GNE - Genesis Energy

[macduffy]

I don't believe this was a true 'bonus' issue of new shares, the shares were simply transferred from the crown to shareholders who held the shares since IPO for 1 year (ie the crown owned more than 51% at IPO).. but it would be great if someone could confirm/deny this

That's correct. From the point of view of the private shareholders it was a reward for retaining the shares up to that point - so for them (us) it was a bonus from the govt, not from the company.

[Bobdn]

Im travelling at the moment on holiday. I always go over budget with some YOLO justification as though i was a teenager. This recent spike in the share price is making me feel much better about my wayward spending. GNE is by far my biggest holding so a few cents here and there makes a big difference to my networth and mental health.

btw, Wifi in hotels in asia just seems to get better and better every year.

[Beagle]

Disappointed in some respects I missed out on the bonus shares. Can't have it both ways I suppose. Sold around current level's before the drop and bought back in at $1.80 many months ago. Been one of my top performing stocks this year which doesn't say much for how the rest of my portfolio is going :ohmy: Safe yield is in strong demand so I expect these shares will continue to find solid support notwithstanding the latest quarterly performance figures are affected by warmer weather. https://www.nzx.com/files/attachments/240131.pdf
Disc Holding a modest allocation for dividend yield.

[Traderx]

Sold today (very small holding) @ 224.

Negatives - increasing carbon cost (likely to head towards $25/T- currently $18/T) and 1-2 unit subsidy phasing out over next few years. GNEs retail offers have left me disillusioned also. Focused on large upfront incentive (free $250). Not much for loyal customers. To me is a recipe for expensive churn. I know it common industry practice now but GNE only lock in for 12 months which is less than others with similar upfront incentives. Also hope of a real oil rally fading fast along with Kupe's hedged position.

SP has come up quite a bit to close to my view of fair value so with the above in mind - I'm out.

Cheers

[Jantar]

........
SP has come up quite a bit to close to my view of fair value so with the above in mind - I'm out.

Cheers
And what will happen after Friday's announcement of the Tiwai Point decision? Whichever way it goes will have more effect on Meridian, but Genesis do have South Island generation.

[sb9]

And what will happen after Friday's announcement of the Tiwai Point decision? Whichever way it goes will have more effect on Meridian, but Genesis do have South Island generation.

Could you elaborate what's the announcement on Friday pls.

[Jantar]

Could you elaborate what's the announcement on Friday pls.
That is the last day that the smelter can declare whether to reduce one potline and bring their load down to 400 MW.

[bull....]

That is the last day that the smelter can declare whether to reduce one potline and bring their load down to 400 MW.

do you think 100mw is much in the scheme of thing? easily offloaded elsewhere?

[Jantar]

do you think 100mw is much in the scheme of thing? easily offloaded elsewhere? 158 MW. Enough to constrain the lines out of the lower South Island.

[Raz]

Disappointed in some respects I missed out on the bonus shares. Can't have it both ways I suppose. Sold around current level's before the drop and bought back in at $1.80 many months ago. Been one of my top performing stocks this year which doesn't say much for how the rest of my portfolio is going :ohmy: Safe yield is in strong demand so I expect these shares will continue to find solid support notwithstanding the latest quarterly performance figures are affected by warmer weather. https://www.nzx.com/files/attachments/240131.pdf
Disc Holding a modest allocation for dividend yield.

Need to come to dark side and trade a little.

[Jantar]

That is the last day that the smelter can declare whether to reduce one potline and bring their load down to 400 MW. Sorry, I made a mistake on this information. I really should check the records rather than rely on memory. The final date is 3rd August, not 28th July, and the reduction is slightly more than a single potline in that they can reduce by 177 MW.

[Bobdn]

The market is reacting well to your correction. I think you gave it a bit of a scare yesterday ;)

[Joshuatree]

Meridian, power company shares up as Tiwai stays open -

Business ... (https://www.google.co.nz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&cad=rja&uact=8&ved=0ahUKEwif7o-v36TOAhXDmpQKHawdA5sQFghAMAY&url=http%3A%2F%2Fwww.nzherald.co.nz%2Fbusiness%2Fn ews%2Farticle.cfm%3Fc_id%3D3%26objectid%3D11491178&usg=AFQjCNHKbFpHP0g2ZB0n-WXVsQ8mXTh7wg&sig2=nE_L6DTKVcqiqbIt9jDoOg)

Tiwai Point smelter to remain open | Radio New Zealand News (https://www.google.co.nz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=13&ved=0ahUKEwif7o-v36TOAhXDmpQKHawdA5sQFghXMAw&url=http%3A%2F%2Fwww.radionz.co.nz%2Fnews%2Fnation al%2F280319%2Ftiwai-point-smelter-to-remain-open&usg=AFQjCNGdglVd9nBSR73f2W2EMiBXbbBDNA&sig2=Hi8nPh6tWtEJeyPhdCc8cg)

[Snoopy]

Meridian, power company shares up as Tiwai stays open -

Business ... (https://www.google.co.nz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&cad=rja&uact=8&ved=0ahUKEwif7o-v36TOAhXDmpQKHawdA5sQFghAMAY&url=http%3A%2F%2Fwww.nzherald.co.nz%2Fbusiness%2Fn ews%2Farticle.cfm%3Fc_id%3D3%26objectid%3D11491178&usg=AFQjCNHKbFpHP0g2ZB0n-WXVsQ8mXTh7wg&sig2=nE_L6DTKVcqiqbIt9jDoOg)

Tiwai Point smelter to remain open | Radio New Zealand News (https://www.google.co.nz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=13&ved=0ahUKEwif7o-v36TOAhXDmpQKHawdA5sQFghXMAw&url=http%3A%2F%2Fwww.radionz.co.nz%2Fnews%2Fnation al%2F280319%2Ftiwai-point-smelter-to-remain-open&usg=AFQjCNGdglVd9nBSR73f2W2EMiBXbbBDNA&sig2=Hi8nPh6tWtEJeyPhdCc8cg)

Not that newsy though. Those articles referenced appear to be exactly one year old!

SNOOPY

[Joshuatree]

You're right , exactly 1 year; apologies. S0 where is the announcement?.Looks like jantar got it wrong twice:confused:

[Hectorplains]

You're right , exactly 1 year; apologies. S0 where is the announcement?.Looks like jantar got it wrong twice:confused:

Haha, I thought you posted the old news to show that you thought the status quo would be maintained this time too. I need to get out more...

[Jantar]

Those articles are old. But the deal has been done and Tiwai will continue to take their full 577 MW for at least 2 more years.

[Joshuatree]

Great to hear .I guess its tomorrows news then:)

[trader_jackson]

http://www.radionz.co.nz/news/top/309737/nz's-aluminium-smelter-keeps-current-power-deal

Would have thought there would have been something more official from the power companies (or meridian at least)...

[QOH]

Is this good for Genesis as well as Meridian?

[Beagle]

Yes it is. Pretty sure I recall there was a behind the pay wall article in the NBR on Friday confirming they're still taking the 577MW. I should have cut and pasted it but was way too busy at work. Basic thrust of the article IIRC was the smelter operator would be less efficient with one pot line down so they basically said they had to stick with the status quo as that was more efficient for them.

[Jantar]

Is this good for Genesis as well as Meridian?
It is good for all the power companies. It alleviates the Lower South Island line constraints that would occur if 177 MW of load was to pulled from the system.

[Joshuatree]

Am nonplussed re the almost complete lack of media and company report/notification/comment on this significant news.:confused:

[horus1]

its a pity that the changes to transmission prices ,$20mper year, made certain of this. It is a straight cross subsidy from domestic consumers to Tiwai , meridian gets a heap of it too.

[fish]

Am nonplussed re the almost complete lack of media and company report/notification/comment on this significant news.:confused:

Annual report out Thursday

I have not seen any
predictions

Suspect the divi will be 8.2 cents again plus imp credits

[bull....]

stable div, bounce back in oil a positive, still losing the most customers out of all retailers but I guess steady as ya go

[Bobdn]

Result seemed fine to me. I'd be happy if this company did nothing more than give me 16.4 cents per share with 80% imputation credits for the next 15 years or so.

I wonder how long kupe will keep producing the goods? Early 2030s maybe?

[trader_jackson]

Result seemed fine to me. I'd be happy if this company did nothing more than give me 16.4 cents per share with 80% imputation credits for the next 15 years or so.

I wonder how long kupe will keep producing the goods? Early 2030s maybe?

Result was also all good with me, small increases 'where it counts' (for me at least), electricity generation, customer numbers, free cash flow, dividends (except a large decrease in debt which is nice) I would also be happy with 16.4 cps at 80% imputation, with the dividends and imputation both being sustainable (dividends even able to be increased a little)

[Hectorplains]

Result was also all good with me, small increases 'where it counts' (for me at least), electricity generation, customer numbers, free cash flow, dividends (except a large decrease in debt which is nice) I would also be happy with 16.4 cps at 80% imputation, with the dividends and imputation both being sustainable (dividends even able to be increased a little)

Yeah, that's all good. I'm not loving Mr England using the opportunity to unleash an outbreak of meaningless verbiage. Doesn't his pronouncement that they want to "reorienting to improve {our} ability to execute strategies at speed... to extract more value from our existing operations while we implement our plans to deliver new services for our customers and thrive in the evolving energy market" mean, well, nothing really?

[Bobdn]

Now that the Air show (funny guy) has come to an end, I'm turning my attention to GNE.

Loving the run up to the xd day.

[Beagle]

N.Z. Herald print edition gave a nice and fulsome outlook of all pending dividends on Monday including exact imputation credits due, ex date and payment dates. A certain dividend hound took great interest :)

Not in that list is the forthcoming result for HLG on 23 September but the company has effectively given guidance already that their final will be in line with historical. With TA looking strong and a very strong currency giving good tailwinds for importers the most cunning hounds have been buying already in anticipation of the pack following. HLG next for the strip for me after this more obvious one but I will hold because of anticipated profit recovery in FY17, so not a strip per se.

[777]

Better than the Herald is the NZX site

https://www.nzx.com/markets/NZSX

List sorted by ex date.

Also has the upcoming meetings.

[bull....]

not far to go to make that new high 2.40 odd off the top me head

[tim23]

I've argued before that if you held from IPO its an all time high given the 1 for 15 bonus accept however that after 15000 shares the effect diminishes.

[Bobdn]

Since owning Contact and GNE, I've always enjoyed a good cold snap. Doing my bit for company profits by having the gas fireplace going full tilt.

[BlackCross]

Don't know whether this was reported earlier?
September quarter weather was warmer than normal, causing mass market electricity and gas volumes to be down 2.8% and 5.1% on the same quarter last year despite flat customer numbers.

Morningstar have reduced to $2.00 and a hold...with"...However, the medium-term outlook for the electricity sector is not very promising because of excess supply, sluggish demand and intense retail competition, which will temper operating income growth in the next few years...." Presume that applies to all suppliers?

[fish]

Don't know whether this was reported earlier?
September quarter weather was warmer than normal, causing mass market electricity and gas volumes to be down 2.8% and 5.1% on the same quarter last year despite flat customer numbers.

Morningstar have reduced to $2.00 and a hold...with"...However, the medium-term outlook for the electricity sector is not very promising because of excess supply, sluggish demand and intense retail competition, which will temper operating income growth in the next few years...." Presume that applies to all suppliers?
Hottest year on record declared by NIWA-
Consequent small fall in demand
Medium term I would have thought a drop in sp of all power companies-those that sell more than they generate dropping less than others.
To counter this we are on the cusp of the electric car mass revolution.
We have a growing population which are spending more time indoors.
Smaller families.
Power companies will close less economic units.
People are not going to stop using electricity so investing in generating companies is safe partcularly as the cost of power is based on the highest cost production

[Snoopy]

Result seemed fine to me. I'd be happy if this company did nothing more than give me 16.4 cents per share with 80% imputation credits for the next 15 years or so.

I wonder how long kupe will keep producing the goods? Early 2030s maybe?



I want to link together a comment from the Chairman, Dame Jenny, and another comment from the newly appointed CFO.

I quote from p5 of AR2016, an excerpt from the Chairman's report.

"Pre tax earnings, however, were under pressure as the company was unable to avoid the full impact of wider market factors, such as <snip> and aggressive competition for retail customers."

I quote from p11 of AR2016, an excerpt from the CFO's report.

"The group implemented a new accounting treatment to defer and amortise customer acquisition costs over the average consumer tenure period. In FY2016, this led to a $10.9m deferral of costs at 30 June 2016"

I understand the CFO's adjustment, from the point of view of aligning expenditure with benefits. The problem I have with it is that, if this policy is continued into the future. then the rolling costs delayed from each successive year will be additive. In FY2015, all customer acquistion costs were written off in one year. Let's say from now on acquisition costs will be written off over three years. That means that in year FY2016 customer acquisition costs written off will be:

1/ 1/3 of FY2016 acquisition costs

FY2017 the customer acquisition costs written off will be:

1/ 1/3 of FY2016 acquisition costs PLUS
2/ 1/3 of FY2017 acquisition costs

FY2018 the customer acquisition costs written off will be:

1/ 1/3 of FY2016 acquisition costs PLUS
2/ 1/3 of FY2017 acquisition costs PLUS
3/ 1/3 of FY2018 acquisition costs

The net effect of this policy, if annual acquisition costs do not change, will be to return us to the FY2015 position in FY2018. In the interim two years, FY2016 and FY2017, acquisition costs will be pushed down the road falsely, IMO, pumping up profits for FY2016 and FY2017. This change could make sense if FY2016 was 'unusually competitive'. But I seriously doubt that the gentailers will become less competitive going forwards. I don't like this change in accounting policy and I will be adjusting it out of the figures when I calculate my normailised profit results.

SNOOPY

[Snoopy]

I quote from p11 of AR2016, an excerpt from the CFO's report.

"The group implemented a new accounting treatment to defer and amortise customer acquisition costs over the average consumer tenure period. In FY2016, this led to a $10.9m deferral of costs at 30 June 2016"

<snip>

The net effect of this policy, if annual acquisition costs do not change, will be to return us to the FY2015 position in FY2018. In the interim two years, FY2016 and FY2017, acquisition costs will be pushed down the road falsely, IMO, pumping up profits for FY2016 and FY2017. This change could make sense if FY2016 was 'unusually competitive'. But I seriously doubt that the gentailers will become less competitive going forwards. I don't like this change in accounting policy and I will be adjusting it out of the figures when I calculate my normailised profit results.


To give the other side to this story, Genesis have outlined their rationale for the change in the forward notes to the accounts, p37 on AR2016. I remain unswayed by management's argument....

The profit bridge shown on p11 of AR2016 does highlight why it is an issue though. You will see there an $8m customer acquisition charge that Genesis are taking on the chin, combined with an $11m charge they are deferring. This is an extraordinary $19m spent just on maintaining their customer base over FY2016. Spread over their 646,000 customers, and assuming a 20% churn rate, that works out to an extraordinary $224 per churned customer per year! Not all of that money would be going to retail customer bribes of course. There would be a staff salary element included too. But the fact remains that $19m represents around 20% of my adjusted NPAT for the year. No wonder management have decided to 'do something about it', so that things don't look so bad in the end of year accounting reconciliation!

A couple more things have emerged from my more forensic examination of Genesis's accounts.

In note 4 there is noted an extraordinary 550% rise in revenue from Emission Unit Trading. This is offset by a 530% rise in Emission Unit Trading expense. The net result is a:

$21.0m - $15.5m = $5.5m

increase in gross profit for Genesis Energy shareholders. That's good for us. But is it repeatable for FY2017 (I'm guessing no)? And what is the explanation for the extraordinary level of increase in Emission Units traded in the first place?

While I am on my 'Genesis grizzle', shareholders need to be aware of the $6.9m profit booked for the write back in value of Huntly Rankine Unit spares. While this is welcome for shareholders, it is certainly not part of 'normal profits' and I can't see such a write up in value being repeated ever again.

Everything I have mentioned in this post I believe effects the EBITDAF figures that Genesis likes to quote. I estimate the normalised NPAT for Genesis Energy for FY2016 is around $120m, significantly lower than the $184m (including asset revalutaions) that Genesis quotes.

Actual NPAT figures have shown a big improvement because of a $370.6m in Generation Asset gains (a portion of that previously written down has flowed straight to headline profits). However, even management don't expect shareholders to pay much attention to that one off 'thin air' gain. That's because, IMO, those thin air gains may easily be offset in the future if more of Genesis Energy's thermal generation capacity becomes stranded as the greater cost of the Emission Unit scheme bites. Be careful out there, investors, with the published GNE profit figures!

SNOOPY

discl: hold GNE

[horus1]

Great analysis snoopy. I will not invest in the generator /retail sector.

[Beagle]

Curious Snoopy me ol mate. Why are you holding GNE given your above post ? Disc: I am unimpressed by the most recent quarterly report. Customer retention has again emerged as a serious issue. Sold late last week.

