GNE - Genesis Energy

[Basil]

Yeah, it was a really HUGE call lowering the final divvy from 8.9 cps last year to 8.8 cps this year with their EBITDAF where it printed and inflation where it is.  Sends a very, very strong signal about their need to conserve cash for massive capex on solar going forward for the rest of this decade.  I note the dividend 5 years ago was 16.9 cps so its risen 4 % in the last 5 years and inflation according to RBNZ is up a total of 20.5% so a 16.5% decline in the real value of the annual dividends over that timeframe..

Maybe that's what we can "look forward" to in the next 5 years as well during a lengthy period of very high capex?

[Shareguy]

No question some investors will be disappointed with the dividend held the same as last year.


Dividends as percentage of FCF

FY23 56%
FY22 70%

Makes sense to conserve cash given the capex going forward. What's a couple of pips anyway. Dividend is still attractive and fully imputed with DRP option.

Good news that greenhouse gas emissions 64 percent lower than FY21.

Huntley operating on 95 percent gas in FY23. Large coal pile remains.

I'm on conference call so will report anything interesting.

[xafalcon]

Yeah, it was a really HUGE call lowering the final divvy from 8.9 cps last year to 8.8 cps this year with their EBITDAF where it printed and inflation where it is.  Sends a very, very strong signal about their need to conserve cash for massive capex on solar going forward for the rest of this decade.  I note the dividend 5 years ago was 16.9 cps so its risen 4 % in the last 5 years and inflation according to RBNZ is up a total of 20.5% so a 16.5% decline in the real value of the annual dividends over that timeframe..

Maybe that's what we can "look forward" to in the next 5 years as well during a lengthy period of very high capex?

Building solar turns capex into revenue in a 12 month period (or less). No lengthy infrastructure build timeline like other forms of electricity generation. So it's unlikely that high CAPEX for building solar will be a 5 year constraint on dividend in its own right.  So maybe something else is being factored in

I'm all for investing for future growth, but this throttling of dividend payment without a rising SP is OTT.

[Cod]

There is a reason that GNE was dropped from the MSCI index, and that reason was unlikely to be arbitrary and capricious.

[Basil]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/GNE/416938/401163.pdf

I am somewhat disappointed with the print and outlook and very disappointed with the dividend and what it signals about their ability to pay dividends going forward.

Firstly, excluding the remarkable hydrology which we all knew about already and looking at the result, I note operating expenses up a whopping 11% to $330m and forecast to grow substantially again in FY24.
The rundown in Kupe output is faster than I was expecting.  The circa $65m development well is just stay in business expenditure but in my view in analogous to a Beaver trying to stem the losses from a badly leaking dam and the ongoing fast rundown in Kupe concerns me in terms of their ability to maintain the dividend.

The outlook is obviously affected by the hopefully one off outage at Unit 5 so normalizing that its $450-$460m which I suppose is okay but doesn't suggest they have any ability to grow the dividend especially against a tidal wave of future capex with solar which i note is forecast to cost ~ $1.5m per mw/hr to build and they have over 700mw/hr's under consideration...so we're talking over $1 Billion.  Not insurmountable by any means with the depreciation, depletion and amortization this year circa $255m, well up on last years $215.8m, see page 35.

Also noting eps was down 13% from 21.2 cps to 18.5 cps this year (page 35) and its hard to imagine it won't decline even more substantially again in FY24 with the outlook for EBITDAF being circa $100m lower.

Talking about the dividend, its a very, very big call to reduce the final divvy from 8.9 cps last year to 8.8 cps this year, (notwithstanding the imputation difference) keeping the annual divvy at 17.6 cps.  To my mind this sends a very powerful signal that they are focused on investing in capex to replace generation capacity / energy capacity they will lose as Kupe runs down fairly quickly over the next 7-10 years.

