GNE - Genesis Energy

[Shareguy]

Craig's latest

Still number one pick. Outperform $3.38

In this report we explore the additive value of each gentailer's development pipeline through to 2050. We find the valuation exposure to demand growth averages c.22% across the sector (MCY 23%, MEL 15%, GNE 12%, CEN 10%, and MNW 47%), with key drivers being 1) the current state of each portfolio, or whereabouts in their respective investment cycle each participant is, and 2) their respective exposure to wind development, which in our view is the technology of choice for new grid-scale generation. We reiterate our view on long-term wholesale prices, detailing our preference for c.$80/MWh (real), as included in our valuations, versus some commentary calling for +$100/MWh. GNE and MCY, in our view, are both currently undervalued by the market, and our top picks. We think the phase out of GNE's thermal plant and covered fuel/carbon position is not fully recognised, particularly as it will be replaced with 'green' PPA's. Likewise with MCY, its premium retail position (post-TPW acquisition) backed by a rapidly expanding renewable energy portfolio and consented pipeline is yet to be fully valued.
We update our valuations to include only minor adjustments to underlying operations and re-calibrate our capital expenditure assumptions across the group. GNE remains our top pick, with MCY now placed second (upgraded from Neutral to Overweight, given our TP relative to current share price). We upgrade MEL, due to the room to move on mass market pricing we observe in the portfolio, with CEN now our fourth choice (prev. 2nd). We are Overweight on all of the big four gentailer's and retain a Neutral recommendation on MNW.
Macro headwinds continue to impact share price performance
A significant headwind facing the sector is the reduced attractiveness of the gentailer dividend yields compared to fixed income alternatives. Recent tightening in NZ's monetary cycle has led to spread contraction between gentailer yields and the NZ 10Y government bond yield (c.250 bps below historical levels on average). Term deposit (TD) rates have also soared since the RBNZ started to lift the OCR, with all major banks in NZ now offering a 1Y TD rate above 5% (+300 bps YTD). Although the present headwinds may cause a shift in assets from value stocks to fixed income, we expect the gentailer's will prove more resilient than in previous changes to bond yields (or other fixed income), dependant on your view of the economic cycle, and are likely to benefit from potential growth opportunities from electrification trends over the medium-term, whilst maintaining a defensive quality should a sharp economic decline unfold in CY2023.

Valuation exposure to demand growth averages c.22% for the sector (MCY 23%, MEL 15%, GNE 12%, CEN 10%, and MNW 47%), with a key driver of the level of exposure brought about by the current state of the portfolio, or whereabouts in their respective investment cycle each participant is (we assume post-2025 to allow for completion of assets currently under construction), and their respective exposure to wind development, which in our view will be the technology of choice for long-term grid scale generation.
GNE and MCY, in our view, are both currently undervalued by the market, and our top picks. We think the phase out of GNE's thermal plant and covered fuel/carbon position is not fully recognised, particularly as it will be replaced with 'green' PPA's. Likewise with MCY, its premium retail position (post-TPW acquisition) backed by a rapidly expanding renewable energy portfolio and consented pipeline is yet to be fully valued.
We favour a long-term price path averaging c.$80/MWh (real). We think long-term wholesale prices are more likely than not to reflect the efficiency gains in renewable energy cost curves relating to wind settling out at a Levelised Cost of Energy (LCOE) of c.$50-65/MWh, plus firming of $15-25/MWh. Our long-term price path flowing into valuations arrives at c.$80/MWh versus some commentary calling for $100-110/MWh.
Our updated yield analysis points to headwinds from the reduced attractiveness of the gentailer dividend yields compared to fixed income alternatives. However, we expect that gentailer's will prove more resilient than previous changes in bond yields (or other fixed income), and are likely to benefit from potential growth opportunities due to electrification trends over the medium-term, whilst maintaining a defensive quality should a sharp economic decline unfold in CY2023

[winner (n)]

At least some guru analyst has come out with something I've been harping on about for a while. This is where the talk of the 220/230 share price comes from

Guru from Craig's says ' A significant headwind facing the sector is the reduced attractiveness of the gentailer dividend yields compared to fixed income alternatives. Recent tightening in NZ's monetary cycle has led to spread contraction between gentailer yields and the NZ 10Y government bond yield (c.250 bps below historical levels on average'

