GNE - Genesis Energy

[Plata]

Craig's did a similar exercise a while ago and concluded ...

The analysis suggests that the sensitivity of gentailer stocks to the 10-year government bond yield has lessened in recent times. Two potential reasons for this could be that investors feel bond yields have reached a level where they may start to plateau, or possibly that other factors such as positive sentiment toward electrification is providing a certain amount of buoyancy to the stocks, resulting in a level of dislocation from historical behaviours. It is possible that investors are concerned about a recessionary outlook, thus turning to utility stocks as a defensive strategy, with an expectation that once a recession takes hold bond yields would likely fall, hence making the gentailer yield more attractive

Craigs Back office, "hmm oh jeez guys why isn't our dividend model working that accurately anymore, ya reckon its the EVs? Ya reckon its forward bond yield expectations?", "na mate I reckon its POSITIVE SENTIMENT, people are finally waking up and realizing electricity is the next big thing", "did any of you fellas read the latest GNE investor preso?", "Na mate just went to the presentation in person for the free food and to try find some new clients", "yeah I bet there isn't any indication of an underlying change in the company that could explain things in there", "for sure mate, only a sharsies user would read em".
You cannot view this attachment.

[winner (n)]

Craigs Back office, "hmm oh jeez guys why isn't our dividend model working that accurately anymore, ya reckon its the EVs? Ya reckon its forward bond yield expectations?", "na mate I reckon its POSITIVE SENTIMENT, people are finally waking up and realizing electricity is the next big thing", "did any of you fellas read the latest GNE investor preso?", "Na mate just went to the presentation in person for the free food and to try find some new clients", "yeah I bet there isn't any indication of an underlying change in the company that could explain things in there", "for sure mate, only a sharsies user would read em".
You cannot view this attachment.

Impressive chart eh Plata

They might have to change the scale next time to make 14 cents look relatively good ...maybe even leave the labels off

[winner (n)]

One way of looking at things .....as explained to me years ago by a real investment manager (not a broker guru etc)

Say for an investment country risk is the 10 year Govt rate ...now 5.9%

GNE bonds trading at say 6.7% ........the difference to 10 year govt is 1.7% points ....we could say this the 'company risk'

GNE divie yield (gross) at moment is 8.2% ......difference to bond rate is 1.5% points and this basically is the 'equity risk premium'...the additional 'risk' of holding shares over bonds.

A week ago that 'equity risk premium' was 3.6% points

So the equity risk premium has been slashed since that announcement ...must have been impressive and as Plata says punters have REAL POSITIVE SENTIMENT at the moment ..like almost nothing can go wrong

[Basil]

Winner me ol mate, I think a lot of people love the whole, we're part of a project that's going to deliver real ESG benefits to N.Z.    Probably why the SP hasn't fallen, yet.

For mine with the 10 year risk free rate about 5% I'd want at least a 4% premium on that for equity risk.
Assuming 14 cps is fully imputed, (not certain it will be), that's 14/0.72 = 19.44 cps / 0.09 = $2.16.  I not favorably inclined to consider GNE again unless it falls to that level. I remain of the view that GNE have no reasonable handle on the real cost of their transformation project, so execution risks are VERY high. 

[Plata]

Yeah there are new risks etc. But I don't really understand why you would focus on dividend yield instead of FCF yield especially given the declining payout ratio we are seeing. Why look at the derivative when you could look at the source, why use a less informative metric? Does the relationship just not hold at the FCF yield level or something? If they cut the dividend entirely would you expect the shareprice to become 0?

[Basil]

Yeah there are new risks etc. But I don't really understand why you would focus on dividend yield instead of FCF yield especially given the declining payout ratio we are seeing. Why look at the derivative when you could look at the source, why use a less informative metric? Does the relationship just not hold at the FCF yield level or something? If they cut the dividend entirely would you expect the shareprice to become 0?

The last is obviously a silly question but to answer your earlier ones, I don't trust the woke board.  They have blatantly lied to investors when they listed that dividends will be maintained in real terms and never even tried to honor that commitment.  It's all about their woke ESG agenda, (they are a quasi-Government department after all), and I think it always will be.  Let me ask you a question.  They have never tried to honor their commitment to keep dividends the same in real terms before so what on earth gives you the confidence to think they will now ?

[Plata]

I think the second they raised the dividend up over 80% of FCF that goal was dead. You can't expect them to grow anything when all they can do to grow is buy a few trees and a few refurbished turbines before the kitty is empty.