[trader_jackson]

Customer retention has raised my eyebrows slightly but it is certainly no where near as bad (losses wise) as it has been in recent times, so I am not to concerned.

For me it is all about the cash flows when it comes to valuing gentailers, and these were ok, but not good and certainly not great.

But I am just not sure of how many other companies can give me 16.4 cents per share, 80% franked (which I see as sustainable), per year return with relatively low risk, and likely to increase above the rate of inflation over the coming short-medium term (dividend wise).

Disclosure: Been holding since IPO, makes up around 10% of my portfolio, average holding cost is $1.40, might sell if it got to $2.30 - $2.40

[Beagle]

TJ - You're probably okay in the short / medium term but as Kupe starts running down their ability to pay dividends at that rate starts to become questionable.

I prefer HLG at present due to the prospect of a strong uplift in profit this year and I see their 30 cps fully imputed as sustainable for at least as long as GNE. (Acknowledge each company has its own peculiar issues to deal with going forward but note HLG trades cum a 16.5 cps fully imputed divvy and GNE trades ex its final divvy).

I also calculate the yields as follows and note the HLG yield is significantly higher.

GNE Gross yield (16.4 / .776) / 1.96 = 10.78% gross
HLG (30 / 0.72) / 3.00 = 13.89% gross.

Tiwai Point is a major over-hanging risk to the sector too so GNE is certainly not a low risk investment in my view.

Just my 2 cents worth but each to their own :)

[fish]

Roger-Thats a viewpoint I would like to test.
Clearly its one thats shared by many in the market and one believed by you.
My view is that we are on the cusp of a big change in Transportation and the type of fuel used.
Its one now shared by Volkswagon.
Did you know that each model Tesla s contains 200kg aluminium ?
Do you really think that Rio Tinto will close a profitable Tiwai pt and pay $300m approx clean up costs?
More likely a negotiating ploy in my opinion.
I was in auckland on Friday and the vehicle fumes were sickening.
City vehicle fumes are as bad as smoking to the body

Then we have the ability of the Gentailers to manipulate pricing by closing down so called inefficient units-like CEN did recently.No one can actually call this market manipulation because the pretext is prevention of global warming.

We have an expanding population who love electricity and spend less time outside.

Your statement about kupe neglects the fact that its a bigger field than initially thought and reserves have been upgraded.It wont be running short in the next 20 years

[huxley]

I also sold out of GNE earlier in the year. Low growth with little prospect of that changing midterm plus the risk of assets becoming stranded from new technology, smelter closing etc etc..
If you're just after income then GNE still an option but it was no longer a fit for me so it got cut .
Just my opinion, good luck to holders.

[horus1]

The demand for electricity is falling by about 2% a year. The costs of alternatives are falling by 15-20% a year . The obvious package is solar, electric vehicle , and use you the Electric Vehicle to feed back into the grid with peer to peer trading. Overseas the days of bulk generation and especially coal fired stations is dead . we are 65% non co2 and the Govt wants to get to 90% . Not a pretty picture.

[BlackCross]

All the facts and figures: http://www.mbie.govt.nz/info-services/sectors-industries/energy/energy-data-modelling/publications/new-zealand-energy-quarterly

and government forecasts (bit dated probably around 2012/13):http://www.mbie.govt.nz/info-services/sectors-industries/energy/energy-data-modelling/modelling/new-zealands-energy-outlook/electricity-insight/electricity-insight.pdf

[fish]

All the facts and figures: http://www.mbie.govt.nz/info-services/sectors-industries/energy/energy-data-modelling/publications/new-zealand-energy-quarterly

and government forecasts (bit dated probably around 2012/13):http://www.mbie.govt.nz/info-services/sectors-industries/energy/energy-data-modelling/modelling/new-zealands-energy-outlook/electricity-insight/electricity-insight.pdf

Thanks for this and all the other points of view-clearly reflected in the current market price.
Interesting that residential use electricity is down 5% but agriculture farming and fishing is up 10%.Probably explains why Contact seems to be concentrating on bigger customers.
Some of the residential fall in demand will be due to warm winters-the last was the warmest on record.No guarantee this will continue.Agree that some residential use will be reduced due to domestic solar.Not convinced that this will grow significantly for many years.Certainly its the way I would like to go but I want others to prove the technology is cost-effective first.

I am still feeling the gentailers need to be part of my diversified portfolio and the dividends will reduce the risk of keeping my investments this way.
They can manipulate the market and close/reduce operating thermal stations to force the price up.

[Beagle]

Hi Fish,

Reserve upgrade is something I have already factored in but oil production still tails off quicker than I would like, LPG and gas production is good for the foreseeable future.

Customer retention is something that bugs me. They keep losing market share and I expect this trend to continue as the incumbent gentailers get their share eroded by new retailers with highly efficient cost structures.

On the electric car front, it will be many years before we even get to 2% of the national fleet as electric cars, (something the Govt is actively promoting through the exemption of road user chares until as a nation we hit that target).

Cost and adequate range are still major barriers and I think they will be for quite some time. VW have been badly burned by their fiasco with diesel engines...you'd expect them to be keen to change direction wouldn't you !

On the Tiwai thing, who can say, its a very small and old mill for Rio Tinto, and aluminium prices could go anywhere like any other commodity. The impact on wholesale and retail pricing if Rio elect to shutdown this operation would be very significant.

Profit is declining this year and my instinct says it will continue to decline further out. Maybe one to hold for dividend yield but its not safe dividend yield and there are better alternatives in my opinion as I outlined above.

For me, I will leave the debate there.

[fish]

Thanks roger-I respect your opinion and contribution.
I wonder if anyone else has looked at genesis customer retention and the effect it will have on cashflow.The new efficient retailers have to buy their electricity and some kind of hedging to stop them going bust in a dry year.That must cost-and the like of genesis are likely to benefit from that cost.
My biggest investment is with contact and I am not concerned at the loss in customer numbers as they are really reducing the cost to generate and hence netback and free cash flow looks really good.
Have not worked it out with Genesis and would appreciate opinions(keeping in mind Ecclesiates 12 !)

[macduffy]

I havn't researched Genesis' customer retention but I can believe that they are making every effort to retain and attract retail customers. Last week I had two calls from them seeking my modest business.

Memo to self: Must consider ditching that pesky landline!

[mshierlaw]

I havn't researched Genesis' customer retention but I can believe that they are making every effort to retain and attract retail customers. Last week I had two calls from them seeking my modest business.

Memo to self: Must consider ditching that pesky landline!

Got three calls within a short space of time about 4 months ago.

Wrote to them asking them to consider more effective means of utilising shareholders funds. E mail back .... "please give us your phone # & the date & time of each call so we can fully investigate". Why bother!

It's been nice & quite since.

[Snoopy]

Curious Snoopy me ol mate. Why are you holding GNE given your above post ? Disc: I am unimpressed by the most recent quarterly report. Customer retention has again emerged as a serious issue. Sold late last week.


Roger, I have a reputation on this forum for commenting harshly on those who I feel put up a flawed investment case for making a share investment, and being relentless in following up on my view if circumstances require it. Therefore I think it is only proper that I should hold myself up to that same standard. I have never been a cheerleader for my own investments. Constant scrutiny is I believe the best way to keep any investor (including myself) honest. So if I see something not going quite in accordance with the company script, I think it is right to point that out.

I am genuinely curious about all the emission unit trading (ETUs) activity at Genesis. With Contact in particular closing Otahuhu which is:

a/ more modern that the Rankine Units and
b/ slightly better located (closer to Auckland)

I guess a large chunk of the potential emission unit trading market is now gone. Genesis had previously announced that all the Rankine Units were to be closed down. So I would have thought that the logical thing to do would be to pre-sell down any associated surplus ETUs, even at a loss, to clear the decks. Yet in actuality Genesis bought a whole lot more ETUs and sold them at a profit? As I said previously, brilliant for GNE shareholders. But what were they doing, apparently speculating in the ETU market? Not the sort of behaviour you might expect from a 'conservative gentailer', 51% government owned. I was genuinely curious as to what back story could be behind this?

Having said this, Genesis is a multifaceted investment with the oil and natuiral gas interests from Kupe. They also have quite a progessive attitude to solar power. The schools partnership, using solar power from the roof of schools to power the classrooms during the day is well established. None of the other gentailers seem to be interested in that. What I am saying here is that GNE is not a black and white investment case. Of the three gentailers I hold: CEN, GNE and MCY, it is Genesis that has delivered the best overall return to me (so far). My next task is to rerun my modelling on the oil and gas revenues, given the market recovery in both. Like you I don't believe the current dividend yield is sustainable. But even if the dividend yield is reduced, that doesn't mean the investment case doesn't stack up.

I remain watchful of Genesis Energy, but not ready to quit my holding just yet.

SNOOPY

discl: hold GNE

[Beagle]

Fair enough mate. All the best with it.

[fish]

Snoopy do you suspect a degree of self-interest or even market manipulation in the closure of Otahuhu by CEN and retention of Rankine units by GEN.
Contact generate more than they retail whilst the opposite applies to GNE

[Snoopy]

Snoopy do you suspect a degree of self-interest or even market manipulation in the closure of Otahuhu by CEN and retention of Rankine units by GEN.
Contact generate more than they retail whilst the opposite applies to GNE


Otahuhu has effectively been replaced by Contact's new Te Mihi geothermal station. I am not sure it was always planned that way. Originally I think Te Mihi was meant to replace Wairakei! But rising carbon charges meant it was Otahuhu that got the chop. So yes the closure of Otahuhu was definitely a self interest win for Contact (not that I am implying there is anything wrong with this - management are clearly responsible for shareholders interests, over and above any national interest).

My overall view is that having a balance between generation capacity and customers is the way to go. Genesis Energy, however, appear not to think this way. Yet so far, with an excess of generating capacity meaning cheap wholesale power prices, the Genesis strategy seems sound. So maybe my generation/customer balance ideas are not right in this market? Yet the futures market seems unpredictable. I think Genesis were surprised about how low the wholesale power price remained even in times of possible shortage.

From outside the tent, the whole power market thing is obviously difficult. Genesis to me is the 'street smart alley cat' of the power industry. The scruffy runt of the gentailer litter, that somehow manages to position itself in just the right 'sweet spot' to dive in for the food morsels amongst the heavy traffic and escape with its tail intact to scrap another day. You have to hand it to Genesis's employees for being able to operate like this. But how much is skill and how much is luck? Is the wily old alley cat that is Genesis one day going to push his luck too far?

SNOOPY

[Snoopy]

Just to reprise. The re-evaluation of the Kupe petrochemical field looks good for GNE. But it appears my modelling has (largely) already taken this into account. Nevertheless there is one benefit I have not yet modelled. Because the field will last longer, that means the field depletion and depreciation charges incurred to date should be spread out over a longer time frame. If I add two years into that timeframe, here is what happens.



YearNo. of Oil & LPGOil BarrelKupe CondensateResource DepreciationNet


Equiv barrelsPrice USDRevenueand AmortizationProceeds


201664000076.6$64,189,474$20,610,081$43,895,113


201762000045$39,558,818$19,286,913$20,271,905


201857900045$34,571,102$18,048,694$16,522,408


201953700045$30,004,886$16,883,967$13,114,919


202055800045$29,176,617$15,805,632$13,370,986


202147600045$23,291,139$14,790,910$8,500,229


202239300045$17,995,312$13,841,334$4,153,978


202343400045$18,596,859$18,596,859


202439300045$15,758,884$15,758,884


202526900045$10,094,114$10,094,114


202622700045$7,971,221$7,971,221


202714500045$4,764,859$4,764,859


20286200045$1,906,558$1,906,558


Total5.333E06$298,195,663$119,273,530$178,922,132


PV per share$0.18


PV per share (tax paid)$0.13



Not exciting. But that extra cent added onto the value of each Genesis share is still worth noting.


The reserves extracted during FY2016 have been officially 'depleted'. So what is the value of the oil and natural gas still in the ground in Kupe to 'Genesis Eneregy' today?



YearNo. of Oil & LPGOil BarrelKupe CondensateResource DepreciationNet


Equiv barrelsPrice USDRevenueand AmortizationProceeds


201762000057.01$53,070,511$15,335,747$37,734,763


201857900053.58$39,921,568$14,262,245$25,659,322


201953700050$32,253,563$13,363,888$18,989,675


202055800050$31,168,834$12,235,416$18,833,418


202147600050$24,727,275$11,471,937$13,255,338


202239300050$18,986,495$10,668,901$8,317,924


202343400050$19,499,565$9,922,078$9,577,487


202439300050$16,421,420$9,227,533$7,193,887


202526900050$10,453,299$10,453,299


202622700050$8,203,702$8,203,702


202714500050$4,873,433$4,873,433


20286200050$1,937,946$1,937,946


Total4.693E06$261,717,609$96,487,745$165,029,864


PV per share$0.17


PV per share (tax paid)$0.12



A few things have changed year to year.

1/ I have updated the FY2017 and FY2018 hedged posiotions for oil in accordance with the forward hedging disclosed in the AR2016 results presentation.
2/ I have lifted my 'spot value' of oil from $US45 a barrel to $US50 a barrel, in light of the rallying oil price on world markets over the last six months. In addition my 'spot value' exchange rate is now $NZ1 = $US0.72, up from $NZ1 = $US0.66.
3/ The depreciation that I previously modelled over 7 years from FY2016 inclusive has now been modelled over 8 years from FY2017 inclusive. Furthermore, because oil is now a lesser share of revenue, in percentage terms, the proportion of Kupe field depreciation that I have apportioned to oil has reduced.
4/ The discount rate for future cashflows remains at 7%.

The result, a mere 1cps decrease in the financial value of reserves after a full years operation, would have to be pleasing to shareholders. Previously undisclosed relatively favourable hedging positions to current market prices have helped. The rise in spot price I have assumed from USD45 to USD50 a barrel has been partially undone by the consummate rise in exchange rate. The slowing rate of depreciation and amortisation at Kupe is perhaps the most significant effect in the 'increased valuation' (when compared year on year).

SNOOPY

[Beagle]

Good work Snoopy, you are to be commended for putting in such a stellar effort.

[fish]

snoopy is doing great work.
I do see more value in kupe than suggested.
Its the value of synergy and insider knowledge that Genesis has through its large shareholding.
Contact has to pump surplus gas into an old field to store.
Can Genesis just ask for more or less flow as needed-I don't know but it would be a great way of getting more value if done?

[Bobdn]

I am just returning from a whistle stop tour of a few countries in Asia (Korea, Vietnam, China)So many people, so much development. Dr Doom Marc Faber thinks oil will hit $70 and soon. The reason is infrastructure development in places like the Philipines and Indonesia. Worth seeking out the article (cnbc) online. I really hope it gets there soon. Apart from my Air NZ shares, just about everything else i own would benefit including my bank shares.

[Snoopy]

I do see more value in kupe than suggested.
Its the value of synergy and insider knowledge that Genesis has through its large shareholding.
Contact has to pump surplus gas into an old field to store.
Can Genesis just ask for more or less flow as needed-I don't know but it would be a great way of getting more value if done?


I am not sure that Genesis has much 'insider knowledge' of Kupe, because Origin Energy operate Kupe and everyone else are just 'follow along' shareholders, albeit some being larger than others..
But I think p33 of the float prospectus will answer your question fish.

-----

FUEL SUPPLY - GAS

"Genesis Energy has a portfolio of natural gas supply contracts (of which Kupe is just one) under which it is permitted to purchase various volumes of natural gas for differing periods of time from a number of different suppliers and from different gas fields in the Taranaki region. This diverse portfolio means that Genesis Energy is not reliant on one supplier or one field for natural gas supplies and that its gas supply arrangements do not all terminate on the same date.

The company has sufficient contracted natural gas to meet the fuel requirements of its existing Thermal Generation and customers until the end of the decade (2020).

A feature of Genesis Energy's natural gas supply contracts is that the company is able to nominate daily and weekly quantities and to adjust the volumes of gas it takes for planned plant outages, within minimum and maximum take restrictions. This enables some flexibility for Genesis Energy to manage seasonal, operational and electricity-market-driven fluctuations in natural gas requirements. In addition it provides Genesis Energy with flexibility to increase its electricity generation levels in times of increased demand and high wholesale prices and to supply other natural gas users through short or longer term gas contracts.

Another feature of Genesis Energy's natural gas supply contracts are take or pay provisions which mean that Genesis Energy is required to pay for the majority of gas volumes it has contracted to purchase whether or not it takes the gas. Such provisions, including the long term nature of the contracts, provides certainty to the developers to invest in gas fields and are a common practice in the New Zealand market."

------


SNOOPY

[Snoopy]

As with the oil and condensate, the gas field proportion of depletion and depreciation can likewise be spread out over 7 years, not 5. So here are those changes.