Could say punters seduced by perceived higher yields but taking on increased risk in return

[Hectorplains]

At least some guru analyst has come out with something I've been harping on about for a while. This is where the talk of the 220/230 share price comes from

Guru from Craig's says ' A significant headwind facing the sector is the reduced attractiveness of the gentailer dividend yields compared to fixed income alternatives. Recent tightening in NZ's monetary cycle has led to spread contraction between gentailer yields and the NZ 10Y government bond yield (c.250 bps below historical levels on average'

Could say punters seduced by perceived higher yields but taking on increased risk in return

There's also the Onslow decision hanging like the Sword of Damocles...

[Basil]

At least some guru analyst has come out with something I've been harping on about for a while. This is where the talk of the 220/230 share price comes from

Guru from Craig's says ' A significant headwind facing the sector is the reduced attractiveness of the gentailer dividend yields compared to fixed income alternatives. Recent tightening in NZ's monetary cycle has led to spread contraction between gentailer yields and the NZ 10Y government bond yield (c.250 bps below historical levels on average'
Could say punters seduced by perceived higher yields but taking on increased risk in return

Brokers picking about 18cps in dividends and if they're imputed at 80% like they always have been that's ~ 23 cps gross and on a closing price of $2.58 that's 8.9% gross on a quasi "perpetual" bond.
10 year Govt stock at about 4.3% last time I looked so a 460 basis points premium.
Maybe investors are not silly and realise you'll get a lot more bang for your buck, (capital gain), on a perpetual quasi bond when interest rates come down in a recession than you will on 10 year Govt stock.  Markets are always forward looking and are anticipating the reduction in interest rates with the pending recession.

[Shareguy]

I see one of the brokers has chosen Genesis in their share pics for 2023. However the brokers did not do that well in 2022 with their pics. Hopefully this year will be better.

Thought this was interesting

https://www.stuff.co.nz/timaru-herald/news/130826835/tekapo-power-schemes-improvements-push-past-40m-mark

[Basil]

Interesting article for sure.  Pretty cool that whole Tekapo power system.
Tekapo open day sounds interesting for people into that sort of thing.
In the good old days before OSH got involved with the risks of rock falls we did the Doubtful sound cruise that included a bus trip down into the underground depth's of the Manopouri power station...that was pretty cool.  Now the numb-nuts at OSH say it's too risky and you might get squashed by a rock. so they exclude the power station visit from that trip.  Trip is so cool though even without the Manopouri power station visit https://www.viator.com/tours/Te-Anau/Doubtful-Sound-Wilderness-Day-Cruise-from-Manapouri/d22016-2264P28?tsem=true&mcid=42482&supci=708981324&supag=35857402966&supsc=aud-537214857358&supai=294113995139&supap=&supdv=c&supnt=d&suppm=www.learnitwise.com&pref=02&gclid=EAIaIQobChMItN3u8reb_AIVB4VmAh2oLwPxEAEYASABEgL9QPD_BwE

[Shareguy]

Thought this was interesting from a recent newsroom article.

Rio Tinto had belatedly realised in a world of rising carbon prices, where smelters around the world averaged 12-13 tonnes of CO2 for every tonne of aluminium produced, that renewably powered Tiwai's relatively-small two tonnes of CO2 was quite a selling point.

And meanwhile, aluminium prices have risen from a March 2020 low of US$1,480/tonne up to a peak of nearly $3,500/tonne earlier this year, before settling around $2,400 – providing more healthy returns on the company's Tiwai investment.

"Historically, US$2,400 might seem a bit elevated, but right now around 50 percent of smelters around the world are underwater, losing money, just with the cost pressures," Blenkiron says.


https://www.newsroom.co.nz/tiwai-pt-smelter-owner-looks-to-build-its-own-renewable-power-generation

[Hectorplains]

Thought this was interesting from a recent newsroom article.

Rio Tinto had belatedly realised in a world of rising carbon prices, where smelters around the world averaged 12-13 tonnes of CO2 for every tonne of aluminium produced, that renewably powered Tiwai's relatively-small two tonnes of CO2 was quite a selling point.