I don't really care what they say about the dividend, I don't really care about the dividend. I'm glad they have cut it, capital loses as kupe runs out + tax on unimputed dividends sounds shit for lack of a better word. I invested in this because of the low price to FCF ratio and the safety compared to other companies with similar ratios. I don't expect FCF generation to plummet going forward, so don't see how I can go too wrong holding.

I don't agree with this idea that the executive suite are dragging investor returns down with esg stuff, the majority of esg stuff gne has done so far has clear value to the company (the largest expense being the forestry carbon credit hedge).

I think the real worry with GNE is the never ending OPEX growth. Its all very well to say in 2028 it will be all sorted but they are really just kicking the can down the road. What in Gods name are they doing with all this "technology investment". Last I checked all their apps are done and released, and they are outsourcing backend to gentrack and someone else. What are they doing?

[Basil]

I don't really care what they say about the dividend, I don't really care about the dividend. I'm glad they have cut it, capital loses as kupe runs out + tax on unimputed dividends sounds shit for lack of a better word.

This is where you and I are very different.  I'm semi-retired looking to gradually move into full retirement in the years ahead so I am investing to replace income I will lose in that transition.  8% gross is not without its merits if I believe it will go up in line with inflation, (I don't) because the company has not earned my trust.

One possible reason for the board to spin investors this growing dividend in line with inflation yarn and expect us to believe them is...wait for it...not a single current board member was there when GNE listed!  It's quite possible they're not even aware we've heard this "fairy tale" before. 

On the whole woke thing, maybe have a read of their last few annual reports, they're chock-a-bloc full of woke ideals the company is chasing. 

I'm sure they'll find many more wonderful woke ways to spend any excess free cash flow over and above what dividends they pay in the years ahead.  No matter what their free cash flow is one thing I am very confident of with this lot, the very best you can possibly hope for is they do keep their word and do increase dividends in line with inflation this time....but I don't trust a board that have spun me this B.S. for years with every dividend decision they've made.  If they can't keep their word on dividends, how can you trust their EBITDA forecasts for the next few years or their attempts to control opex?  As you say, what is this extra tech investment this year? ($25m from memory).

The real worry is not just their recent inability to control opex.  There's plenty else to worry about. How do you know for sure their guesses on the future capex for this transformation are not wildly inaccurate?
Have you ever known a Govt department or quasi govt department to be able to accurately forecast huge construction projects many, many years hence?  Just as a case example reminder, remember how the Lake Onslow battery project was originally costed @ $4 Billion and then some years later the capex cost was estimated to have quadrupled to $16 Billion?  No wonder it has been canned!  How do you know for sure GNE's capex estimates aren't wrong by some similar order of magnitude and that the level of execution risk with their so-called transformation project is therefore not off the charts?

Trust us, we are a large majority Govt owned company with truly wonderful ESG objectives, what could possibly go wrong lol.

[Plata]

The real worry is not just their recent inability to control opex.  There's plenty else to worry about. How do you know for sure their guesses on the future capex for this transformation are not wildly inaccurate?
Have you ever known a Govt department or quasi govt department to be able to accurately forecast huge construction projects many, many years hence?  Just as a case example reminder, remember how the Lake Onslow battery project was originally costed @ $4 Billion and then some years later the capex cost was estimated to have quadrupled to $16 Billion?  No wonder it has been canned!  How do you know for sure GNE's capex estimates aren't wrong by some similar order of magnitude and that the level of execution risk with their so-called transformation project is therefore not off the charts?

Trust us, we are a large majority Govt owned company with truly wonderful ESG objectives, what could possibly go wrong lol.

Installing grid scale batteries on flat ground at a preestablished grid connection site sounds pretty hard to screw up, and there are many similar projects as precedent in NZ and AU to base costs off of. Similar story with solar, experienced JV partner etc etc. Those two initiatives make up the vast majority of their committed/semicomitted spending, hence I am not too worried about big cost overruns on those projects. I think if they went 4 or even 2 times over budget on that stuff it would call into question the competence of the entire executive and upper engineering management.

[LoungeLizard]

I'd go along with a correlation between Govt stock yield and SP of companies like GNE, but as we all know correlation is not causation. One does not always follow the other.

 If divvy's were cut because a company was failing then yes, shift your money to a safe haven. But that's not the case with GNE. As Plata points out, FCF and core metrics are solid and mostly unchanged  - they have just decided to use some of that FCF to safeguard the business and - hopefully - make it even more profitable down the line. That's what a prudent Board would, and should, do.

If you focus entirely on dividends then yes, it is bad news, but if you are long term holder then over time GNE is still a good, safe stock to hold. And the yield is still 6% in the meantime. That's why the SP hasn't plunged on the announcement and I still don't think it will. If I'm wrong and it does, I for one, will be adding.