The main reason I invest in GNE is as a dividend stock so some questions present.
1. Can they continue to fully impute future dividends given dividends and eps are very, very close ?  Maybe.
2. Can they maintain the current dividend given significant solar capex in future years and a further decline in likely eps this year ?  Perhaps, but possibly not. 
3. Can they grow dividends in the future in line with inflation....I think that's extremely unlikely.

The above got me thinking about a review of how their dividends have grown in the last 5 years.  Leaving aside the difference in imputation rates because that's too hard to call going forward.
I note in 2018 they paid 16.9 cps and this has very gradually risen to 17.6 cps in 2022 and stayed the same in 2023.  So, in five years the dividend has grown a "whopping" 4%.  Comparing this to the RBNZ inflation calculator over that timeframe inflation has been 20.5% in total so in real inflation adjusted terms the dividends have declined 16.5% in value.  Hmmm  When this listed in 2014, one of the foundational principles was that they were going to grow dividends in line with inflation.  I think they have failed so miserably they have decided they no longer want to even try.

As I see it, the prospect of this income erosion happening again, (dividends declining in real terms quite materially) in the next 5 years as they embark on a major solar build program is very high so although the current yield is okay, it's at the lowest margin to the 10 year risk free rate in many years and in real terms I think the value of future dividends is highly likely to decline materially.  So, is this a stock I want to be invested in long term anymore?

Disappointingly there is no news advancing the biomass trail I could see in terms of extending the Rankine units useful life.

With the imminent exit from the MSCI small companies index at the end of this month...what is the catalyst for this to go higher in the next week ?  I can't see anything whereas on the other hand as analysts digest the outlook for GNE and the index exclusion takes effect in the short term at least, I expect further share price weakness.

Disc: I reduced my stake this morning.  If the price is right on the index exit, (I would need to see it no higher than high $2.30's) I might replace some or all those sold this morning.  I also note a LOT of woke stuff in the presentation about people and planet...

[LoungeLizard]

Looks like the market is a little underwhelmed with the result.

My two cents worth is that it is devilishly difficult to consistently pick winners in the current environment - if ever - and so a diverse/balanced portfolio is crucial to even out the highs and lows. So some exposure to the energy market is probably sensible, and for me Genesis is the pick of the bunch, the issues noted notwithstanding.

Normally when companies say that they are "investing for growth" and pay little or no dividends, then that is a red flag for me, but in GNE's case they do have to pivot towards renewable energy sources and that doesn't come cheap. Their investment in solar will eventually save money, so if dividends remain static for a time then that's broadly acceptable in my opinion.

That said, although I wouldn't go so far as to sell, I won't be adding to my modest holding in the near term either, unless the SP dips further.   

[Shareguy]

Craig's thought the result was good.  Analyst pointed out

New CEO only been in the roll for a few months...cautious

That dividend would of disappointed some, however final dividend of 8.8cps (8.9cps FY22), fully imputed (prev. 80% imputed)

The ceo said the board had decided to hold the divi steady in order to pay down debt while preserving capital for future investment.

Will be interesting once the latest research notes come out.  I'm picking that after the rebalance is over and interest rates start to recede that the share price will climb back up.  In the meantime the dividend's keep coming for a relatively safe stock.   

[Plata]

I think in the context of the wider NZX this was a good result and reasonable guidance.

[Onemootpoint]

The last few posts have all been very good and raised some valid points.

I don't think much has changed - the result was good enough and the div change makes no material difference to me but added up the difference for GNE can be utilised where it is needed elsewhere for the benefit of the company and it's shareholders.

The price is down somewhat in recent times and I mentioned earlier the yield is looking attractive. My thoughts for some time have been that when the share[rice drops to a rather arbitrary $2.40 I may consider a buy in. I may wait to check the effect of the fund exclusion may have on the share price. Worldwide market sentiment over the coming months may also cause the price to drop.

The further it drops the 'higher' the yield is on a cost basis percentage.

[winner (n)]

Basil mention that  the current yield is okay, it's at the lowest margin to the 10 year risk free rate in many years.