And meanwhile, aluminium prices have risen from a March 2020 low of US$1,480/tonne up to a peak of nearly $3,500/tonne earlier this year, before settling around $2,400 – providing more healthy returns on the company's Tiwai investment.

"Historically, US$2,400 might seem a bit elevated, but right now around 50 percent of smelters around the world are underwater, losing money, just with the cost pressures," Blenkiron says.


https://www.newsroom.co.nz/tiwai-pt-smelter-owner-looks-to-build-its-own-renewable-power-generation

Aluminum's all-time high was actually around $4,100/tonne in March in the aftermath of Russia's invasion of Ukraine.  It has been unnaturally volatile this year.   Most predictions seem to be that it has further to fall before it settles at around 2000/t. which is more inline with it's five year norm.  If that comes to pass and how that sits with Tiwai and Rio, who knows?  Will Rio be back with its corporate hand out... now that's a safer bet. 

[Basil]

Aluminum's all-time high was actually around $4,100/tonne in March in the aftermath of Russia's invasion of Ukraine.  It has been unnaturally volatile this year.   Most predictions seem to be that it has further to fall before it settles at around 2000/t. which is more inline with it's five year norm.  If that comes to pass and how that sits with Tiwai and Rio, who knows?  Will Rio be back with it's corporate hand out... now that's a safer bet. 

I got to thinking this morning that all this smooth talking by the new CEO of Tiwai point smells a lot like cheap talking public relations B.S. to this old hound's nose.  Does a leopard change its spots ?  At the end of the day I think we all know that if the price of Aluminum falls back below about $U.S.2,000 Rio Tinto will be back to its old tricks.   I'm happy to have quite a few in my portfolio but I'm disinclined to get too big in GNE.

[entrep]

Coming into an interesting zone

[xafalcon]

There's also the Onslow decision hanging like the Sword of Damocles...

I see Lake Onslow differently. I would expect the government will buy out the Huntly power station when Lake Onslow is running, in exchange for GNE keeping it available right through to the bitter end. And the purchase of Huntly will probably include an option to buy into the Lake Onslow project in some form

But with Labour now "trimming" their policies to avoid annoying voters before the election, the whole Lake Onslow project may get put on the backburner

[Basil]

From vague recollection the Lake Onslow project even if approved is about a 15 year timeframe away from completion which isn't all that much different from what Genesis are talking about with Huntly possibly running until about 2040, running another ~ 17 years.

[Plata]

I think the real concern with GNE at this point is what next after Kupe? O&G provides a fair bit of cash to support the dividend, they don't have too many years left to boost other income sources to supplement this shortfall. Adding more compression wells can help to an extent but ultimately that just depletes it faster.

[Hectorplains]

I see Lake Onslow differently. I would expect the government will buy out the Huntly power station when Lake Onslow is running, in exchange for GNE keeping it available right through to the bitter end. And the purchase of Huntly will probably include an option to buy into the Lake Onslow project in some form

But with Labour now "trimming" their policies to avoid annoying voters before the election, the whole Lake Onslow project may get put on the backburner

Onslow's purpose is for New Zealand to be on 100 percent renewable energy.  I can't see any flavour of Government pouring billions into Onslow AND then buying out Huntly to have as a backstop.  Onslow seeks to solve the problem of storage lakes dry years and the irregular supply of renewable energy sources such as wind, and therefore mitigates any need for Huntly.  I do agree that this is likely to take a back seat until after the election, and neither National nor Act have shown any enthusiasm for a back to future, modern time 'Think Big' project. 

[Hectorplains]

From vague recollection the Lake Onslow project even if approved is about a 15 year timeframe away from completion which isn't all that much different from what Genesis are talking about with Huntly possibly running until about 2040, running another ~ 17 years.

The estimation is a four to five years build, and then two years to fill the reservoir - so more like 7 years.  Yes, it may be wise to double that and add one more, if you look at how so many big projects run wildly overtime, Transmission Gully anyone. However; the intent is for long before 2040.

Carbon emissions aside, you also have to look at the cost of running Huntly.  When all four of the Rankine units are running they burn through an impressive 10,000 tonnes of coal a day.  While Genesis is fortunate to have a stockpile... replenishing that with foreign coal, at todays prices, would be hugely expensive.