There are plenty of companies that have wasted millions on woke initiatives (WHS, anyone?) but this isn't the case with GNE. Solar, wind and battery storage technology aren't woke initiatives - renewable energy is the future. GNE are future proofing the business and, given their mix of assets, I reckon they are still the best buy in the sector.

[winner (n)]

Suppose they don't want to go from 'Genesis Magic" to "Genesis Malaise" by not improving, growing, and elevating what matters, ie not thinking of the future.

The second law of thermodynamics states that "The arc of the universe bends toward chaos; entropy in a closed system always increases; things left to their own devices naturally deteriorate over time." In other words, we don't want Genesis to let "entropy" get the better of them.

[Basil]

I respect your point of view LoungeLizard but for the sake of clarity I'm not saying replacing dirty generation assets with renewables is woke.  I am referring to all their other woke projects.  Have a read of their 2022 annual report, its choc-a-bloc full of B Corp type projects and statements with modest disclosure on costs, and all the usual claims that by embracing B Corp type policies this is great for all stakeholders. 

Maybe I am just deeply cynical and jaundiced by all the endless ESG stuff we get these days in the name of benefiting all stakeholders and simply hanker for the good old days and companies that focus their ideals on pure capitalism or very close to pure profit objectives.  The ol Greed is good, greed is right Gordon Gekko speech in Wall Street, I am sure you know the one.  Perhaps that's to my disadvantage but I don't think so.  A little bit of ESG is okay in my book, heck even Turners had a photo in their annual report of some staff participating happily in a pink shirt day.  I get it that they need to embrace employees with all types of sexual tendencies, heck they have 700 staff so there's bound to be all types in there, and they need to feel included, but some companies take things much too far with Synlait being the best example but GNE in my opinion is not all that far behind.

Anyway, ESG debate aside as that's a can of worms that can be debated forever and a day, I have made the call that their promise about future dividend growth simply cannot be trusted because they have a very long track record of complete B.S. in that respect in the past and I'm going to stick with my assumptions around that.  If the share price gets to a point where it offers a 9% yield, (about $2.16) I am happy to have another look at GNE but otherwise I'm quite happy to leave it.

[Waltzing]

" Greed is good, greed is right Gordon Gekko speech in Wall Street"

a traders rule book to live by....

https://www.youtube.com/watch?v=VVxYOQS6ggk

[xafalcon]

Monthly data since GNE listed ....Rsq is .61 ...though reducing lately

Only done v NZ 10 year but points re global action noted. Not so keen as to do all that detail ...suits me as it is.

As I've said before I know very little about how this industry works so it's only a numbers game to me.

Craig's did a similar exercise a while ago and concluded ...

The analysis suggests that the sensitivity of gentailer stocks to the 10-year government bond yield has lessened in recent times. Two potential reasons for this could be that investors feel bond yields have reached a level where they may start to plateau, or possibly that other factors such as positive sentiment toward electrification is providing a certain amount of buoyancy to the stocks, resulting in a level of dislocation from historical behaviours. It is possible that investors are concerned about a recessionary outlook, thus turning to utility stocks as a defensive strategy, with an expectation that once a recession takes hold bond yields would likely fall, hence making the gentailer yield more attractive

Thanks for posting this. It's good to better understand others perspectives and the reasoning behind them

Another variable that is present for foreign investors (a large chuck of GNE holdings excl NZ govt) is exchange rate. NZD has been appreciating lately against many other currencies. This increases foreign investor returns even with a static SP, and amplifies returns when SP increases

The opposite was happening over the previous 18 months. So maybe this has an influence on the decreasing SP?

Have you investigated this variable? I would imagine that USD would be the main determinant due to reserve currency status

[xafalcon]

Installing grid scale batteries on flat ground at a preestablished grid connection site sounds pretty hard to screw up, and there are many similar projects as precedent in NZ and AU to base costs off of. Similar story with solar, experienced JV partner etc etc. Those two initiatives make up the vast majority of their committed/semicomitted spending, hence I am not too worried about big cost overruns on those projects. I think if they went 4 or even 2 times over budget on that stuff it would call into question the competence of the entire executive and upper engineering management.

Based on long established price trends for solar panels and lithium batteries, the price is only going in one direction - downwards, by 5-10%pa

So risk is more likely to be "coming in under budget". No problem if it's GNE capital (battery), but in JV (like GNE solar)  it risks overpaying via higher energy cost payments

Overall I expect that the JV will bring more benefits (esp experience) than negatives

I fully agree that both grid scale batteries and solar are mature technology with minimal project cost risk