24,350 net royalty acres that produced 26,551 boe/d. Proved reserves are mostly oil, and at the end of 2019 stand at 99,392 mboe. Viper’s mineral and royalty interests give it significant exposure to perpetual ownership of high margin, primarily undeveloped assets with no capital requirements to generate its long-term free cash flow. Viper is a variable distribution partnership that is taxed like a corporation in the United States.

(Source: Morningstar)

General Advice Warning

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

The company remains on track to meet our full-year outlook, which includes an estimated $1 billion gross negative impact from winter storm Uri in mid-February, in line with management’s guidance. Our fair value estimate includes a $2 per share reduction to reflect storm losses partially offset by near-term cost-savings benefits and long-term benefits from changes in Texas energy markets that should favor NRG.

After closing the $3.625 billion Direct Energy deal in January and several moves to shrink its power generation fleet, NRG is on a path toward becoming primarily a retail energy services company rather than an independent power producer. It already ranks among the largest retail electricity and natural gas companies in the U.S. and plans to expand its customer base in areas outside its core Texas market. Although this strategic shift changes NRG’s fundamental value drivers, we still don’t think it can establish a long-term competitive advantage that would warrant an economic moat.

Management reaffirmed its $2.4 billion-$2.6 billion EBITDA guidance excluding storm impacts for 2021, in line with our estimate. Management has pulled back substantially on its debt reduction plan and now targets $255 million of debt reduction this year, down from its pre-storm plan to retire $1.05 billion of debt this year. share buybacks and dividend growth will become top capital allocation options in 2022 as NRG pushes back its timeline for achieving investmentgrade credit ratings.

Company Profile 

NRG Energy is one of the largest retail energy providers in the U.S., with 7 million customers, including its 2021 acquisition of Direct Energy. It also is one of the largest U.S. independent power producers, with 22 gigawatts of nuclear, coal, gas, and oil power generation capacity primarily in Texas. Since 2018, NRG has divested its 47% stake in NRG Yield, among other renewable energy and conventional generation investments. NRG exited Chapter 11 bankruptcy as a stand-alone entity in December 2003.

(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.

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

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

Company’s Future Outlook

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

Company Profile

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

(Source: Morningstar)

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.

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

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

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

Financial Strength

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

Bull Says

• TC Energy has strong growth opportunities in Mexican natural gas, as well as LNG.

• The company offers virtually identical growth prospects and a protected earnings profile to Enbridge but allows investors to bet more heavily on natural gas.

• The Canadian regulatory structure allows for greater recovery of costs due to project cancelations or producers failing compared with the United States.

Company Profile

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

 (Source: Morningstar)

General Advice Warning

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

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

Financial Strength

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

Bull Says

• As an early entrant into the Marcellus, Range has a big, blocky acreage position that allows for longer lateral drilling, decreasing capital costs per unit of production.

• Range’s capacity on the Mariner East 2 pipeline gives it access to international NGL markets, supporting realized prices.

• The firm enjoys peer-leading drilling and completion costs per thousand lateral feet.

Company Profile

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

 (Source: Morningstar)

General Advice Warning

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

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

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

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

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

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

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

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

(Source: Fact Set)

General Advice Warning

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

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

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

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

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

Company Profile

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

 (Source: Morningstar)

General Advice Warning

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