GNE - Genesis Energy

[LoungeLizard]

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

If it gets down to those levels then that's a buy in my book. Even at $2.40 it's very tempting but it looks as though it will fall further. The vultures are circling...

[LoungeLizard]

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.

Well, I've got a diesel campervan with a Greenpeace sticker on it, so we're all hypocrites mate!

[Shareguy]

Fbar out with latest.

Sell sell sell

GNE also surprised by holding the FY23 dividend flat to FY22, sending a signal it is likely to be more cautious going forward. Earnings cuts and dividend cuts has resulted in a -31cps reduction in our target price to NZ$2.65. With an uncertain near-term outlook and a strategy update pending, we drop our rating a notch to NEUTRAL from OUTPERFORM.

[Plata]

I think maintaining the dividend is going to hinge on how well they can stop OPEX inflation. A few years ago opex was going down. If they can get back to that then there should be enough FCF left after dividends to deal with the solar needs. Don't forget that most years around 40 million gets raised via DRP as well. At 50/50 split with FRV Solar that would be around 1 Lauriston solar farm per year. Regarding that solar farm, I'm impressed with the capacity factor they are expecting. Normally I thought NZ solar hung around 13% but they seem to reckon they will get 20%. Looking at the financials it doesn't look too bad, if we assume all of the solar output is used to replace thermal generation, based on recent years thermal gen cost of $96/MWh Lauriston should deliver around 7-8 million a year in generation cost savings. Probably looking at 7-9% return p/a on the asset cost. Nothing special, but necessary none the less.

[xafalcon]

I have reconsidered my thoughts on the dividend.

The increased imputation credits outweigh the lack of any slight ($0.001) increase in the final dividend. So rather than having a tax bill attributable to incomplete imputation (effectively decreasing my dividend), Genesis has already paid my tax bill so I get to keep all the dividend.  This is a better result than a typical $0.001 increase in the final dividend

Yes, I would have liked a bigger dividend to reflect the excellent year the company had. But the debt reduction will improve future earnings

[Basil]

Good points above.
I've spent most of the day digesting the annual report and brokers reports on GNE.
My thoughts in summary:
GNE to me is almost like a game of two halves, followed by a rematch with lower earnings after that.
The last 9 years since it listed in 2014 and next 9 look very different to me.
When this listed in 2014, the end of Kupe and the Rankines was far off into the future it could almost be overlooked.  9 years on the end of the effective level's of generation from these assets is a reality that's now brought into stark relief by GNE themselves stopping the dividend growth sending a very powerful signal about the future. 

Sure GNE will say they have a vital role to play in the economy transitioning into a sustainable future...but they would say that and have too.  The reality is there is enormous new solar and wind generation planned by GNE's peers (16,000 GW's in the pipeline of renewable generation from the industry) so GNE's solar is only a very small part of that and they only have a 60% interest in that JV.

Looking ahead to the next 9 years, we have Kupe running down right down into the very tail end of its useful life and so much new solar and wind generation in progress it appears the Rankine's output will be extremely limited around the same time as Kupe dramatically tails off.

Crucially, from my perspective as someone in the near term who is entering retirement, I am not convinced GNE can maintain its current dividend rate past the current decade.  Nor am I convinced they can maintain the current 100% imputation rate and expect a reversion to a lower level.  (The imputation account is empty)

The Rankine's appear set to play only a very, very limited baseload back up generation role in the 2030's.  Likewise, as noted above, Kupe will be seriously tailing off by the turn of this decade and I note their infill gas well this year only replaces approx one year of production capability.

Assuming the strategic review due to be enunciated in late November doesn't signal a major step up in capex and winding down of the dividend, (I am not convinced this is a very safe assumption), I agree with one brokers view that dividends are flat (at best) for the rest of this decade and then transition to a lower level thereafter.  One brokers view is a level of 16 cps is sustainable thereafter...I am not sure I agree it's that high.  I think it's safer to assume 14 cents.