YearKupe GasValueResource DepreciationNet


(GJ)Receivedand AmortizationProceeds



20167.00E06$47,320,000$18,889,919$28,480,081


20177.00E06$44,282,056$17,677,187$26,604,869


20186.50E06$38,479,209$16,542,311$21,936,898


20195.1E06$28,253,093$15,480,295$12,772,798


20206.3E06$32,660,243$14,486,460$18,173,783


20216.3E06$30,563,455$13,556,421$17,007,026


20225.1E06$23,153,418$12,686,106$10,467,312


20235.6E06$23,981,181$0$23,791,181


20245.6E06$22,263,788$0$22,263,788


20253.5E06$13,021,533$0$13,021,533


20263.2E06$11,141,075$0$11,141,075


20272.3E06$7,493,556$0$7,493,556


20288.00E05$2,540,580$0$2,540,580


Total6.43E07$324,963,186$116,306,640$208,656,546


PV per share$0.22


PV per share (tax paid)$0.16








YearKupe GasValueResource DepreciationNet


(GJ)Receivedand AmortizationProceeds




20177.00E06$46,600,000$15,364,253$31,241,747


20186.50E06$40,247,610$14,288,755$25,958,855


20195.1E06$29,368,371$13,288,542$16,079,829


20206.3E06$33,739,076$12,358,344$21,380,732


20216.3E06$31,377,341$11,493,260$19,884,081


20225.1E06$23,622,655$10,688,732$12,933,923


20235.6E06$24,122,900$9,940,521$14,182,379


20245.6E06$22,434,297$9,244,684$13,189,612


20253.5E06$13,039,935$0$13,039,935


20263.2E06$11,087,670$0$11,087,670


20272.3E06$7,411,415$0$7,411,415


20288.00E05$2,615,820$0$2,615,820


Total5.73E07$285,673,090$96,667,090$189,006,000


PV per share$0.19


PV per share (tax paid)$0.14



There has been a deterioration in the 'gas' value of the Kupe field on the Genesis Energy balance sheet year to year. My modelling puts this deterioration as 3cps, or 2cps after tax. Note that this is slightly different to the Oil/LPG component which I estimate has shrunk by 1cps over that same period. So why has the 'gas' portion of the field shrunk in value faster than the 'oil ' portion of the field?

SNOOPY

[Snoopy]

There has been a deterioration in the 'gas' value of the Kupe field on the Genesis Energy balance sheet year to year. My modelling puts this deterioration as 5cps, or 4cps after tax. Note that this is slightly different to the Oil/LPG component which I estimate has shrunk by 1cps over that same period. So why has the 'gas' portion of the field shrunk in value faster than the 'oil ' portion of the field?


This question I pose above is somewhat contrived. There is only one Kupe field. Once you start pumping from a Kupe well, the field operator simply has to take whatever comes up from the ground.

For pricing for gas, I am using the 'energy' section (prices spreadsheet) of the mbie government website. The $NZ/GJ rate for CY2015 (the latest full year available) was $NZ5.29/GJ (nominal). (The nominal price figures are those not adjusted for inflation.) This is down from the $NZ6.25/GJ (nominal) figure for CY2014. This price decrease is principally, I believe, because of the announced closure of both the Otahuhu (Contact) and Southdown (Mercury) gas fired power stations, signalling a lower demand for 'spot gas' going forwards.

I use the pharse 'spot gas' advisedly. Under note 25 in Genesis Energy AR2016 there is information on 'price risk' which states:

"The Group has limited exposure to changes in the sale price for gas and LPG as most of the volume is forward sold." 'Most' could be anything more than 50%. But for modelling purposes I am using 80%. This means that despite the decay in wholesale gas price during the year, I am assuming that 80% of Kupe gas is contracted for sale at $NZ7.00/GJ (nominal). This $7 figure is representive of the spot gas price at the time the Kupe field entered production. No information is made available to the public on the exact prices at which Genesis Energy have signed their gas supply contracts. But I feel:

1/ given prevailing gas market prices at the time AND
2/ most gas is sold to large wholesale players who favour long term contracts rather than gambling on securing supply on the spot market in the future

my "80(Long Term): 20 (Spot)" modelling split with prices set at $NZ7.00/GJ (nominal) (Long Term) is reasonable. I am happy top be corrected if my assumption is wrong!

It should not go unnoticed that, as gas prices have trended down, over the past year, the price for a barrel of oil has trended higher. Despite this, the number of barrels of oil produced by Kupe over CY2016 was lower. And despite the oil price rising gross oil returns per barrel at Kupe were lower. This is because of even more highly priced hedged oil contracts expiring. I model Kupe depreciation and depletion according to the respective revenue split between 'oil (including LPG)" and "gas". So as the proportional revenue from oil has fallen, the depreciation/depletion costs are shunted more towards gas. A lower depreciation/depletion cost base for oil in turn implies higher profits for the 'oil division'.

I will end this post as I started, reminding readers that there is no separate 'oil division' and 'gas division'. There is only the one Kupe, selling two broad product streams. Given this, it probably makes most sense to look at the combined diminuation in value of 'oil' and 'gas'.

SNOOPY

[Snoopy]

i will end this post as i started, reminding readers that there is no separate 'oil division' and 'gas division'. There is only the one kupe, selling two brod product streams. Given this, it probably makes most sense to look at the combined diminuation in value of 'oil' and 'gas'.

Here is the short version for those who don't want to read the details. This is my estimate of the total fall in the 'forecast future value' of Kupe because of price changes and field depletion that have occurred over the FY2016 financial year.



FY2016 (forecast)FY2017 (forecast)


per share value Kupe Oil (pre tax) [A]18c17c


per share value Kupe Gas (pre tax)22c19c


per share value all Kupe (pre tax) [A]+[B][b]40c36c


per share value all Kupe (after income tax)30c26c



Note that all of these comparative figures are on a 'post field revaluation reserve' basis. IOW the effect of the revaluation of the Kupe total field reserves during FY2016 has been applied to both sets of figures.

SNOOPY

[fish]

This question I pose above is somewhat contrived. There is only one Kupe field. Once you start pumping from a Kupe well, the field operator simply has to take whatever comes up from the ground.

For pricing for gas, I am using the 'energy' section (prices spreadsheet) of the mbie government website. The $NZ/GJ rate for CY2015 (the latest full year available) was $NZ5.29/GJ (nominal). (The nominal price figures are those not adjusted for inflation.) This is down from the $NZ6.25/GJ (nominal) figure for CY2014. This price decrease is principally, I believe, because of the announced closure of both the Otahuhu (Contact) and Southdown (Mercury) gas fired power stations, signalling a lower demand for 'spot gas' going forwards.

I use the pharse 'spot gas' advisedly. Under note 25 in Genesis Energy AR2016 there is information on 'price risk' which states:

"The Group has limited exposure to changes in the sale price for gas and LPG as most of the volume is forward sold." 'Most' could be anything more than 50%. But for modelling purposes I am using 80%. This means that despite the decay in wholesale gas price during the year, I am assuming that 80% of Kupe gas is contracted for sale at $NZ7.00/GJ (nominal). This $7 figure is representive of the spot gas price at the time the Kupe field entered production. No information is made available to the public on the exact prices at which Genesis Energy have signed their gas supply contracts. But I feel:

1/ given prevailing gas market prices at the time AND
2/ most gas is sold to large wholesale players who favour long term contracts rather than gambling on securing supply on the spot market in the future

my "80(Long Term): 20 (Spot)" modelling split with prices set at $NZ7.00/GJ (nominal) (Long Term) is reasonable. I am happy top be corrected if my assumption is wrong!

It should not go unnooiced that, as gas prices have trended down, over the past year, the price for a barrel of oil has trended higher. Despite this, the number of barrels of oil produced by Kupe over CY2016 was lower.
One reason for the faster deterioration

Great research and analysis snoopy.
Thanks for posting.
Pricing Genesis is so complex and subject to unknowns.
Kupe almost certainly is going to have its output increased-at a cost but relatively cheaply as the strucure is there-more perforations and bores I believe tied back to the unmanned platform.Processing is onshore including lpg so I guess they dont have to flood the market with natural gas and the price for natural gas over and above that contracted will reflect international prices

[Snoopy]

Pricing Genesis is so complex and subject to unknowns.


The main problem for analyst shareholders is that Genesis is a hybrid company. There is a nice clean exposure for shareholders to oil and gas at the wholesale level. Then laid on top of that is the NZ retail electricity and gas market operation. So yes Genesis is more complex than the other gentailers. But I believe my general method of trying to split off Kupe, then analysing what is left as 'Genesis the Gentailer' is the best way to understand it.



Kupe almost certainly is going to have its output increased-at a cost but relatively cheaply as the strutcure is there-more perforations and bores I believe tied back to the unmanned platform.


Do Kupe have the capacity to increase their output? Given their output was less this year than last, I guess they do. But 2P reserves on the books will be depleted faster if Kupe bump up production. So valuing Kupe on a lifetime production basis (as I am doing), the gross total field value will not increase(*) if the operators deplete the field faster.

Do you really think they will boost production fish? Would it not require the oil price to go much higher to justify such a move? I don't know the answer to that question, I am just asking. I see nothing in AR2016 that specifically says that production from Kupe will be increased.



Processing is onshore including lpg so I guess they don't have to flood the market with natural gas and the price for natural gas over and above that contracted will reflect international prices


How much natural gas (as opposed to LPG which is grouped with oil condensate) is exported to other countries from Kupe? I thought the answer was none! Happy to be corrected on this point. But I thought the pricing for natural gas is a purely domestic equation, with no reference at all to international prices. Hence the fall in the NZ gas price with the announcement of the closure of Otahuhu and Southdown, a purely domestic market price setting event?

SNOOPY

(*) apart from the increase in value in bringing revenue forwards because of the time value of money discount factor.

[fish]

[QUOTE=Snoopy;642807]The main problem for analyst shareholders is that Kupe is a hybrid company. There is a nice clean exposure for shareholders to oil and gas at the wholesale level. Then laid on top of that is the NZ retail electricity and gas market operation. So yes Genesis is more complex than the other gentailers. But I believe my general method of trying to split off Kupe, then analysing what is left as 'Genesis the Gentailer' is the best way to understand it.



Do Kupe have the capacity to increase their output? Given their output was less this year than last, I guess they do. But 2P reserves on the books will be depleted faster if Kupe bump up production. So valuing Kupe on a lifetime production basis (as I am doing), the gross total field value will not increase(*) if the operators deplete the field faster.

Do you really think they will boost production fish? Would it not require the oil price to go much higher to justify such a move? I don't know the answer to that question, I am just asking. I see nothing in AR2016 that specifically says that production from Kupe will be increased.


I am also an unfortunate shareholder of NZOG and they have increased the reserves.-have a look at their website on kupe.Several mechanisms but reserves by definition are what can be recovered-not the actual amount in the ground.So they are forecasting to increase production.They had no problem exporting oil and condensate from Tui.I havnt confirmed the process but kupe does have its own processing plant onshore and natural gas can be converted to lpg-dont know if they are doing it and just a bit short of time atm to check it out.However the plan is to increase kupe production

[fish]

a little more research about Kupe.
P1 resrves increased by 82% between june 2015 and june 2016.
Natural gas is used for 20% of our energy.
Surplus can and is converted to methanol and urea plus used in lots of other manufacturing.
Oil and LPG are exported to Australia.

Snoopy you are far more capable of research than I am and I probably have a lot more in invested in Genesis( I margin lend for long-term dividends-hence I invest in companies that pay higher dividends than the interest I am charged).
I really would appreciate if you could research Kupe more and if appropriate revise your valuations including future likely dividends from Genesis

[Snoopy]

a little more research about Kupe.
P1 resrves increased by 82% between june 2015 and june 2016.

<snip>

I really would appreciate if you could research Kupe more and if appropriate revise your valuations including future likely dividends from Genesis


Fish , I am not sure why Kupe is highlighting P1 reserves, as for planning purposes it seems to be P2 reserves that they normally use. Of most interest to me regarding Kupe is the NZOG news release of 27th October 2015 headlined:

"34.7% increase in Kupe Development Reserves"

In particular I would draw your attention to the table presented in that press release. I partially repeat this table below, together with a column on the end that I have added:



Kupe: New Zealand Oil & Gas SharePrevious 2P Developed Reserves less production since July 12P Developed Reserves at 1 Oct 2015Change (A)Previous 2P Developed Reserves at 30 June 2015 (B)Revised Reserves at 30 June 2015 (A)+(B)


Sales gas (PJ)17.423.35.918.424.3


LPG (kilotonnes)75.797.421.779.9101.6


Light Oil (millions of barrels)0.71.00.30.81.1



That 30th June 2015 date is important because it represents the starting point for FY2016, the first year that the uprated reserve estimate was discernable. The next most important thing to remember is that the above table, published by NZOG, represents their 15% share of the Kupe field. Genesis Energy own 31% of Kupe. So to get the resource representing the Genesis shareholding, we have to multiply the NZOG figures by a factor of 31/15.



KupeRevised Reserves at 30 June 2015 (NZOG share)Revised Reserves at 30 June 2015 (GNE share)


Sales gas (PJ)24.350.2


LPG (kilotonnes)101.6210


Light Oil (millions of barrels)1.12.3



As Genesis Energy shareholders, it is the last column of the above table that is of most interest.

SNOOPY

[Snoopy]

Fish , of most interest to me regarding Kupe is the NZOG news release of 27th October 2015 headlined:

"34.7% increase in Kupe Development Reserves"

In particular I would draw your attention to the table presented in that press release. I partially repeat this table below, together with a column on the end that I have added:



Kupe: New Zealand Oil & Gas SharePrevious 2P Developed Reserves less production since July 12P Developed Reserves at 1 Oct 2015Change (A)Previous 2P Developed Reserves at 30 June 2015 (B)Revised Reserves at 30 June 2015 (A)+(B)


Sales gas (PJ)17.423.35.918.424.3


LPG (kilotonnes)75.797.421.779.9101.6


Light Oil (millions of barrels)0.71.00.30.81.1



That 30th June 2015 date is important because it represents the starting point for FY2016, the first year that the uprated reserve estimate was discernable. The next most important thing to remember is that the above table, published by NZOG, represents their 15% share of the Kupe field. Genesis Energy own 31% of Kupe. So to get the resource representing the Genesis shareholding, we have to multiply the NZOG figures by a factor of 31/15.



KupeRevised Reserves at 30 June 2015 (NZOG share)Revised Reserves at 30 June 2015 (GNE share)


Sales gas (PJ)24.350.2


LPG (kilotonnes)101.6210


Light Oil (millions of barrels)1.12.3



As Genesis Energy shareholders, it is the last column of the above table that is of most interest.


Next I draw your attention to page 11 of NZOG AR2015, and in particular the forecast 'production graph' at the top of that page. I took that graph and enlarged it by photocopier to four times the printed out size. From that I was able to scale off the bottom three sub parts of each column: Kupe Condensate (light green), Kupe LPG (dark blue) and Kupe Gas (light blue). By enlarging that graph I was able to use an old fashioned 'double pointed divider' to accurately measure the height of each sub column. I was then able to scale that column height against the column graph scale and derive an expected production schedule in numerical form. It was this schedule that I used to supply the 'production numbers' to my Kupe valuation.

All the numbers derived from that page 11 of NZOG AR2015 graph were in 'Millions of Barrels of Oil Equivalent' (mbooe). For gas, the NZOG IR2015 gives the following conversion factor:

162.4 booe = 1TJ

Now there are one thousand Terajoules in a Petajoule. So

163,400 booe = 1PJ, which alternatively translates to

1,000,000 booe = 6.1PJ

So using that conversion factor, I was able to derive the expected gas production from Kupe in Petajoules (PJ), until field closure in 2028. I derived the production figures as carefully as I could. But I was taking the scalability and accuracy of the production graph as a matter of faith. The critical figure in my 'best guess' from SOFY2016 production schedule, is found right at the bottom of the table, and I have reproduced the total gas produced, according to my interpretation of the graph, below:



YearKupe GasValueResource DepreciationNet


(GJ)Receivedand AmortizationProceeds


Total (2016 to 2018 inclusive)64.3E06$324,963,186$116,306,640$208,656, 546


PV per share$0.22


PV per share (tax paid)$0.16



Now one PJ is equivalent to one million GJ. So from a Genesis Energy shareholding perspective, I was assuming 64.3PJ of recoverable gas in the field. Yet the revised 2P figure after field revaluation only came to 50.2PJ. So what is the casue of this discrepancy? There are many possibilities. But the important point to note is that because I am assuming more gas is pulled out of the ground than Genesis can claim to own, I have if anything overestimated the value of Kupe to Genesis Energy.

SNOOPY

[Snoopy]

Now one PJ is equivalent to one million GJ. So from a Genesis Energy shareholding perspective, I was assuming 64.3PJ of recoverable gas in the field. Yet the revised 2P figure after field revaluation only came to 50.2PJ. So what is the casue of this discrepancy? There are many possibilities. But the important point to note is that because I am assuming more gas is pulled out of the ground than Genesis can claim to own, I have if anything overestimated the value of Kupe to Genesis Energy.