I've plotted the difference between the yield and the 10 year rate on chart below for you. I've used gross dividend and taken tax off both....so difference after tax.

I see the difference as a measure of risk .....a risk factor in holding GNE shares

For the first year or so post IPO investors seemed to demand a 5% risk premium. Then through to 2020 they seemed happy with a 4% risk premium. since then that risk premium has drifted down to about 3%. Since lising the average has been just under 4%

So have punters recently seen GNE as less risky' than previous ...or have they just been content on getting a 'decent' dividend without considering risk. Good question.

Reading the results announcements, commentaries and comments on this thread you'd have to think there is a lot more 'risk' now in how GNE is going to perform in the future. Does this mean the risk oremium should be higher than around the current 3%?

If so GNE is currently 'overpriced'. If the premium/difference reverted to say 4% then that indicates a share orice of about $2.20/$2.25.

The saving grace iof course if 10 year rate falls. If it fell to say 3% and risk premium stayed about the same GNE share price could go over $3.

Conclusion: I reckon GNE is currently 'overpriced' at $2.50.....but long term even if the dividends don't increase that much in next few year if interest rates fall (so they say bit I'm not certain they will) there is a buffer. Maybe the story is be happy with dividend and hope for gains from interest rate falls sometime in the future.

I still think pricing GNE on yields is a better approach than using other multiples. Dividend yield and all that it entails the driver of the GNE share price

Interesting to see what happens next month or two .....and the impact of this stupid index rebalancing

[Shareguy]

Craig's latest

Still number one power pick

GNE – The shares closed 3.5% lower yesterday, albeit after Genesis delivered record EBITDA of $524m for FY23 (CIPe $522m) on the back of a wet year where GNE was able to back away costly thermal electricity production (incl. emissions) and purchase electricity from a lower priced spot market for resale. The surprise in the result was the opex inflation +11% on the pcp to $330m which will no doubt become a focus point for new CEO Malcolm Johns. GNE declared a final dividend of 8.8cps leaving the total dividend flat on FY22 at 17.6cps despite the 25% yoy increase in cash flow. Cam Parker still expects small growth in the dividend going forward (at c1.5%pa) ... and maintains the overweight rating ... albeit his DCF driven TP falls 8% to NZ$3.05 reflecting the rise in interest rates.

[Basil]

"Cam Parker still expects small growth in the dividend going forward (at c1.5%pa)"
The mind boggles as to what he's basing this on?  It would only have cost GNE $2m to follow the historical long entrenched pattern of increasing the final dividend by a smidgeon, (usually 0.1 cps) each year.  That they chose not to do this in a year of remarkable, perhaps once in a lifetime hydrology, is truly significant.

So instead of reducing debt by (from memory $68m they could have reduced it by $66m instead...WOW that's a "big" difference... (cynicism intended)

But NO, despite operational costs increasing 11% and senior management and staff being happy to put up their hands for inflation rate increases of at least 7%, they wanted to send a message loud and clear that shareholders should NOT expect dividend growth while they are reinventing themselves with solar. 

It smacks of arrogance but to my mind sends a coded message that shareholders are the sacrificial lamb here and as long as they are benefiting people and the planet we should be happy with what we get.  Later yesterday I mused...what else do you really expect from a company controlled by this woke government?

To my mind it also signals that the race to replace generation and energy from Kupe and the Rankine units as they come towards their end of life in the long term is an extremely serious one and there are no guarantees whatsoever that solar outputs and returns from same will match the returns these aging assets currently confer.

I also noted the new CEO is engaging in a major rethink of their long term strategy with this to be announced in late November.  Its hard not to think that the new CEO will have a laser focus on trying to grow and dividend growth is not even on the radar at least in the medium term, in fact it could very well be the sacrificial lamb and the current level may be under threat.

All that said, I freely acknowledge we all have different objectives with investing.  Many younger investors will no doubt be delighted to accept the same or some reduction in dividends and see the company transform itself into one where renewable generation is to the forefront over the next decade or so.  Each to their own.