I am not convinced at all that they will build sufficient renewable generation in time to give returns commensurate with the gradual wind-down of Kupe and the Rankine units.

Using a discount dividend valuation model fair value to me if the 10-year Govt stock risk free rate was 4.0% is $2.45 + near term dividend of 8.8 cps = $2.54.
With the 10-year risk free rate currently situated at just north of 5% I see a spot value today of $2.28.
Assumptions underlying this are 17.6 cps dividends with 80% imputation through to FY30 and 14 cps thereafter with 80% imputation.
8.5% required rate of return on dividends in the long term with normalised risk-free rate, currently 9.5% gross.
Elephant in the room is will the new CEO embark upon such new capex as to threaten the sustainability of the dividend in the near term ?

I note one broker has a DCF valuation of $2.20 which isn't far off my value but then goes on to use a blended average of various valuation methodologies including peer group comparisons which in my view may not be relevant due to the limited life of legacy assets.
Disc: Recently sold 90% of my shares.

[Shareguy]

As far as GNE goes I think a number of investors are concerned about the dividend cut. At the end of the day though it's fully imputed as against last year and is bugger all. What's a pip. It's the step change after 10 years and I understand that. Is it the new ceo wanting to be cautious as often is the case, or the start of dividend cuts to replace old ageing assets. It's human nature to be cynical I guess.

A payout ratio of 59 percent below their own target of 70-90 percent of free cash flow. Plus the DRP reduces cash payments by 22 percent.  A good balance sheet with FY24 with possible add back of unit 5 impact from insurance of $20m to $30m.

However is this the start of something much bigger. As you point out the rankines are coming to the end of their life.

My understanding is that resource consent expires in 2037. I note the interim ceo Tracey Hickman said in Feb 23 that there is a possibility to extend to 2040.

At the moment I see three major risks one is the smelter the other is Onslow and with the current outage how confident are we that the rest of the rankines are not going to have some sort of issue before replacement renewables are on line.

We also have increased costs up 11 percent this year ($31m) and set to rise ($45m) in 2024.These should level out I think. Carbon price out look who knows. They have a large pile of coal purchased at good prices that has not been utilised due to the rain.

As far as Kupe gos. We are going to need gas for some time. I see this as being very valuable. Who knows the field may have larger or smaller reserves.

Genesis have a solar 500MW target by 2026. Indicative costs are NZ $1.5m/MW. My understanding is that the new solar/wind generation will gradually replace the Rankins. Possible grid scale battery also.

I don't expect much is going to happen until the update in November. By then we will hopefully have some clarity on the smelter and a very good chance of a national government which will be the end of Onslow.

As far as the share price is concerned much has to do with bond yields and interest rates as investors have been attracted to the yield for a relatively safe majority government owned stock. Lately bond yields and interest rates have been going up. As soon as they start coming down the share price should head back up.

If the smelter does not sign up one would think that Genesis is going to have some very cheap hydro for some time. Certainly will be no need to burn coal. One thing for sure is they have a large retail base to feed.

This re balance will be over soon so will be interesting to see what affect that will have.

I have been a holder since it listed and have enjoyed a steady stream of new shares. Will continue to add on weakness as part of a balanced portfolio.

[Basil]

Good post Shareguy.  I think its FY27 for implementation of the 500 MW of solar but GNE's share is only 60%, 300 MW's.  Is this peak capacity and how much does it produce on average across the seasons taking into account the limited daylight hours ?  Keep in mind Rankine can potentially 24/7, 365 days a year so that's a LOT of generation to replace.  I don't know enough about average daily outputs from a 60% share of 500 mw's of peak capacity but by comparison Huntly has a peak output of over 1200 mw's and only a third of that is unit 5 so that's a lot of Rankine capacity to replace, about 800 mw's at peak load if they are all working.