OK I have gone into detail as to how I have modelled the PJ of gas available to Genesis in the Kupe field. I will save readers the details of the similar exercise I did to derive:

a/ the kilotonnes of LPG and
b/ millions of barrels of light oil

that is the Genesis share of the Kupe resource.

But I will summarize the production figures that I used in deriving the value of Kupe to Genesis, compared to the resource that is on record as available to Genesis from their shareholding in Kupe.




Kupe2P Reserves assumed by Snoopy valuation model at 30 June 2015Actual 2P Revised Reserves at 30 June 2015 (GNE share)


Sales gas (PJ)64.3 (+28%)50.2


LPG (kilotonnes)269 (+28%)210


Light Oil (millions of barrels)3.1 (+35%)2.3



Readers will see that as well as overestimating the gas available for sale, I have also overestimated the amount of LPG condensate and light oil available for sale as well! The fact that all figures are consistently high would indicate that if I have made an error, then it is likely to be a 'conceptual mistake', not a 'procedural mistake'. The light oil overestimate error looks worst. But this could be explained by the fact that the oil figures were the least precise to begin with. So in my assessment it is the imprecision of the 'Genesis share of the revised field data' to begin with that has created this anomoly.

Nevertheless any overestimate of value on my behalf simply means that my valuations should be regarded as 'maximum' estimates. When I end up removing the overestimated value of Kupe to Genesis from the rest of Genesis, this will underestimate the value of what is left of Genesis. IOW I will overall be making a conservative valuation of Genesis when it eventually comes out!

SNOOPY

[fish]

Thanks for that thorough research snoopy.
Not the increase in value of increased reserves I expected.
I look forward to your valuation of genesis.

[Snoopy]

Thanks for that thorough research snoopy.
Not the increase in value of increased reserves I expected.
I look forward to your valuation of genesis.

Given my acknowledged 'errors', I have been staring today at the 'FY2016 NZOG Annual Report' and the actual and forecast 2P (Proven & Probable) production forecast. It now goes out to 2035. I was thinking, how can the owners of the Kupe field possibly know how much oil/lpg/gas will be produced from 18 years into the future? Then the answer hit me. They don't know! They can't possibly know, as evidenced by the recent revision upwards of reserves during FY2016 as new information was forthcoming.

I have no doubt that NZOG are experienced oil/gas investors and can draw on data both publically available and not, from their own experience. This means they can make an educated and informed guess at what might happen. But to actually know what will happen in 18-20 years time - no chance! So my proposition is that the Kupe '2P' production graph, once it goes out a few years, cannot be reliable. What do you think Oil and Gas investors? Am I on to something?

SNOOPY

[Hectorplains]

[QUOTE This means they can make an educated and informed guess at what might happen. But to actually know what will happen in 18-20 years time - no chance! So my proposition is that the Kupe '2P' production graph, once it goes out a few years, cannot be reliable. What do you think Oil and Gas investors? Am I on to something?

SNOOPY[/QUOTE]

Yep, that's what a 'prediction', or 'guess' - if you want to use the more pejorative synonym, is. It's reliable like a weather forecast, a broker's fair price or the Black Caps.

[Snoopy]

Yep, that's what a 'prediction', or 'guess' - if you want to use the more pejorative synonym, is. It's reliable like a weather forecast, a broker's fair price or the Black Caps.


I have been reworking my Genesis Energy Kupe production schedule, based on the latest projections in the NZOG AR2016 "Actual and Forecast 2P Production". The projections go out in a slow decay to year 2034. But I have stopped at year 2028, to compile the figures below.



Kupe2P Reserves assumed by Snoopy valuation model at 30 June 2016 but from 30/06/20152P Reserves assumed by Snoopy valuation model at 30 June 2015Actual 2P Revised Reserves at 30 June 2015 (GNE share)


Sales gas (PJ)74.5 (+48%)64.3 (+28%)50.2


LPG (kilotonnes)277 (+32%)269 (+28%)210


Light Oil (millions of barrels)3.3 (+43%)3.1 (+35%)2.3



As you can see, the total production I will be assuming in my upcoming reevaluation of the field production data is even further above the 2P (Proven and Probable) reserves than I have been assuming up to now.

One thing missing from my analysis is any information on further incremental Kupe field production costs that are required to keep the forecast production schedule on track. We are told such expenditure has been pushed further out into the future than originally expected. But we have no information on what these costs might be. And this information is required to properly assess Kupe field profitability. It seems 'not right' to continue to book future gross returns, beyond 2028, as 'profits' when we have no information on the likely costs incurred to gain those profits.

Further, it seems clear that the '2P' production hinted at in the annually published NZOG projected field production data must contain more product that that deemed 'proven' and 'probable'. It must contain some of the 'possible' (part of the 3P 'proven', 'probable' and 'possible' Reserve Set) as well.

In summary, my next 'gas' and 'condensate' spreadsheet will be providing a 'hopeful high' valuation of Kupe as it relates to Genesis Energy. If we keep in mind the Genesis Energy valuation equation:

'Genesis Energy' = 'Genesis Gentailer' + 'Genesis Kupe'

then assuming 'Genesis Kupe' is valued slightly highly, this means that 'Genesis Gentailer' will be valued slightly lower than it should be when I do the

'Genesis Energy (market value)' - 'Genesis Kupe' = 'Genesis Gentailer'

subtraction.

SNOOPY

[Bobdn]

Newspaper article in 2012 said Kupe had a 15 to 20 year life span. That's plenty for me and, as I'm getting on in years, there's a reasonable chance I'll run out before Kupe does.

[fish]

Newspaper article in 2012 said Kupe had a 15 to 20 year life span. That's plenty for me and, as I'm getting on in years, there's a reasonable chance I'll run out before Kupe does.
Kupe will not run out its just that one day the costs of production will exceed the value of the products and then the field will be sealed.
As you can see there are so many inherent variables-as Snoopy is finding out-that we dont know how long the field will be profitable.
So far production and reserves has exceeded initial expectations.

[Zaphod]

Kupe will not run out its just that one day the costs of production will exceed the value of the products and then the field will be sealed.
As you can see there are so many inherent variables-as Snoopy is finding out-that we dont know how long the field will be profitable.
So far production and reserves has exceeded initial expectations.

Adding to the above, we may also see additional extensions to the life of the field in depending upon further advances in extraction technology and as the price of oil rises back to previous levels making extraction of the last barrels economic.

[Snoopy]

The reserves extracted during FY2016 have been officially 'depleted'. So what is the value of the oil and natural gas still in the ground in Kupe to 'Genesis Eneregy' today?



YearNo. of Oil & LPGOil BarrelKupe CondensateResource DepreciationNet


Equiv barrelsPrice USDRevenueand AmortizationProceeds


201762000057.01$53,070,511$15,335,747$37,734,763


201857900053.58$39,921,568$14,262,245$25,659,322


201953700050$32,253,563$13,363,888$18,989,675


202055800050$31,168,834$12,235,416$18,833,418


202147600050$24,727,275$11,471,937$13,255,338


202239300050$18,986,495$10,668,901$8,317,924


202343400050$19,499,565$9,922,078$9,577,487


202439300050$16,421,420$9,227,533$7,193,887


202526900050$10,453,299$10,453,299


202622700050$8,203,702$8,203,702


202714500050$4,873,433$4,873,433


20286200050$1,937,946$1,937,946


Total4.693E06$261,717,609$96,487,745$165,029,864


PV per share$0.17


PV per share (tax paid)$0.12



A few things have changed year to year.

1/ I have updated the FY2017 and FY2018 hedged positions for oil in accordance with the forward hedging disclosed in the AR2016 results presentation.
2/ I have lifted my 'spot value' of oil from $US45 a barrel to $US50 a barrel, in light of the rallying oil price on world markets over the last six months. In addition my 'spot value' exchange rate is now $NZ1 = $US0.72, up from $NZ1 = $US0.66.
3/ The depreciation that I previously modelled over 7 years from FY2016 inclusive has now been modelled over 8 years from FY2017 inclusive. Furthermore, because oil is now a lesser share of revenue, in percentage terms, the proportion of Kupe field depreciation that I have apportioned to oil has reduced.
4/ The discount rate for future cashflows remains at 7%.

The result, a mere 1cps decrease in the financial value of reserves after a full years operation, would have to be pleasing to shareholders. Previously undisclosed relatively favourable hedging positions to current market prices have helped. The rise in spot price I have assumed from USD45 to USD50 a barrel has been partially undone by the consummate rise in exchange rate. The slowing rate of depreciation and amortisation at Kupe is perhaps the most significant effect in the 'increased valuation' (when compared year on year).


What follows below is a look at the oil and condensate slated for production, but this time using the production schedule graphed in the FY2016 NZOG annual report.



YearNo. of Oil & LPGOil BarrelKupe CondensateResource DepreciationNet


Equiv barrelsPrice USDRevenueand AmortizationProceeds


201764000057.01$54,782,462$15,335,747$39,446,715


201851500053.58$35,508,821$14,262,245$21,246,576


201947500050$28,529,688$13,363,888$15,265,800


202039500050$22,063,959$12,235,416$9,728,544


202141500050$21,558,443$11,471,937$10,086,507


202241500050$20,049,352$10,668,901$9,380,451


202341500050$18,645,898$9,922,078$8,723,820


202451500050$21,519,163$9,227,533$12,291,630


202537000050$14,378,144$14,378,144


202631000050$11,203,294$11,203,294


202727000050$9,074,668$9,074,688


202811550050$3,610,206$3,610,206


Total4.8505E06$260,924,098$96,487,745$164,436,353


PV per share$0.16


PV per share (tax paid)$0.12



Note that slightly more oil and LPG is forecast to be produced overall. Also note that volume of production is already slated to be pushed out more over the later years being examined. Overall the revised extraction timing and slightly larger volume extracted has lead to a decrease in the value of Kupe Oil (the Genesis part of it) by 1cps over iteration 1. This is largely due to the projected lesser oil harvest (slowed down because of the falling oil price?) in the near years, not quiet balanced out by the increased extraction in latter years due to the 'time value of money' effect.

SNOOPY

[Snoopy]

YearKupe GasValueResource DepreciationNet


(GJ)Receivedand AmortizationProceeds


20177.00E06$46,600,000$15,364,253$31,241,747


20186.50E06$40,247,610$14,288,755$25,958,855


20195.1E06$29,368,371$13,288,542$16,079,829


20206.3E06$33,739,076$12,358,344$21,380,732


20216.3E06$31,377,341$11,493,260$19,884,081


20225.1E06$23,622,655$10,688,732$12,933,923


20235.6E06$24,122,900$9,940,521$14,182,379


20245.6E06$22,434,297$9,244,684$13,189,612


20253.5E06$13,039,935$0$13,039,935


20263.2E06$11,087,670$0$11,087,670


20272.3E06$7,411,415$0$7,411,415


20288.00E05$2,615,820$0$2,615,820


Total5.73E07$285,673,090$96,667,090$189,006,000


PV per share$0.19


PV per share (tax paid)$0.14



There has been a deterioration in the 'gas' value of the Kupe field on the Genesis Energy balance sheet year to year. My modelling puts this deterioration as 3cps, or 2cps after tax. Note that this is slightly different to the Oil/LPG component which I estimate has shrunk by 1cps over that same period. So why has the 'gas' portion of the field shrunk in value faster than the 'oil ' portion of the field?


Time to rerun the Kupe valuation model (natural gas component) , this time using the 2P production chart in the NZOG FY2016 annual report.



YearKupe GasValueResource DepreciationNet


(GJ)Receivedand AmortizationProceeds


20175.80E06$38,616,400$15,364,253$23,252,147


20186.10E06$37,770,834$14,288,755$23,482,079


20196.00E06$34,551,025$13,288,542$21,262,483


20205.70E06$30,525,831$12,358,344$18,167,487


20215.70E06$28,389,023$11,493,260$16,895,763


20225.70E06$26,401,791$10,688,732$15,713,459


20235.70E06$24,553,666$9,940,521$14,613,145


20245.30E06$21,232,459$9,244,684$11,987,775


20255.80E06$21,609,035$0$21,609,035


20265.80E06$20,096,403$0$20,096,403


20275.80E06$18,699,454$0$18,699,454


20284.50E06$13,485,552$0$13,485,552


Total6.79E07$315,921,673$96,667,090$219,254,583


PV per share$0.22


PV per share (tax paid)$0.16



Again we are looking at lower near term production , but with a fatter 'tail' that more than makes up for the slower start. The mysterious 'increase in the amoung of gas available to sell' well above last years uprated 2P field revaluation is a big help in boosting the gas component of the Kupe revaluation.

SNOOPY

[Snoopy]

Here is the short version for those who don't want to read the details. This is my estimate of the total fall in the 'forecast future value' of Kupe because of price changes and field depletion that have occurred over the FY2016 financial year.



FY2016 (forecast)FY2017 (forecast)


per share value Kupe Oil (pre tax) [A]18c17c


per share value Kupe Gas (pre tax)22c19c


per share value all Kupe (pre tax) [A]+[b]40c[b]36c


per share value all Kupe (after income tax)30c26c




Note that all of these comparative figures are on a 'post field revaluation reserve' basis. IOW the effect of the revaluation of the Kupe total field reserves during FY2016 has been applied to both sets of figures.


Once again we look at the total residual value of the Kupe Field to Genesis Energy at the start of FY2016 (using NZOG production schedules as graphed in NZOG Annual Report for FY2015) compared to the total residual value of the Kupe Field to Genesis Energy at the start of FY2017 (using NZOG production schedules as graphed in NZOG Annual Report for FY2016).




FY2016 (forecast)FY2017 (forecast)


per share value Kupe Oil (pre tax) [A]18c16c


per share value Kupe Gas (pre tax)22c22c


per share value all Kupe (pre tax) [A]+[B][b]40c38c


per share value all Kupe (after income tax)30c28c



Note that all of these comparative figures are on a 'post field revaluation reserve' basis. IOW the effect of the revaluation of the Kupe total field reserves during FY2016 are consistent with both sets of figures.

SNOOPY

[trader_jackson]

Once again we look at the total residual value of the Kupe Field to Genesis Energy at the start of FY2016 (using NZOG production schedules as graphed in NZOG Annual Report for FY2015) compared to the total residual value of the Kupe Field to Genesis Energy at the start of FY2017 (using NZOG production schedules as graphed in NZOG Annual Report for FY2016).




FY2016 (forecast)
FY2017 (forecast)


per share value Kupe Oil (pre tax) [A]
18c
17c


per share value Kupe Gas (pre tax)
22c
19c


per share value all Kupe (pre tax) [A]+[B]
[B]40c
36c


per share value all Kupe (after income tax)
30c
26c



SNOOPY

Interesting research Snoopy, so could one say the value of GNE's 'gentailer' part is only $1.52? (with current share price of $1.92)
If that's the case, GNE seems cheap!

[Snoopy]

Interesting research Snoopy, so could one say the value of GNE's 'gentailer' part is only $1.52? (with current share price of $1.92)
If that's the case, GNE seems cheap!

The Kupe value figure you have used is based on the 2015 projected production schedule. The Kupe value figure based on the 2016 projected production schedule is 38c (before tax) and 28c (after tax). I would tend to use the after tax figure because if as a shareholder you wait to get your return from Kupe, then ultimately you will be taxed (not 100% sure if I should be using the pretax or post tax Kupe valuation though!). So using the 'Genesis Energy' value equation:

'Genesis Energy' = 'Genesis Gentailer' + 'Genesis Kupe'

And putting in the per share values we know, based on today's GNE market price:

$1.92 = 'Genesis Gentailer' + $0.28

I get 'Genesis Gentailer' = $1.64

But you need to remember that not all of Genesis's earnings come from 'Genesis Gentailer'. There is a little bit more work to do before proclaiming whether 'Genesis Gentailer' is cheap or not.

SNOOPY

[Snoopy]

What follows below is a look at the oil and condensate slated for production, but this time using the production schedule graphed in the FY2016 NZOG annual report.



YearNo. of Oil & LPGOil BarrelKupe CondensateResource DepreciationNet


Equiv barrelsPrice USDRevenueand AmortizationProceeds


201764000057.01$54,782,462$15,335,747$39,446,715





Time to rerun the Kupe valuation model (natural gas component) , this time using the 2P production chart in the NZOG FY2016 annual report.



YearKupe GasValueResource DepreciationNet


(GJ)Receivedand AmortizationProceeds


20175.80E06$38,616,400$15,364,253$23,252,147




My modelled earinings from Kupe can be worked out by adding the two highlighted figures from the top row of the respective 'condendate' and 'gas' earnings tables.

$23,252,147 + $39,446,715 = $62.699m

Divide that by the number of Genesis shares on issue and you get 'earnings per share'.

$62.699m / 1,000m = 6.3cps

You can cross check this figure by looking at Section 3 (Segment Reporting) of AR2016 and looking at the 'oil and gas', profit before tax figure:

$43.2m / 1,000m = 4.3cps

That is quite a big difference. So what is the explanation?