[LoungeLizard]

"Cam Parker still expects small growth in the dividend going forward (at c1.5%pa)"
The mind boggles as to what he's basing this on?  It would only have cost GNE $2m to follow the historical long entrenched pattern of increasing the final dividend by a smidgeon, (usually 0.1 cps) each year.  That they chose not to do this in a year of remarkable, perhaps once in a lifetime hydrology, is truly significant.

So instead of reducing debt by (from memory $68m they could have reduced it by $66m instead...WOW that's a "big" difference... (cynicism intended)

But NO, despite operational costs increasing 11% and senior management and staff being happy to put up their hands for inflation rate increases of at least 7%, they wanted to send a message loud and clear that shareholders should NOT expect dividend growth while they are reinventing themselves with solar. 

It smacks of arrogance but to my mind sends a coded message that shareholders are the sacrificial lamb here and as long as they are benefiting people and the planet we should be happy with what we get.  Later yesterday I mused...what else do you really expect from a company controlled by this woke government?

To my mind it also signals that the race to replace generation and energy from Kupe and the Rankine units as they come towards their end of life in the long term is an extremely serious one and there are no guarantees whatsoever that solar outputs and returns from same will match the returns these aging assets currently confer.

I also noted the new CEO is engaging in a major rethink of their long term strategy with this to be announced in late November.  Its hard not to think that the new CEO will have a laser focus on trying to grow and dividend growth is not even on the radar at least in the medium term, in fact it could very well be the sacrificial lamb and the current level may be under threat.

All that said, I freely acknowledge we all have different objectives with investing.  Many younger investors will no doubt be delighted to accept the same or some reduction in dividends and see the company transform itself into one where renewable generation is to the forefront over the next decade or so.  Each to their own.

Yes, that needs to be said - we all invest for different reasons and time-frames. Not a one-size-fits all. In the short term GNE may not appeal to some as divvy's go back in real terms. If one has a longer lens then it is acceptable that GNE has to future proof the business and it would be irresponsible (risky) to continue to pay increasing dividends when it's assets need replacing/modernising.

As a dabbler in SKY (yeah, I know) then I see that as a cautionary tale of a business which paid massive dividends for too long (I remember getting a 32c special dividend!) and didn't look up and see the digital asteroid about to hit it. Not that GNE is any real danger, but renewables will pay an increasing part of the future energy landscape and investing in them now, will pay dividends (literally) later. 

[Basil]

Yes, that needs to be said - we all invest for different reasons and time-frames. Not a one-size-fits all. In the short term GNE may not appeal to some as divvy's go back in real terms. If one has a longer lens then it is acceptable that GNE has to future proof the business and it would be irresponsible (risky) to continue to pay increasing dividends when it's assets need replacing/modernising.

As a dabbler in SKY (yeah, I know) then I see that as a cautionary tale of a business which paid massive dividends for too long (I remember getting a 32c special dividend!) and didn't look up and see the digital asteroid about to hit it. Not that GNE is any real danger, but renewables will pay an increasing part of the future energy landscape and investing in them now, will pay dividends (literally) later.

Well said my friend but the question in my mind is will the investment in renewables pay dividends in due course that are larger or smaller than those from the legacy assets?  For me that's the unknown $64,000 question.  That said, I do agree they can't simply do nothing.  I leave the feel good lower emissions stuff to others...nice feelings about generation being more environmentally friendly doesn't pay for the thousands of liters of diesel I burn in my boat every year, opps, is that a Freudian slip and does that make me a bad high emissions dog lol   

On another subject poking a bit of fun at myself I told myself this morning that I had been on the keyboard here too much this week and to take a break for today and the weekend.  That didn't work out to well did it lol  Oh well, there's always a chance for a fresh start tomorrow.

[winner (n)]

Shareprice down to 240 .....getting closer to 220/225