Kupe's outputs will steadily tail off over the next decade....no way to materially change that outcome.  Eventually unless the Govt allow more exploration we will have to import LPG and Gas at hugely elevated prices to those currently prevailing.  I suppose some "rocket scientists" in the Green party will count that as a win.

No question GNE was great value when they listed at $1.55 and original IPO investors have done very well and enjoyed great yield over the years but legacy nonrenewable generation is basically half used up now as I see it and that must be factored into one's valuation thinking now, in my view.  Pretty sure they abandoned their formal 70-90% dividend payout ratio a while back and there's no formal new policy now.   Might review and refresh my memory on that tomorrow.

As you suggest, not long until the index exclusion this Thursday.  It will be a big test for the share price to see how local investors try and soak up international selling pressure as it exits the MSCI small company index.  Closed at a new multi-year low today and I very much doubt that's the end of this correction.  Might grab a few of the ones I sold back if it goes very close to my revised fair value of $2.28.

[xafalcon]

The reality is there is enormous new solar and wind generation planned by GNE's peers (16,000 GW's in the pipeline of renewable generation from the industry) so GNE's solar is only a very small part of that and they only have a 60% interest in that JV.

That's one mighty large intermittent generation pipeline, when we consider that current generation capacity is approximately 9GW

1800 times more generation than present???

What will it all be used for? And how will it be moved around the country without "thousandss of new pylons"?

And where are all the solar panels and wind turbines going to be located? Assuming half the capacity is solar, that's 16 billion solar panels covering 2.9 million hectares (zero gaps between panels)

[Basil]

Apologies for the typo, its 16,278 MW's in total of new solar, wind and geothermal under review (not GW's) and consideration / current development at various stages, by all industry participants according to a broker report.  They give a full breakdown by company, location and type of project including where in many cases...far too extensive to post here and any more info would be a breach of copyright.  Not all of this will pass the rigorous cost benefit analysis by these companies by any means especially with the much higher cost of capital and debt these days but I think a fair bit of it will over the next decade or so.

GNE's total share of that is only ~ 700 mw's and its JV stuff so they only have 60% of that, approx 420 mw's about 2.9% of the total that's under consideration / development across the country.  There's so much in the pipeline this underpins my thinking that the role of the Rankine units past this decade is extremely limited.  Factor in Kupe's role in the 2030's is also very limited, very late-stage field outputs and this underpins my thinking about a much lower dividend in the 2030's and beyond.

Glad you pointed this out because on looking at this again I gleaned some other important information.
Of the various forms of renewable energy under consideration / development its broken down into the following types.
Geothermal 607 mw's generating as estimated 5100 GW / hr's of output per annum (assuming this runs 24/7 365 days a year that's a conversion of 8.4
Solar 9027 mw's generating an estimated 15,763 GW / hr's of output, average output / peak capacity relative to Geothermal only 21%
Wind 6.644 mw's generating estimated 22,870 GW/hr's, average output relative to geothermal of 41%  (Makes sense, the wind can blow 24/7 at times).

Extending this to GNE's solar and what does 60% of 700 mw's of solar sort of replace in terms of baseload generation?
60% of 700 = 420 mw's of peak output x 21% average output = the same as 88 mw's of equivalent base load generation, albeit only generated intermittently.
Obviously, this isn't going to come anywhere near to replacing the earnings as the Rankines and Kupe tail off.  Happy with my workings today.

[Plata]

There is definitely risk to the dividend, but do wonder if 14 cps is a bit extreme. Even if you assume they issue another 250 million shares via DRP that still has dividend outgoings below where they are now. Hopefully opex does not continue to inflate so badly and they actually achieve all the efficiencies they are hoping for with this technology spend.

One thing to consider is the ~1900 GWh worth of coal inventory. This inventory + some other fuel is on books at $157.5 million (at cost or todays value, whatever is lower). They have said in the report that they do not foresee any more coal purchases, if this is true then this will be another source of cash flow in the coming years. I'm thinking they are going to run on gas a lot more going forward to realise the Kupe cash flows sooner.