SNOOPY

[Snoopy]

$62.699m / 1,000m = 6.3cps

You can cross check this figure by looking at Section 3 (Segment Reporting) of AR2016 and looking at the 'oil and gas', profit before tax figure:

$43.2m / 1,000m = 4.3cps

That is quite a big difference. So what is the explanation?


If you look at page 38 of AR2016, you can ses that the company oil and gas divisional figures include a few adjustments that I do not

1/ A net interest bill of $2.8m. I have considered Kupe as a stand along equity investment free of company borrowings. I think of it this way because Genesis has no day to day input into the running of Kupe and minimal (if any) staff looking after their investment in Kupe. Kupe is run solely by Origin Energy. You could argue that I should have included a Genesis funding charge against the Genesis shareholding. But I think it is a contentious issue.

2/ 'Change in the Fair Value of Financial Instruments' and 'Other Losses' to the total of $3.7m have been included in the company figures. I don't include 'Change in the Fair Value of Financial Instruments' as these tend to be transient year on year movements that even out to zero over the contracted period of production. Likewise I don't include "other (non core) losses."

3/ There are $4.2m of unspecified 'Other Expenses', not part of depreciation, amortisation and depletion. I have left these out as being 'non-core' to the general operation of Kupe.

So bridging these changes from the company declared figure to mine:

$43.2m + $2.8m +$3.7m + $4.2m = $53.9m

This is still shy of the $62.7m in earnings that I am claiming. But shareholders also need to remember that I am assuming 80% of gas earnings are pre-booked at $7/GJ and 20% of gas is sold on the spot market at $5.3/GJ. Where did I decide on the 80/20 split between historical and spot gas prices? In my head, because Genesis does not disclose such fine details. It's a pure educated guess on my part! So if instead between 50% and 80% of gas is sold at the spot price, then this would lower my estimated earnings.

Yet if estimated earnings are lower, this means the discounted value of the sum of the earnings of the whole field are lower too, and the value I attribute to the whole of Kupe is lower (so yield does not change). I can fiddle around with my spreadsheet making more changes and complicating the earnings formula. But there is no 'one way' you can universally look at Kupe earnings and declare that to be 'right'. So I have decided to be 'consistent' rather than try and be 'more correct' (whatever that means). It keeps things simpler. And as long as by estimates are within the 'earnings ballpark' it is sufficient for my own valuation purposes.

SNOOPY

[Snoopy]

The Kupe value figure you have used is based on the 2015 projected production schedule. The Kupe value figure based on the 2016 projected production schedule is 38c (before tax) and 28c (after tax). I would tend to use the after tax figure because if as a shareholder you wait to get your return from Kupe, then ultimately you will be taxed (not 100% sure if I should be using the pretax or post tax Kupe valuation though!).


Having some second thoughts here. I was considering Kupe as a permanent stream of value for Genesis Energy going all the way out to 2034. This is how I see things today, and Genesis have given no indication that their stake in Kupe is for sale. But the stake could be sold. And if that happens it probably would not be sold on a 'tax paid' basis. So on reflection, I think that the Kupe stake should be valued on a 'pre-tax' basis, without the assumption that Genesis and by implication Genesis shareholders will pay all tax on profits from the field into the future.

SNOOPY

[fish]

Having some second thoughts here. I was considering Kupe as a permanent stream of value for Genesis Energy going all the way out to 2034. This is how I see things today, and Genesis have given no indication that their stake in Kupe is for sale. But the stake could be sold. And if that happens it probably would not be sold on a 'tax paid' basis. So on reflection, I think that the Kupe stake should be valued on a 'pre-tax' basis, without the assumption that Genesis and by implication Genesis shareholders will pay all tax on profits from the field into the future.

SNOOPY

I agree Kupe is best valued on a pre-tax figure-although I wouldnt assume Genesis would ever want to sell it.
My main thought is that if tax is paid I get it back through imputation credits.
Their policy is to pay high dividends and expect cash flow will enable this.Hence dividend is not fully imputed.
Next having a shareholding is a form of relatively free hedging against the price of gas.
Looking at AIR there are a lot of cost factors involved in their hedging of fuel-both internally and externally in making these hedges which as shareholders we are not aware of-but those hedge managers are well-paid and it will require other management time.
Finally there will be costs involved in maintenace and making the field more efficient and productive.

[Snoopy]

'Genesis Energy' = 'Genesis Gentailer' + 'Genesis Kupe'


You need to remember that not all of Genesis's earnings come from 'Genesis Gentailer'. There is a little bit more work to do before proclaiming whether 'Genesis Gentailer' is cheap or not.


It is now 'normalised result' reconciliation time. I am basing this calculation for the normalised profit of the whole of Genesis Energy on the published "Consolidated Statement of Income", on p31 of AR2016



EBITDAF$335.3m


less Emission Unit Trading Net Gain {$21.0m-$15.5m}($5.5m)


less One off Gain on value of Turbine Parts($6.9m)


Total: Normalised EBITDAF$322.9


less Net Finance Expense ($2.0m - $65.2m) ($63.2m)


less Depreciation, Depletion & Amortisation ($127.5m)


Total: NPBT (normalised)$132.2


less Income Tax @ 28%($37.0m)


Total: NPAT (normalised) $95.2



Note that the declared after tax profit for Genesis Energy over FY2016 was $184.2m. Yet the 'normalised profit' (repeatable profit, pulling out one off events), is only a little more than half this figure!

SNOOPY

[fish]

[QUOTE=Snoopy;643760]It is now 'normalised result' reconciliation time. I am basing this calculation for the normalised profit of the whole of Genesis Energy on the published "Consolidated Statement of Income", on p31 of AR2016

Again thanks for the work you are putting in.
However I do question the validity of normalised profits.
For instance depreciation is high-righty so to depreciate Huntly but has the hydro assets been depreciated.Tekapo,tongariro etc -some assets in relation to future normal profits should really be appreciated.
Are interest rates reducing the interest expense.
Has the purchase price of electrcity been reduced.
There are so many variables that relate to future profits.
I feel cash flow is a more valid parameter as to future earnings

[Snoopy]

I do question the validity of normalised profits.
For instance depreciation is high-righty so to depreciate Huntly but has the hydro assets been depreciated. Tekapo, Tongariro etc -some assets in relation to future normal profits should really be appreciated.
Are interest rates reducing the interest expense.
Has the purchase price of electricity been reduced.
There are so many variables that relate to future profits.
I feel cash flow is a more valid parameter as to future earnings

I am going to share a little investment secret I have with you fish. I too appreciate the very long term likelihood that the long running hydro assets will increase in value and thus 'shore up' the balance sheets of the energy companies that hold them. If Tiwai closes, I am prepared to hold my gentailer shares long into the future until they 'come right' through a natural increase in demand due to population rise.

However, I look at the nominal prices.xlsx spreadsheet on the mbie website and see wholesale gas for CY2015 at a ten year low 5.29$/GJ. Since wholesale gas is the top up fuel that is needed to bridge the gap between any demand shortfall from the renewable power sources, this tells me that our current renewable power plants are more than capable of meeting NZs electricity demand. And that means that I should not be looking for an underlying increase in electricity demand, or an associated rise in the value of NZs hydro stations any time soon.

Of more medium term concern is a likely rise in NZ interest rates from all time lows. That alone will affect the 'Discount Rate' (AR2016 p46) applied to future profit streams that are used to value these power stations. Thus in the medium term, I think there is a real chance that the value of some of these hydro assets will decrease. Consequently, I don't believe it is wise to build an investment case assuming these hydro assets will increase in value in the medium term.

The purchase price of electricity I believe is largely irrelevant to our gentailers. That's because the 'retail' side of the business is a natural hedge to whatever price movements occur in the 'wholesale' side of the business.

Your last statement, that I have highlighted, looks like you are dangerously close to believing the proclamations from your own hype-hole. I presume you meant to write:

"cash flow is a more valid parameter as to future dividends"

But your sub-conscious is so attuned to thinking of cashflows as a proxy for earnings, that you now see earnings, in a sub conscious way as something not to bother about! I would suggest you might want to rethink that! Dividends not paid out of profits are to my way of thinking the equivalent of a capital return. Genesis may pay your own capital that you already own back and call that a "non imputed dividend". But is such a payment really a dividend?

SNOOPY

[Snoopy]

Of more medium term concern is a likely rise in NZ interest rates from all time lows. That alone will affect the 'Discount Rate' (AR2016 p46) applied to future profit streams that are used to value these power stations. Thus in the medium term, I think there is a real chance that the value of some of these hydro assets will decrease. Consequently, I don't believe it is wise to build an investment case assuming these hydro assets will increase in value in the medium term.


An interesting little aside here on 'discount rate'.

Under 'Property Plant and Equipment' valuation comments GNE AR2016 p46

"...unobservable inputs in the valuation model were:

<snip>

Discount Rate. Pre-tax equivalent discount rate of 10.8%. Discount rate is independent of wholesale electricity prices and generation volumes."

Under "Goodwill and Asset Impairent Testing", from the CEN AR2016 p66

"Determining value in use involves estimating future cash flows for each CGU ('Cash Generation Unit'). The cashflows are adjusted for future growth based on historical inflation and discounted at a post tax discount rate of 7-9% to arrive at present value, or recoverable amount of each CGU."

8% (to take the mid point) and nearly 11% is a huge discrepancy in assumption between two broadly similar (?) companies operating in the same market. A 3% discount rate valuation difference represents nearly a billion dollars in asset valuation (or a non-trivial $1 per share, spread over the one billion GNE shares in existence) booked on the Genesis Energy balance sheet. Has anyone got an inkling as to what might cause such a discount rate valuation discrepancy between the two companies?

SNOOPY

PS Genesis AR2016 p46 (again). The wording of the sensitivity analysis seems to say that if the discount rate rises from 10.8% to 11.8%, then the result is an increase in asset values of $373m. I would have thought that if the discount rate increases then the value of those generation assets should fall by $300m. Am I reading that table correctly?

[Beagle]

So with the recent slight bounce in the SP and finding that real profit is only close to half what was paid in dividends, (no longer fully imputed as foreshadowed by this hound), and with the medium term outlook for interest rate increases is Snoopy still content to hold ?

[Snoopy]

An interesting little aside here on 'discount rate'.

Under 'Property Plant and Equipment' valuation comments GNE AR2016 p46

"...unobservable inputs in the valuation model were:

<snip>

Discount Rate. Pre-tax equivalent discount rate of 10.8%. Discount rate is independent of wholesale electricity prices and generation volumes."

Under "Goodwill and Asset Impairent Testing", from the CEN AR2016 p66

"Determining value in use involves estimating future cash flows for each CGU ('Cash Generation Unit'). The cashflows are adjusted for future growth based on historical inflation and discounted at a post tax discount rate of 7-9% to arrive at present value, or recoverable amount of each CGU."


For further comparative purposes in valuing assets, Mercury Energy (MCY AR2016 p59) uses a discount rate of 7.4 - 7.9% (within bound but on the low side of the Contact Energy figure).

Meridian Energy OTOH uses a different method incorporating a suitable EBITDAF multiple of 12 (MEL AR2016 page 67). That is a different approach to take, as it assumes a market biased approach to a single year forward looking perspective. Not a good way to evaluate the true value of long lived hydro assets, I would have thought!

SNOOPY

[Snoopy]

So with the recent slight bounce in the SP and finding that real profit is only close to half what was paid in dividends, (no longer fully imputed as foreshadowed by this hound), and with the medium term outlook for interest rate increases is Snoopy still content to hold ?

If the market value of GNE generation assets (after the FY2016 revaluation upwards) is really one billion more ($1 per share more) than the book value shown in the AR2016 accounts, then this may very well influence my buy/sell decision making!

SNOOPY

[Jantar]

Under 'Property Plant and Equipment' valuation comments GNE AR2016 p46


..... Pre-tax equivalent discount rate of 10.8%. .......

from the CEN AR2016 p66
....... a post tax discount rate of 7-9%

....
Considering one is pre tax and the other is post tax I would have thought that they were pretty similar.

[fish]

If the market value of GNE generation assets (after the FY2016 revaluation upwards) is really one billion more ($1 per share more) than the book value shown in the AR2016 accounts, then this may very well influence my buy/sell decision making!

SNOOPY

Thank you so much snoopy for sharing your research.

I am so glad I sold most of my nzo,some of my AIR and have been building up CEN and to a lesser extent GNE.
The world is truly unpredictable.
We are so lucky here.
I have a feeling(not a prediction) that We are about to see more immigration from California and England.
We might even see an increase in electricity demand and no one prepared to invest more in generation.
Whatever happens I am going to keep getting good dividends.
The SP is likely to be volatile for sometime to come .
In the meantime I am going to avoid trading,not look at the SP and instead focus my interests elsewhere

[Snoopy]

Considering one is pre tax and the other is post tax I would have thought that they were pretty similar.

GNE: post tax discount rate (1-0.28) x 10.8 = 7.8
CEN: post tax discount rate of 7 to 9%
MCY: post tax discount rate of 7.4 - 7.9%

Yes everything looks more consistent expressed in post tax terms. It is goodbye to the hidden $1b windfall of Genesis Assets hidden on the books though :-(

SNOOPY

[Snoopy]

So with the recent slight bounce in the SP and finding that real profit is only close to half what was paid in dividends, (no longer fully imputed as foreshadowed by this hound), and with the medium term outlook for interest rate increases is Snoopy still content to hold ?

Compared to Contact (CEN AR2016 p63), Genesis Energy is not very forthcoming on the exact interest rates attributable to the individual parts of their borrowings (GNE AR2016 p51,53).

The next big blocks of bank credit to expire looks like at not insignificant $125m of notes in 2017 and $175m at an unknown interest rate in July 2018. I would guess significant interest savings are on the cards from rolling over those historical loans , even if our own interest rates have started to rise again by then (Contact borrowings expiring around that time period have coupon rates of about 7%).

SNOOPY

[Snoopy]

Time to rerun the Kupe valuation model (natural gas component) , this time using the 2P production chart in the NZOG FY2016 annual report.



YearKupe GasValueResource DepreciationNet


(GJ)Receivedand AmortizationProceeds


20175.80E06$38,616,400$15,364,253$23,252,147


20186.10E06$37,770,834$14,288,755$23,482,079


20196.00E06$34,551,025$13,288,542$21,262,483


20205.70E06$30,525,831$12,358,344$18,167,487


20215.70E06$28,389,023$11,493,260$16,895,763


20225.70E06$26,401,791$10,688,732$15,713,459


20235.70E06$24,553,666$9,940,521$14,613,145


20245.30E06$21,232,459$9,244,684$11,987,775


20255.80E06$21,609,035$0$21,609,035


20265.80E06$20,096,403$0$20,096,403


20275.80E06$18,699,454$0$18,699,454


20284.50E06$13,485,552$0$13,485,552


Total6.79E07$315,921,673$96,667,090$219,254,583


PV per share$0.22


PV per share (tax paid)$0.16




There is something troubling about my above valuation of Kupe (gas). There is a nice decay(*) of a depleting resource going out into the future until 2024 (see last column of table). By 2025 the net value of recovered gas suddenly doubles, even though production remains less than 10% higher than the previous year. So what is happening here?

In the small print of the Genesis Energy AR2016 on page 48 we find the following note:

"Depletion of Oil and gas producing assets excluding major inspection costs is calculated on a unit of production basis using the proven remaining reserves (1P)..."

However, when the Kupe field had its reserves upgraded, all the talk was about the greater 2P reserves now available. Further down on AR2016 p48 we learn something interesting about 'Proven Reserves'

"Proven reserves are those which have a 90% likelihood of being delivered."

So even 'proven reserves' are not considered a given. Notwithstanding this, the table that I have produced is actually a mismatch: Offsetting 2P revenue against 1P field depletion costs. So is my table really a long list of numbers that is really a waste of time? I would argue 'no' for the following reasons:

1/ 2P reserves are still the most probable measure of actual reserves. But we won't know that for sure until Kupe nears the end of its production life.
2/ There is no estimate given of 2P final production costs. And I don't have sufficient technical expertise to make a good guess.
3/ Offsetting field 1P depletion against 2P production will give a slightly lower field net value than if I was able to offset 2P depletion against 2P production. That's because writing off depletion charges sooner means these charges carry less of a time value of money discount. So my overall valuation of Kupe is slightly less than what it should ultimately turn out to be. Generally having a valuation of the conservative side is better than having an overoptimistic valuation from an investor perspective.

Conclusion: Baring better information becoming available, I will stick with the Kupe valuation that I have done.

(*) the obvious immediate exception being 2017 and 2018 in which the latter year is higher. This is because of lower production scheduled in FY2017 because of planned shut down and maintenance work.

SNOOPY

[trader_jackson]

https://www.nzx.com/companies/GNE/announcements/292744

So... increase in dividends?

Looks like snoopy you'll be re-doing your valuations!

[Snoopy]

https://www.nzx.com/companies/GNE/announcements/292744

So... increase in dividends?

Looks like snoopy you'll be re-doing your valuations!

My post 2082 values 31% of Kupe at 36cps (pre tax, before any borrowing costs). By ratio, this means that 15% of Kupe is worth:

15/31 x 36cps = 17.4cps (cents per Genesis share). There are 1b Genesis shares on issue. So by my reckoning the Kupe stake that Genesis is about to acquire from NZOG, NZOG shareholder approval pending, is worth $174m.

Genesis are offering to pay $168m which is within 3% of my own Kupe valuation. So I have to conclude that at the end of my previously supplied long drawn out multi-spreadsheet Kupe evaluation, the various stokings of my steam powered calculator have paid off!

Maybe I did know what I was talking about all along ;-P. Instead of hiring a high powered valuation firm to appraise their Kupe stake, NZOG should have given the job to the dog on the kennel out the back!

SNOOPY

[Bobdn]

Impressive Snoopy.

So happy that Genesis is increasing it's stake.

[Snoopy]

So... increase in dividends?
Looks like snoopy you'll be re-doing your valuations!


The acquisition is being funded by borrowings. Current borrowing costs average around 6%.

$168m x 0.06 = $10m.

Genesis are claiming that NPAT for FY2017 will increase by $2m after funding costs. So the forecast FY2017 "overall increase before interest costs and tax on that $2m extra profit" (change in EBIT) must be a gain of $10m+ $2m +0.28x $2m = $12.5m.

One thing top remember is that Genesis have already contracted to take all of the gas output from the Kupe field. So from a gas perspective, Genesis are effectively locking in more of their wholesale costs at quite a low market level (from an historical perspective at least).

At float time, Genesis commented that they had too much contracted gas that was affecting profitability and that the oversupply would only start to come into balance starting this year. This NZO Kupe shareholding acquisition won't change the gas supply situation for Genesis, because they are already contracted to take all gas output from Kupe. However, Genesis will ultimately gain greater exposure to oil and LPG going forwards, as a result of acquiring the NZO Kupe stake.

Anyone know details ( like spot price contracts vs hedged price contracts) about the current oil supply contracts that NZOG has, which will continue under Genesis ownership?

SNOOPY

[trader_jackson]

https://www.nzx.com/files/attachments/248626.pdf

Very interesting presentation, I was most interested in slides 75 to 77 (of the attachment)
It would seem GNE are trying to be a "Yield plus Growth" company, which could lead to a re-rating (ie higher share price)
Aside from the re-rating possibility, it looks like they are very confident in increasing their dividends year after year... this alone is enough to make me a happy holder.

Disclosure: held a not-nearly-big-enough shareholding since IPO

[Bobdn]

Thanks for the link. Didn't know the presentation was happening today. GNE is my biggest holding so I must pay more attention.

I bought GNE for a steady, boring income stream for the next 15 years. Any growth would be a welcome bonus.

[Snoopy]

https://www.nzx.com/files/attachments/248626.pdf

Very interesting presentation, I was most interested in slides 75 to 77 (of the attachment)
It would seem GNE are trying to be a "Yield plus Growth" company, which could lead to a re-rating (ie higher share price)
Aside from the re-rating possibility, it looks like they are very confident in increasing their dividends year after year... this alone is enough to make me a happy holder.

Disclosure: held a not-nearly-big-enough shareholding since IPO


Genesis, in that presentation are talking about a 'base yield' of 7% based on the current share price as at 22-11-2016 of $1.96. The interim and final dividend for FY2016 (the two dividends most recently received) were both 8.2c. This means that at presentaion time, the historical yield was:

(8.2c + 8.2c)/ 196 = 8.4% (net)

On top of the dividend Genesis are looking for a capital gain of 7% made up from (slide 76):

1/ 4% from 'optimisation' Looking for a big reduction here is customer churn.
2/ 1% from 'innovation' The innovation will make use of the larger contracted LPG supply from Kupe, with the target markets of SME and other business.
3/ 2% from 'invest'. The invest bit is largely the increased stake in Kupe. This is made up of $168m for the NZOG Kupe stake and $46m, being the Genesis share of expected Kupe field development costs

If all goes well the share price next year will be 196 + 16.4 = 212

SNOOPY

[trader_jackson]

I also note Forsyth have a target price of $2.23, whether it is $2.12 from your valuation above or $2.23 from Forsyth, you'd think the share price should be higher than barely $2! ;)

[Beagle]

My post 2082 values 31% of Kupe at 36cps (pre tax, before any borrowing costs). By ratio, this means that 15% of Kupe is worth:

15/31 x 36cps = 17.4cps (cents per Genesis share). There are 1b Genesis shares on issue. So by my reckoning the Kupe stake that Genesis is about to acquire from NZOG, NZOG shareholder approval pending, is worth $174m.

Genesis are offering to pay $168m which is within 3% of my own Kupe valuation. So I have to conclude that at the end of my previously supplied long drawn out multi-spreadsheet Kupe evaluation, the various stokings of my steam powered calculator have paid off!

Maybe I did know what I was talking about all along ;-P. Instead of hiring a high powered valuation firm to appraise their Kupe stake, NZOG should have given the job to the dog on the kennel out the back!

SNOOPY


Clever hound !

[Snoopy]

I also note Forsyth have a target price of $2.23, whether it is $2.12 from your valuation above or $2.23 from Forsyth, you'd think the share price should be higher than barely $2! ;)


I am still a little puzzled by this forecast 7% yield, which in the fine print on 22-11-2017 presentation slide (p75 of 84) is further explained as:

"Average forecast dividend 2017-2020 divided by average forecast share price."

We aren't told what the average forecast shareprice is. But assuming the current 8.2c interim and final dividend (net) are maintained, we can reverse engineer what that share price might be:

(8.2 + 8.2)/ s = 0.07 => s = $2.34

There are other issues too. Those last 8.2c dividends are only 80% imputed. In this context a 'net' dividend should have already had the tax removed from it.

8.2cps (total dividend) = 6.56cps (imputed) + 1.64cps (unimputed)

Take tax at 28% off the unimputed part of the dividend and I get an equivalent net dividend of:

6.56cps + (1-0.28)1.64cps = 7.74cps

Using that figure to redo the above implied share price calculation:

(7.74 + 7.74) / s = 0.07 => s = $2.21

Of course this is the average forecast share price over a four year period.

Starting from a base figure of $1.96, and assuming a constant cps increase in share price over the forecast four year interval, the following forecast would be in line with just such an average:



Valuation dateForecast Share Price


22-11-2016$1.96


22-11-2017$2.09


22-11-2018$2.21


22-11-2019$2.34


22-11-2020$2.46



Note that the above table assumes that the sum of dividend payments over the next four years are equal to four times the sum of dividend payments for this year.

From "p67 of 84" of the presentaion (small print) "These estimates (EBITDAF for FY2017) are based on an average oil price of US$50.98/bbl for FY2017 and a NZD/USD cross rate of US69.4c". (This assumption makes a difference to the expected earnings from oil.)

However, there is another alternative share price path which also satisfies Genesis's own forecasts:



Valuation dateForecast Share Price


22-11-2016$1.96


22-11-2017$2.46


22-11-2018$2.34


22-11-2019$2.21


22-11-2020$2.09



Dividends in FY2016 were 81.9% of free cashflow, up from 80.9% in FY2015. But look at the 'Balance Sheet Capability' slide (p62 of 84) for the 22-11-2016 presentation. On the bottom RH corner of thet page is the forecast 'dividend payout ratio' as a percentage of 'Free Cashflow'. The graph has no scale. But there is a clear dip in the payout ratio in FY2018 should the buyout of the NZOG Kupe stake go ahead. Evidence perhaps that dividends may hold for FY2017, but may shrink from FY2018 onwards?

SNOOPY

[Snoopy]

To give the other side to this story, Genesis have outlined their rationale for the change in the forward notes to the accounts, p37 on AR2016. I remain unswayed by management's argument....

The profit bridge shown on p11 of AR2016 does highlight why it is an issue though. You will see there an $8m customer acquisition charge that Genesis are taking on the chin, combined with an $11m charge they are deferring. This is an extraordinary $19m spent just on maintaining their customer base over FY2016. Spread over their 646,000 customers, and assuming a 20% churn rate, that works out to an extraordinary $224 per churned customer per year! Not all of that money would be going to retail customer bribes of course. There would be a staff salary element included too. But the fact remains that $19m represents around 20% of my adjusted NPAT for the year. No wonder management have decided to 'do something about it', so that things don't look so bad in the end of year accounting reconciliation!





On top of the dividend Genesis are looking for a capital gain of 7% made up from (slide 76):

1/ 4% from 'optimisation' Looking for a big reduction here is customer churn.


Time to reconcile the comments made by Genesis on customer retention.

1/ 4% on a base share price of $1.96 represents 7.8cps. SO
2/ With 1 billion shares on issue, $0.078 ps translates to $78.4m.
3/ $78.4m spraed over four years is $19.6m per year.
4/ The amount spent on customer retention in FY2016 was $19m

The question is then, will Genesis get through the next four years without spending $19.6m per year on customer retention each year? OK some of those savings could also come from (see p76 of 84):

a/ Leaning out the corporate support centre,
b/ Increasing retail gross margins
c/ Reducing the generation cost base

But look at p9 of 84 of the 22-11-2016 presentation. The number of retailers in NZ has gone from 20 to 26 over the last year. Does that sound like decreasing competition coming up to you?

Then I get to the slide that makes me really angry (p23 of 84). A graph of retail power prices steadily climbing from 2000 to 2016 (except for last year). meanwhile the wholesale price looks to have dropped over that period. OK I can't blame the gentailers for all of that as local lines companies and transpower claim their slices. But that slide suggests that there is a lot of room to cut retail prices!

Bring on the competition!

SNOOPY

[Jantar]

.........
Then I get to the slide that makes me really angry (p23 of 84). A graph of retail power prices steadily climbing from 2000 to 2016 (except for last year). meanwhile the wholesale price looks to have dropped over that period. OK I can't blame the gentailers for all of that as local lines companies and transpower claim their slices. But that slide suggests that there is a lot of room to cut retail prices!

Bring on the competition!

SNOOPY
You have summend up the situation perfectly. As a trader, it is my job to try and keep wholesale prices low, as it is that seperation between cost of energy and netback, that enables the gentailers to absorb some of the network companies' increasing charges.

Retail prices can't realistically keep on rising or customers will move to alternative forms of energy, and already in some areas the lines charges are encouraging many new home builds to seek off grid solutions. But if you want to see what the lines companiy in your area really is, just look at the difference between your retail charge and your suppliers Netback rate. The difference is what is going to Transpower and the network company.

[horus1]

Flick has cut my prices by 20% over 15 months. That is 40% of the energy margin as line charges are fixed. That shows how fat the margins are.

[Snoopy]

Craigs latest update on the gentailers suggest that trust power are the main cause of churn currently and unlikely to stop for 18 months.

And if correct the below is not good.

Flick and Electric Kiwi point the way for product differentiation, billing disclosure and risk premiums
A new threat has emerged, which in our view removes the possibility that historical gentailer premiums will return. New electricity retailer Flick has highlighted the consumer thirst for a spot product and bills customers in a way that clearly defines all the cost components of the bill making comparability easy. Electric Kiwi is a low cost technology driven offering that offers a fixed priced residential contract, covered by the forward ASX hedge curve. This offering caps where risk cover pricing can head. It is our view that any premium for risk mitigation by having a gentailer model will likely be arbitraged away by the combination of technology and clarity of what is being paid by that customer for the risk.

top picks a buy on CEN and MEL Hold on GNE and MRP and TPW.


Flick has cut my prices by 20% over 15 months. That is 40% of the energy margin as line charges are fixed. That shows how fat the margins are.

I am curious about the Flick business model.

From the Filick website, they pass on transmission/distribution at cost, metering at cost, the Electricity Authority levy at cost and a flick Retailer charge which is obviously not at cost, as Flick wouldn't be able to operate if they didn't make a profit on this. The explanation pricing graphic has no scale. But the visual impression is that Flick in house charges make up something like 15% to 20% of your power bill. Can any Flick user out there confirm?

The idea is that customers pay the wholesale cost of electriciy in the power market. This changes every half hour, and the price paid can vary wildly.

"If you switch to Flick and do nothing else, there may be some times that your bill is higher than it would have been if you’d been with another supplier. Past savings are no guarantee of future savings, but over a year, we think you’ll save around 7% if your pattern of energy use is about average. The serious savings (up to 20 – 25%) come when you change the way you use energy, taking advantage of lower prices."

The way I read this, real savings require a consumer to be quite active with their interactions with Flick and change power consumption behaviour. Flick doesn't own any power stations. So it seems like they are merely a consumer conduit. The business model hinges on the idea that consumers can manage their own consumption better than traditional power companies can. But what happens if power prices remain high for an extended period? You might end up being charged $100 to cook your dinner! Wouldn't users be outraged by that and leave on mass? How could Flick survive such an exodus?

Moving on to Electric Kiwi, they buy power on the ASX futures market. But who is on the other side of the transaction selling the power? Power can only be bought from a gentailer (are there any pure generators out there with a guaranteed supply of power to sell?) So what if the gentailers decide not to sell any power to the ASX player to resell on the sell side of the transaction? Electric Kiwi would just collapse in that case as they would have no power to sell to customers!

Both Electric Kiwi and Flick sound good and no doubt would work well 99% of the time. But when that 1% when things are not so favourable goes badly wrong? It looks to me like both companies are finished under this circumstance. How can these companies be a long term threat to an extablished gentailer like Genesis?

SNOOPY

[morphs]

I switched to Flick about 18 months ago from Meridian. We have not changed our habits in any way at all and according to Flick calculations we have saved on average 20% from our previous provider. They do a calculation based on your plan when you changed so you can see the savings. Spot prices overnight are almost nothing so if you wanted to time your dishwasher, laundry etc. you could save more but frankly I can't be bothered.

There was the odd price spike during the winter but it had no material effect on our bills. Because the majority of the bill is made up of other components that are fixed, a doubling of the spot price does not mean that your bill will double. It seems to me that the gentailer rates are set so far above the average spot price that the vast majority of the time you are saving money with flick which more than compensates for the occasional spot price spike. Even if I did have to pay more every now and again I wouldn't switch because I can see the savings over more than a 12 month period.

Very happy with Flick, no reason to use any other provider.

[horus1]

The real issue you are missing is the very high profit margins the gentailers have been taking from the small consumers.Both flick and Electric Kiwi are attacking this very successfully. The hedge product ,EK,will always be dearer than Flick.

[Snoopy]

Hi morphs, and thanks for the feedback.



I switched to Flick about 18 months ago from Meridian. We have not changed our habits in any way at all and according to Flick calculations we have saved on average 20% from our previous provider. They do a calculation based on your plan when you changed so you can see the savings. Spot prices overnight are almost nothing so if you wanted to time your dishwasher, laundry etc. you could save more but frankly I can't be bothered.


Since Flick claim their savings are mainly on the energy part of the bill, is the 20% you are saving:

1/ just on the energy part of the bill, OR
2/ on the whole bill?

And if spot charges at night are 'almost nothing', I wonder if it would be worthwhile putting in a battery storage system to take advantage of that?



There was the odd price spike during the winter but it had no material effect on our bills. Because the majority of the bill is made up of other components that are fixed, a doubling of the spot price does not mean that your bill will double.


The majority of your bill components are fixed? Could you bear to share how much Flick does charge you for using their system!?



It seems to me that the gentailer rates are set so far above the average spot price that the vast majority of the time you are saving money with flick which more than compensates for the occasional spot price spike. Even if I did have to pay more every now and again I wouldn't switch because I can see the savings over more than a 12 month period.

Very happy with Flick, no reason to use any other provider.

OK Thanks. But I wonder if your attitude would be different if the power price spiked to $20,000/MWh, around 200x an average market power rate, over a seven hour period such as happened in 2012?

http://www.scoop.co.nz/stories/BU1202/S00922/court-backs-electricity-authority-over-massive-price-spike.htm

SNOOPY

[Snoopy]

The real issue you are missing is the very high profit margins the gentailers have been taking from the small consumers.Both flick and Electric Kiwi are attacking this very successfully. The hedge product ,EK,will always be dearer than Flick.

Just had a look at the asx hedge market for NZ electricity.

http://www.asx.com.au/products/energy-derivatives/new-zealand-electricity.htm

The last trade for Otahuhu base load power for December 2016 was 48.200. This is based on 0.1MW of electricity per hour based on a Base Load profile at the Otahuhu grid reference point in New Zealand. That doesn't make sense because MW is equivalent to MJ/s and already that means it already has a time component in it. So that means the contract is for power acceleration? It doesn't make sense. Can anyone help me out here!

SNOOPY

[Jantar]

Snoopy, you have it correct, the description in the ASX is incorrect. The correct units are MWhr in 0.1 steps.

[freddagg]

Just had a look at the asx hedge market for NZ electricity.

http://www.asx.com.au/products/energy-derivatives/new-zealand-electricity.htm

The last trade for Otahuhu base load power for December 2016 was 48.200. This is based on 0.1MW of electricity per hour based on a Base Load profile at the Otahuhu grid reference point in New Zealand. That doesn't make sense because MW is equivalent to MJ/s and already that means it already has a time component in it. So that means the contract is for power acceleration? It doesn't make sense. Can anyone help me out here!