We still have three rankines. Avg steam turbine plant retirement age in USA is ~50 years, some higher some lower. It is highly probable at least one rankine makes it well into 2030. I expect this decade will see continued declines in rankine utilisation, this may extend their operating life further especially if they avoid doing lots of heating/cooling cycles (associated with peaking operation).

[winner (n)]

NIWA says a very cold night ....chance of 0° or less high in most of country

Even Auckland / Northland mentioned .......and Southland only 'warmer' place over night.

No doubt grid under pressure ....again

[winner (n)]

Good posts there Basil

Seems a lot of what you say points to GNE being more 'risky' now than the last few years.

As I said earlier based on historic 'risk premiums' GNE currently has been over priced ...punters have been content with getting a perceived good yield.

If that 'risk premium' reverts to average then share price about $2.20 on cards.....and could go even lower if yield went back to IPO levels

Updated this chart for you


You cannot view this attachment.

[Basil]

Very interesting chart Winner, thanks for sharing.  Notable that the yield premium was much larger in the early years compared to now which doesn't make sense when you consider the average age of nonrenewable generation assets was a lot younger back then.

Plata, thanks for your views, appreciated.  I don't think extreme is the right adjective to describe my estimate of dividends next decade, too conservative maybe but I'd rather err on the side of conservatism given we're talking about forecasting dividends in the next decade.
There's no question in my mind that one or possibly two Rankine units will play a role as baseload backstop generation for some of the 2030's, and remaining tail end production from end-of-life Kupe output will help too but my view is these are very minor roles compared to their generation and production currently.  There's so much new generation in the pipeline from others, and Kupe is tailing off pretty quickly. 

I really don't think there's any magic wizardry the new CEO can weave. You can't make a silk purse out a sow's ear. The board either cuts dividends soon and makes an even more massive investment in solar and wind, (might be what they announce end of November as part of their long-term strategy review), or they cut about the turn of the decade to reflect substantially decreased outputs from legacy assets going forward.  My view is I am very confident of my thesis that the current dividend rate is not sustainable long term and that's central to forming my view of valuing GNE.

[Plata]

That is fair. I do question the relevance of other generation projects to GNE cutting the dividend given GNE has never had the most output yet has the most customers even after the trustpower acquisition to my knowledge. I think if the other operators thought output = customers we would not be seeing deals like contacts Tuahara 650 GWh contract being offered, lord knows GNE won't be paying the equivalent retail netback CEN could achieve.

IMO, the vast majority of output in progress right now is intermittent, and much of it is solar. It has been repeatedly demonstrated overseas that absent of reactive changes in demand or of non-intermittent supply, spot market volatility is greatly increased to the downside during times of high wind or during the middle hours of every single sunny day with enough solar (see "duck curve"). Pretty sure that some Haiwain and Californian grids have experienced negative spot prices regularly at midday, although those are extreme cases. IMO with so many customers vs GNE max output AND the high degree of adjustability (ramp up/wind down rankines, unit 5, 6), GNE is highly advantaged by this stampede of renewables. The most recent result was buoyed by significant spot market purchases at good rates due to excessive hydro output depressing prices. I expect a similar outcome once solar starts to make a meaningful % of day time power output. GNE either has to buy power from the spot market or other big players, or make it themselves with Huntley to meet the demands of its customers. Anything that increases the supply of power is an absolute good for GNE IMO, so long as it is predictable enough to give huntley time to spin up.

Despite this, I do agree that the dividend being cut is very much on the table in the medium-long term. I think the next couple of years will be the decider as to whether or not that happens. If OPEX inflates another 10/11% in FY25 it will probably be all over before they even get the chance. But my current position (in more ways than one) is that the dividend will not be getting cut any time soon.