SNOOPY

Very common for the electricity industry to misuse the term Watt when they mean Joule

[Jantar]

Very common for the electricity industry to misuse the term Watt when they mean JouleIt is not normally the industry who misuse, but those on the preiphery of the industry. MW is a measure of power. MJ is a measure of energy, but is a very large and combersome number which does not directly compare power and energy in a manner that a layman can recognise. MWh is a much simpler method of 1 MW generated for 1 hour or 3600 MJ. For some reason it is PR types who want to change MWh to MW per Hr. They don't seem to realize the difference betwee a multiplicatin and a division function.

[Snoopy]

Snoopy, you have it correct, the description in the ASX is incorrect. The correct units are MWhr in 0.1 steps.

OK, so for December 2016 $48,200 per MWh over a half hour is equivalent to $96,400 MWh of energy over an hour. But these costs are for 0.1 MWh steps. So to buy a "whole" MWh we have to multiply this cost by 10. So the market cost to buy 1MWh of power is $964,000 for December 2016. Is that correct?

SNOOPY

[Jantar]

OK, so for December 2016 $48,200 per MWh over a half hour is equivalent to $96,400 MWh of energy over an hour. But these costs are for 0.1 MWh steps. So to buy a "whole" MWh we have to multiply this cost by 10. So the market cost to buy 1MWh of power is $964,000 for December 2016. Is that correct?

SNOOPY

Not quite. First off you have mis-read the price. It is $48.20 per MWh, not $48,200 per MWh. It is quoted in $/MWh, but may be bought in 0.1 MWh steps. 0.1 MWh would ttherfore cost $4.82.
Using 1 MW for a half hour is 0.5 MWh and would cost $24.10.

[Snoopy]

My post 2082 values 31% of Kupe at 36cps (pre tax, before any borrowing costs). By ratio, this means that 15% of Kupe is worth:

15/31 x 36cps = 17.4cps (cents per Genesis share). There are 1b Genesis shares on issue. So by my reckoning the Kupe stake that Genesis is about to acquire from NZOG, NZOG shareholder approval pending, is worth $174m.

Genesis are offering to pay $168m which is within 3% of my own Kupe valuation. So I have to conclude that at the end of my previously supplied long drawn out multi-spreadsheet Kupe evaluation, the various stokings of my steam powered calculator have paid off!

Maybe I did know what I was talking about all along ;-P.


The independent report on the value of Kupe has now been published.

https://www.nzx.com/files/attachments/249286.pdf

The Northington Report is more sophisticated than my own effort, as you might expect. Nevertheless, I thought it useful to find out how the essential valuation inputs differed from my own.



Snoopy Input (Kupe valuation)Northington Input (Kupe valuation){Northington Page Reference}


Evaluation Period12 years17years{p11}


Natural Gas Prices$NZ5.29/GJ (spot- 20% output), $NZ7/GJ (contract- 80% output)$US5-7/GJ{p14}


Long Term Oil Price per barrel$US50$US68{p17}


US Exchange Rate$NZ1.00 = $US0.72$NZ1.00 = $US0.70{p17}


Final Field Abandanment Clean Up not considered$250m{p17}


Time Value of Money Discount Rate 7%2.5% + 0.9 x 7% = 8.8%{p27}



There are some balancing factors here among the differences.

1/ I have assumed a lower long term oil price, but this is counterbalanced by the lower discount rate.
2/ I have ignored field closure costs, but this is counterbalanced by ignoring five years of field income from 2029 to 2034

I am satisfied with my own assumptions, made without reference to the Northington report and will not be revising them. I don't believe my slightly simpler model has grossly distorted the field valuation.

SNOOPY

[Marilyn Munroe]

There is an article in The Australian speculating on Kupe Field operator Origin seeking to sell its stake.

Would Genesis be able to digest this?

Boop boop de do
Marilyn

PS. To get around The Australian pay-wall go to news.google.com.au and use the words Origin and Kupe as search terms.

[trader_jackson]

There is an article in The Australian speculating on Kupe Field operator Origin seeking to sell its stake.

Would Genesis be able to digest this?

Boop boop de do
Marilyn

PS. To get around The Australian pay-wall go to news.google.com.au and use the words Origin and Kupe as search terms.

Wow, this is quite interesting, but I don't think Genesis would be able to... Genesis would essentially become just as much of an oil company as it would a power gentailer... it would be transformational in some ways, and allow a turbo charging of the dividend even further, but I don't think it would happen as I don't think it would strategically fit that well with their recently released 'vision' (the big 84 page powerpoint), and I'm not sure they would have quite enough balance sheet flexibility... however a partial capital raising could get around this, and I would imagine easily taken up... certainly something to watch closely

[macduffy]

Doesn't this come down to: Would the majority shareholder, ie the government, be interested? Further privatisation of this, or other assets, seems unlikely but one never knows!

[Snoopy]

This table refers to the just completed FY2015. I have split Genesis up into the Kupe bit and what is left (the Gentailer bit). Profit for the year is assumed to be $90m NPAT (9cps), the mid point in the profit guidance issued on 29th April 2015. My Kupe valuation is the sum of the 'liquid fuel' valuation (post 1674) and 'gas' valuation (my thread post 1642).



Division ValueEarnings DividendCapital Return Dividend


Gentailer$1.24.6 + $0.034$0.09-$0.026=$0.064$0.034+$0.036


Kupe$0.19 + $0.25$0.0260


Total$1.72$0.09$0.07



So what is the above table about? Genesis are on record as forecasting a profit of 9cps,while paying a dividend of 16cps. Where is the money coming from to make up the dividend payment? The table is my way of explaining it.

Net profit from oil and LPG is predicted at 2.6cps. But net cashflow is much greater, with an additional 3.4cps flowing into Genesis's coffers. This money is a pay back for writing off some of the Kupe development costs on Genesis's books. It is real money, but it is not profit. You might think of it as Genesis paying some of their shareholder capital back to shareholders as a dividend. I have called it a 'capital return dividend'.

To make up the total dividend payment a further 'capital return dividend' of 3.6 cps is required. You can think of this as surplus capital on the books not related to Kupe. This way all the number add up. But it is clear the 'real dividend' isn't as large or sustainable as the headline figures make it appear!


The above is one of the most confusing posts on sharetrader that I have read this year. And that is a worry because 18 months ago I wrote it! So it is time to present the same information, for reference purposes, in a more understandable way. Part of the clarity problem is that 'asset' information is mixed up with 'dividend' information. The dividend information is presented below.



InterimFinalSnoopy Modelled Kupe NPATSnoopy Modelled Kupe Oil D,D&AImplied Gentailer NPATTotalMissing Other Capital Asset to Fully Fund Dividend


Declared Dividend8c8c16c


Normalised earnings2.8c6.2c9.0c


Implied Capital Dividend Component[/TD]3.3c7.0c3.7c



However, all of this was complied before the actual FY2015 results were released. I subsequently calculated actual normalised earnings for Genesis Energy for FY2015 to be 8.6cps, not 9cps. This changes the dividend information as follows



InterimFinalSnoopy Modelled Kupe NPATSnoopy Modelled Kupe Oil D,D&AImplied Gentailer NPATTotalMissing Other Capital Asset to Fully Fund Dividend


Declared Dividend8c8c16c


Normalised earnings2.8c5.8c8.6c


Implied Capital Dividend Component[/TD]3.3c7.4c4.1c



Now I have the dividend information correct, the asset information and the association ratios dervied from that are best displayed separately in the table below:



AssetsNormalised NPATPE Ratio


Share Price$1.728.6c20.0


Snoopy Kupe Value$0.442.8c15.7


Implied Value Genesis Gentailer$1.285.8c22.1



{Note that the $1.72 share price is a reference price taken during trading on the day I first did this calculation (3rd August 2015) }

This gives a net earnings yield for 'Genesis Gentailler' of

5.8/128 = 4.53%

In turn this is equivalent to a gross yield of 4.53/0.72 = 6.29%

For gentailer, I regard a gross yield of 6% as 'fair' in today's market. So we can work out a fair share value of 'Genesis Gentailer' alone by ratio as below:

$1.28 x (6.29/6.00) = $1.34

To this we must add back the value of the Genesis stake in Kupe to arrive at a 'fair value' for the Genesis share price

$1.34 + $0.44 = $1.78

Rather than discuss this here , I will update the current year results in this format first.

SNOOPY

[Snoopy]

I calculated actual normalised earnings for Genesis Energy for FY2015 to be 8.6cps.



InterimFinalSnoopy Modelled Kupe NPATSnoopy Modelled Kupe Oil D,D&AImplied Gentailer NPATTotalMissing Other Capital Asset to Fully Fund Dividend


Declared Dividend8c8c16c


Normalised earnings2.8c5.8c8.6c


Implied Capital Dividend Component[/TD]3.3c7.4c4.1c



Now I have the dividend information correct, the asset information and the association ratios dervied from that are best displayed separately in the table below:



AssetsNormalised NPATPE Ratio


Share Price$1.728.6c20.0


Snoopy Kupe Value$0.442.8c15.7


Implied Value Genesis Gentailer$1.285.8c22.1



{Note that the $1.72 share price is a reference price taken during trading on the day I first did this calculation (3rd August 2015) }

This gives a net earnings yield for 'Genesis Gentailler' of

5.8/128 = 4.53%

In turn this is equivalent to a gross yield of 4.53/0.72 = 6.29%

For gentailer, I regard a gross yield of 6% as 'fair' in today's market. So we can work out a fair share value of 'Genesis Gentailer' alone by ratio as below:

$1.28 x (6.29/6.00) = $1.34

To this we must add back the value of the Genesis stake in Kupe to arrive at a 'fair value' for the Genesis share price

$1.34 + $0.44 = $1.78

Rather than discuss this here , I will update the current year results in this format first.




InterimFinalSnoopy Modelled Kupe NPATSnoopy Modelled Kupe Oil D,D&AImplied Gentailer NPATTotalMissing Other Capital Asset to Fully Fund Dividend


Declared Dividend7.74c7.74c15.5c


Normalised earnings2.6c6.1c8.7c


Implied Capital Dividend Component[/TD]2.9c6.8c3.9c



Now I have the dividend information correct, the asset information and the association ratios dervied from that are best displayed separately in the table below:



AssetsNormalised NPATPE Ratio


Share Price$1.928.7c22.0


Snoopy Kupe Value$0.382.6c14.6


Implied Value Genesis Gentailer$1.546.8c21.6



{Note that the $1.92 share price is a reference price taken during trading on the day I first did this calculation (4th November 2016) }

This gives a net earnings yield for 'Genesis Gentailler' of

6.8/154 = 4.41%

In turn this is equivalent to a gross yield of 4.41/0.72 = 6.13%

For gentailer, I regard a gross yield of 6% as 'fair' in today's market. So we can work out a fair share value of 'Genesis Gentailer' alone by ratio as below:

$1.54 x (6.13/6.00) = $1.57

To this we must add back the value of the Genesis stake in Kupe to arrive at a 'fair value' for the Genesis share price

$1.57 + $0.38 = $1.95

Note that the timing of this valuation (a month ago) was before Genesis announced that they would be buying the NZOG stake in Kupe.

SNOOPY

[Snoopy]

1/ The calculation for a single equivalent grossand net dividend yield on the interim and final 8.2c (80% imputed) for both FY2016 dividends is as follows.

8.20c = 6.56c (imputed) + 1.64c (unimputed)

=> Gross Dividend = 6.56c/0.72 + 1.64c = 10.75c
=> Equivalent Net Dividend = 10.75c x 0.72 = 7.74c

2/ The valuation of the Kupe field is based on available projected oil and gas extraction profiles before the re-evaluation of the field announced to the market on 21st April 2016. This is because the depletion, deprecitaion and amortisation of the field was being done for FY2016 in accordance with the assumed reserves at the beginning of FY2016. Subsequent to the Kupe resouce being upgraded, the annual depletion charge has decreased, and value of Kupe assets on the books consumately increased. However, this information was not available at the start of the financial year when depletion charges for FY2016 were determined.

3/ The earnings of Kupe are all calculated using my own model. They do not relate directly to the segmented results as published by 'Genesis Energy' on Kupe at the end of their financial year. I have done this because there was very little difference in the overall value of Kupe, as determined by the Northington Partners independent valuation, and my own valuation of Kupe. However, although I know the basic parameters used to value Kupe by NP, I do not have the Northington spreadsheet so that I can change these parameters "at will" and see what happens. Yet I do have this information for my own model. So I am going with the model that I know best!

4/ 'Earnings' for Kupe I am interpreting as 'direct external earnings'. The approximation that I am using is that all oil and LPG is sold externally (the LPG at the equivalent prevailing oil price) and that all Kupe natural gas is retained for use within Genesis. In fact some LPG is retained within Genesis for sale to Genesis customers. And some natural gas is sold externally. However, as a first approximation, I believe my assumptions are realistic for investment valuation purposes. The natural gas assets I am valuing as a "wholesale input resource" available to the rest of Genesis. I do this because the alternative to owning a Kupe stake would be to buy more natural gas on the spot wholesale market, or on a longer term gas contract. Thus the wholesale gas market provides an effective measure of the value of Kupe to Genesis today.

SNOOPY

[trader_jackson]

http://www.stuff.co.nz/business/87245995/origin-energy-to-spin-out-nz-assets

Update on what is happening with the rest of Kupe

[huxley]

"Last month, NZX-listed Genesis Energy said it would buy NZ Oil & Gas' stake in Kupe for $171 million, which would lift its stake in the project from 15 per cent to 46 per cent."

Looks like another great article buy stuff reporters... : /

[Snoopy]

Note that the declared after tax profit for Genesis Energy over FY2016 was $184.2m. Yet the 'normalised profit' (repeatable profit, pulling out one off events), $95.2m is only a little more than half this figure!


Today I want to talk about the figure in the big box below: 3.9c.




InterimFinalSnoopy Modelled Kupe NPATSnoopy Modelled Kupe Oil D,D&AImplied Gentailer NPATTotalMissing Other Capital Asset to Fully Fund Dividend


Declared Dividend7.74c7.74c15.5c


Normalised earnings2.6c6.1c8.7c


Implied Capital Dividend Component[/TD]2.9c6.8c3.9c




My heading "Missing Other Capital Asset to Fully Fund Dividend" implies that all legitimate ways to find this extra capital have been 'lost'. That is probably unfair in the case of Genesis Energy. There are various legitimate FY2016 historical transactions that I list below. These mean the cash / 'asset as good as cash' generating position of Genesis Energy is rather better that my $95.2m normalised net profit figure might suggest.



Normalised EBITDAF$322.9m


add Emission Unit Trading Net Gain {$21.0m-$15.5m}$5.5m


add One off Gain on value of Turbine Parts$6.9m


sums to Declared EBITDAF$335.3m


less Net Finance Expense ($2.0m - $65.2m)($63.2m)


less Stay in business CAPEX($3.9m)


less Software Amortisation($9.9m)


less Establish a New Customer Acquisition associated Deferred Expense Balance($3.9m)


add Net Conversion of Huntly Coal to Cash $15.5m


less Income Tax @ 28% derived from Normalised EBITDAF($37.0m)


less Change in fair value of financial instruments($26.6m)


less Other losses($3.0m)


Total: 'Profit + Unusuals + Net harvested Depreciation, Depletion & Amortisation ' $203.4m



Note that $203.4m spread over one billion Genesis Energy shares on issue = 20.3cps. This neatly covers the 15.5cps (after tax) interim and final dividends paid for FY2016. So how Genesis Energy got to pay out a dividend equal to nearly twice their underlying profit is neatly explained. Yet the question remains for next year: Just how many of these 'behind the scenes' cash generators can 'work the magic' for FY2017?

SNOOPY

[Snoopy]

The acquisition is being funded by borrowings. Current borrowing costs average around 6%.

$168m x 0.06 = $10m.

Genesis are claiming that NPAT for FY2017 will increase by $2m after funding costs. So the forecast FY2017 "overall increase before interest costs and tax on that $2m extra profit" (change in EBIT) must be a gain of $10m+ $2m +0.28x $2m = $12.5m.


I have been running the numbers for income statement comparison purposes.



FY2016 31% Kupe owned as publishedDifferenceFY2016 46% Kupe owned (future retrospective)


EBITDAF$335.3m+$39.0m (Genesis given)$374.3m


Depletion, Depreciation & Amortisation($127.7m)-$14.9m (proportional increase on Kupe Assets)($142.4m)


Revaluation of Generation Assets$138.0m$138.0m


Change in Fair Value of Financial Instruments($26.6m)($26.6m)


Other gains (losses)($3.0m)($3.0m)


EBIT (sub-total)$316.2m$340.3m


Finance Revenue$2.0m$2.0m


Finance Expense($65.2m)-$5.6m (adjustment made to fit)($70.8m)


EBT (sub-total)$253.0m$271.5m


Income tax (calculated at 28%)($68.8m)-$7.2m (calculated difference)($76.0m)


NPAT (total)$184.2m+11.3m+$11.3m (Genesis given)$195.5m



SNOOPY

[Snoopy]

Now I have the dividend information correct, the asset information and the association ratios dervied from that are best displayed separately in the table below:



AssetsNormalised NPATPE Ratio


Share Price$1.928.7c22.0


Snoopy Kupe Value$0.382.6c14.6


Implied Value Genesis Gentailer$1.546.8c21.6



{Note that the $1.92 share price is a reference price taken during trading on the day I first did this calculation (4th November 2016) }

This gives a net earnings yield for 'Genesis Gentailler' of

6.8/154 = 4.41%

In turn this is equivalent to a gross yield of 4.41/0.72 = 6.13%

For gentailer, I regard a gross yield of 6% as 'fair' in today's market. So we can work out a fair share value of 'Genesis Gentailer' alone by ratio as below:

$1.54 x (6.13/6.00) = $1.57

To this we must add back the value of the Genesis stake in Kupe to arrive at a 'fair value' for the Genesis share price

$1.57 + $0.38 = $1.95

Note that the timing of this valuation (a month ago) was before Genesis announced that they would be buying the NZOG stake in Kupe.


I am using as my reference date 17th November 2016, the day after the purchasing of NZOG's 15% share in Kupe was announced. Note that the day before the larger shareholding in Kupe was announced the share price closed at $1.89.



AssetsNormalised NPATPE Ratio


Share Price$1.979.8c20.1


Snoopy Kupe Value$0.563.7c15.1


Implied Value Genesis Gentailer$1.416.8c20.7



Notes:

1/ Incremental retrospective profit increase given by Genesis was $11.3m (referr to my previous post).

$11.3m/ 1,000m (shares) = 1.1eps (incremental). All of this incremental profit is derived from the increased share in Kupe.

2/ New 'Snoopy' Kupe field value is determined by multiplying by the ratio of the increased holding.

38c x 46/31 = 56c

Earnings yield for 'Genesis Gentailer' of

6.8/141 = 4.82%

In turn this is equivalent to a gross yield of 4.82/0.72 = 6.69%

For gentailer, I regard a gross yield of 6% as 'fair' in today's market. So we can work out a fair share value of 'Genesis Gentailer' alone by ratio as below:

$1.41 x (6.69/6.00) = $1.57

To this we must add back the value of the Genesis stake in Kupe to arrive at a 'fair value' for the Genesis share price

$1.57 + $0.56 = $2.13

SNOOPY

[Snoopy]

Notes:

2/ New 'Snoopy' Kupe field value is determined by multiplying by the ratio of the increased holding.

38c x 46/31 = 56c

<snip>

For gentailer, I regard a gross yield of 6% as 'fair' in today's market. So we can work out a fair share value of 'Genesis Gentailer' alone by ratio as below:

$1.41 x (6.69/6.00) = $1.57

To this we must add back the value of the Genesis stake in Kupe to arrive at a 'fair value' for the Genesis share price

$1.57 + $0.56 = $2.13


I am a little uncomfortable about my $2.13 'fair valuation' price for Genesis Energy.

The first reason why is that my valuation is from a perspective 'looking forward', assuming Genesis owned 46% of Kupe going into the FY2016 financial year (July 2015). Not only did Genesis not own 46% of Kupe at that point. There was no hint from an investor perspective that they would. Indeed I would speculate that this decision (to increase the Kupe stake) was the work of new CEO Marc England, who only took up his position in May 2016. That means my 'valuation' was on the basis of facts that only became knowable with hindsight.

The second problem is that Kupe was being depleted and surplus cashflow (not profit) was being distributed to shareholders as 'unimputed dividends'. Thus by the end of FY2016, the depletion of the resource should have been taken off my total capital valuation of Kupe. This I did not do. But complicating the 'end of financial year' resource valuation, was the fact that Kupe reserves were officially upgraded by 34.75% on 28th October 2015. I did not take this into account in my valuation process either! Bizzarely, my two 'errors' in effect, have nearly cancelled each other out. So my valuation at $2.13 looks roughly right, even if the method of obtaining it was ropey. It is very unlikely the reserves at Kupe will be upgraded during FY2017 as well. So this is definitely a live issue going forwards. And it is actually the FY2017 valuation going forwards that is of interest to investors!

SNOOPY

[Snoopy]

What follows below is a look at the oil and condensate slated for production, but this time using the production schedule graphed in the FY2016 NZOG annual report.



YearNo. of Oil & LPGOil BarrelKupe CondensateResource DepreciationNet


Equiv barrelsPrice USDRevenueand AmortizationProceeds


201764000057.01$54,782,462$15,335,747$39,446,715


<snip>


Total (2017-2028)4.8505E06$260,924,098$96,487,745$164,436,353


PV per share$0.16


PV per share (tax paid)$0.12





Time to rerun the Kupe valuation model (natural gas component) , this time using the 2P production chart in the NZOG FY2016 annual report.



YearKupe GasValueResource DepreciationNet


(GJ)Receivedand AmortizationProceeds


20175.80E06$38,616,400$15,364,253$23,252,147


<snip>


Total (2017-2028)6.79E07$315,921,673$96,667,090$219,254,583


PV per share$0.22


PV per share (tax paid)$0.16






The second problem is that Kupe was being depleted and surplus cashflow (not profit) was being distributed to shareholders as 'unimputed dividends'. Thus by the end of FY2016, the depletion of the resource should have been taken off my total capital valuation of Kupe. This I did not do.


It is now time to calculate the expected field depletion of the Kupe resource over the FY2017 year. The method is fundamentally a simple subtraction. All I have to do is take the total field resource, and take away from that number the resource that will be extracted over the FY2017 year. There is a small complicating factor. The field resources going into the future are discounted to reflect the 'time value of money'. We have moved forward by one year as we move from EOFY2016 to EOFY2017. This means that one years worth of discounting has to be removed from the remaining total. A 7% discount (the figure I have used) can be removed by dividing by the factor:

(1-0.07) = 0.93

I have reproduced above the relevant parts from my 'oil' and 'gas' production tables based on the Kupe field extraction profiles as suggested in the NZOG FY2016 report. So now we have all the figures needed to make the depletion over FY2017 calculation.

Part 1/ Oil Bit

($164,436,353 - $39,446,715)/ 0.93 = $134,397,440

Part 2/ Gas Bit

($219,254,853 - $23,252,147)/ 0.93 = $210,155,598

Adding up the EOFY2017 value of the field remaining from parts 1 and 2:

$134,397,440 + $210,155,598 = $345,153,058

Divide that by the billion Genesis Energy shares on issue and this equates to 34.5cps.

However, those workingsare all based on Genesis holding a 31% holding in Kupe. If they 'go according to plan' and acquire the NZOG 15% stake bringing their total Kupe holding up to 46%, then the Genesis Energy share of the Kupe field increases in value in proportion to the increased shareholding:

34.5cps x (46/31) = 51cps

In my previous post 2134, I calculated the value of 46% of the Kupe field at SOFY2017 at 56cps.

This means from a Genesis Energy share perspective, Kupe is expected to deplete over the course of FY2017 at a rate of:

56cps - 51cps = 5cps.

SNOOPY

[Snoopy]

6.8/141 = 4.82%

In turn this is equivalent to a gross yield of 4.82/0.72 = 6.69%

For gentailer, I regard a gross yield of 6% as 'fair' in today's market. So we can work out a fair share value of 'Genesis Gentailer' alone by ratio as below:

$1.41 x (6.69/6.00) = $1.57

To this we must add back the value of the Genesis stake in Kupe to arrive at a 'fair value' for the Genesis share price

$1.57 + $0.56 = $2.13

SNOOPY




This means from a Genesis Energy share perspective, Kupe is expected to deplete over the course of FY2017 at a rate of:

56cps - 51cps = 5cps.


IF:

1/ We assume that Genesis Energy can maintain their interim and final dividend of 8.2cps franked at 80% (which is what thay did over FY2016), AND
2/ that the purchase of the 15% equity stake in Kupe from NZOG is completed, boosting the total Genesis stake in Kupe to 46%.

THEN, taking account of the expected field depletion over the year, we can finally work out 'fair value' for Genesis Energy on the market today:

$2.13 - $0.05 = $2.08

And what was the closing price of GNE shares on the NZX on Friday? Up 3c to $2.13.

That means all of my modelling of the Genesis Energy share price is spookily in the ballpark!

SNOOPY

[Snoopy]

IF:

1/ We assume that Genesis Energy can maintain their interim and final dividend of 8.2cps franked at 80% (which is what thay did over FY2016), AND
2/ that the purchase of the 15% equity stake in Kupe from NZOG is completed, boosting the total Genesis stake in Kupe to 46%.

THEN, taking account of the expected field depletion over the year, we can finally work out 'fair value' for Genesis Energy on the market today:

$2.13 - $0.05 = $2.08

And what was the closing price of GNE shares on the NZX on Friday? Up 3c to $2.13.

That means all of my modelling of the Genesis Energy share price is spookily in the ballpark!


A small shift in the ballpark with GNE shares clsoing just above $2 today. NZOG shareholders have approved the sale of their 15% Kupe stake with a decent 87% of shareholders voting 'yes'.

All good for GNE holders I think!

SNOOPY

[Hoop]

As the share price stands today the chart says the 8.2c dividend going ex-date on the 29th March will be enough to break GNE's technicals..To prevent this event happening, buyer demand must rise (OBV) enough to lift the share price to higher highs between now and the 28th March

The 2 TA indcators (remember many are unreliable when the share price flatlines (low volatility) I used is an oscillator MACD (better reliability in times of low volatility) and buyer/seller behaviour using the OBV...Both show a degree of negative divergence suggesting weakness and a higher chance that GNE technicals will break down and enter into a correction phase..

http://i458.photobucket.com/albums/qq306/Hoop_1/GNE%2010032017.png (http://s458.photobucket.com/user/Hoop_1/media/GNE%2010032017.png.html)

[Snoopy]

8.2cps (total dividend) = 6.56cps (imputed) + 1.64cps (unimputed)

Take tax at 28% off the unimputed part of the dividend and I get an equivalent net dividend of:

6.56cps + (1-0.28)1.64cps = 7.74cps

Using that figure to redo the above implied share price calculation:

(7.74 + 7.74) / s = 0.07 => s = $2.21

Of course this is the average forecast share price over a four year period.

From "p67 of 84" of the presentation (small print) "These estimates (EBITDAF for FY2017) are based on an average oil price of US$50.98/bbl for FY2017 and a NZD/USD cross rate of US69.4c". (This assumption makes a difference to the expected earnings from oil.)

Here is a share price path which satisfies Genesis's own forecasts:



Valuation dateForecast Share Price


22-11-2016$1.96


22-11-2017$2.46


22-11-2018$2.34


22-11-2019$2.21


22-11-2020$2.09



Dividends in FY2016 were 81.9% of free cashflow, up from 80.9% in FY2015. But look at the 'Balance Sheet Capability' slide (p62 of 84) for the 22-11-2016 presentation. On the bottom RH corner of thet page is the forecast 'dividend payout ratio' as a percentage of 'Free Cashflow'. The graph has no scale. But there is a clear dip in the payout ratio in FY2018 should the buyout of the NZOG Kupe stake go ahead. Evidence perhaps that dividends may hold for FY2017, but may shrink from FY2018 onwards?


The above information was derived from Genesis Energy's 22nd November 2016 presentation to shareholders. This presentation was made just after the announcement of Genesis acquiring the Kupe shareholding of NZOG.

I have been reviewing my portfolio of high yielding shares, and for each one asking the question:
"As interest rates rise, can this company provide sustainable growth to boost dividends?"

I think looking further than twelve months out, the answer for Genesis Energy is 'no'. So I am now off the share register, having effectively preinvested my original Genesis Energy capital back into Contact Energy over the last couple of years.

All the best to shareholders that remain. Genesis has become much more a play on the price of oil and gas going forwards, so my $2.10 exit may yet prove premature. But I didn't buy Genesis Energy to start speculating on the oil price myself.

My investment in Genesis Energy has been highly educational. I knew little about how to value an oil field before I acquired my Genesis holding and have since learned a lot. It has also been a highly profitable investment, as I have held since the discounted IPO and banked all the bonus shares and dividends that have been forthcoming since float date.

What Genesis Energy management have done with what started out as a 'rag tag of assets', back when recently departed CEO - Albert Brantley - first came on board, I think is amazing. But I can't quite make the future vision for Genesis add up in sustainable 'eps' and hence 'dps' terms. So time to bank what management have done for Genesis Energy 'so far' and move on.

SNOOPY

[ScrappyO]

Just wanted to know if any holders have received there dividend cheque by post, I'm still waiting?
Thanks in advance.

[JoeGrogan]

Just wanted to know if any holders have received there dividend cheque by post, I'm still waiting?
Thanks in advance.

Yeah i received the cheque through the post about a week and half ago

[macduffy]

Yes, direct credited to a/c on 13 April and mail advice since received. Easter mail problem?

[trader_jackson]

https://nzx.com/companies/GNE/announcements/300418

Purchase price doesn't look that cheap to me, but also dones't look terribly expensive either... 5% EPS accretion is not to bad, also interesting [but not surprising] that they are looking at a bond offer

[Beagle]

Looks like a good acquisition to me. 5% EPS accretive is not to be sneezed at. Makes common sense for them to leverage their increased stake in Kupe into selling more LPG to small business and retail customers.

[Rabbi]

On fire today. Anyone care to speculate why ?
Dividend yield?

[trader_jackson]

Market just beginning to price in upside bonus of recent gas acquisition probably.

[Hectorplains]

On fire today. Anyone care to speculate why ?
Dividend yield?

Res Bank kept its official cash rate at 1.75 per cent, but "dovish" inflation / rates commentary puts the divy stocks back in focus.

[hogiela]

Everything went gangbusters yesterday ... not just GNE :)

[Beagle]

On fire today. Anyone care to speculate why ?
Dividend yield?


Market just beginning to price in upside bonus of recent gas acquisition probably.

Agree with trader jackson but also worth noting Reserve bank have said they're on track to keep interest rates and current level's for quite some time and I also note that GNE as announced in their most recent quarterly operating report are adopting Fly Buys with effect from this month. So far they said they had received 60,000 expressions of interest in joining because of Fly Buys...quite an interesting bit of anecdotal evidence on the power of that reward scheme. Disc: Recently bought back in a modest stake for strong ongoing dividend yield. The acquisition of Nova energy's LPG business makes compelling common sense on the back of increasing their stake in Kupe. Might as well sell those increased Kupe reserves at retail rather than wholesale !

[trader_jackson]

Agree with trader jackson but also worth noting Reserve bank have said they're on track to keep interest rates and current level's for quite some time and I also note that GNE as announced in their most recent quarterly operating report are adopting Fly Buys with effect from this month. So far they said they had received 60,000 expressions of interest in joining because of Fly Buys...quite an interesting bit of anecdotal evidence on the power of that reward scheme. Disc: Recently bought back in a modest stake for strong ongoing dividend yeild.

I think the bold above Roger mentioned has also benefited GNE the most of the gentailers, and was a surprise to the market (that the RB has taken a neutral stance to raising interest rates)

[Beagle]

I think the bold above Roger mentioned has also benefited GNE the most of the gentailers, and was a surprise to the market (that the RB has taken a neutral stance to raising interest rates)

Definitely a factor especially when you drill down into the full detail of the RBNZ's statement outlining that even in mid 2020 they see the OCR at only 2% http://rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Monetary%20policy%20statements/2017/mpsmay17.pdf and we're seeing some of the REIT's catch a modest bid on the back of that announcement which also supports that viewpoint but on the other hand you could easily make the case that the market is efficiently pricing in the estimated 5% EPS accretion indicated by Nova's acquisition seeing as it was around $2.15 at the time of the announcement, (2.15 x 1.05 = $2.26).
You could argue that the combined effect of these two things means there's still some value left on the table with GNE at around today's price.

[Snoopy]

Agree with trader jackson but also worth noting Reserve bank have said they're on track to keep interest rates and current level's for quite some time and I also note that GNE as announced in their most recent quarterly operating report are adopting Fly Buys with effect from this month. So far they said they had received 60,000 expressions of interest in joining because of Fly Buys...quite an interesting bit of anecdotal evidence on the power of that reward scheme. Disc: Recently bought back in a modest stake for strong ongoing dividend yield. The acquisition of Nova energy's LPG business makes compelling common sense on the back of increasing their stake in Kupe. Might as well sell those increased Kupe reserves at retail rather than wholesale !


It is going to need to be some magic hat that new CEO Marc England is wearing to maintain dividends and in particular the current level of imputation credits.

The Kupe field depletion I calculated at 5cps over FY2017 (my post 2136). That is 5c worth of share price value gone.

Then there are plenty of non-recurring items from FY2016 to replace come FY2017 result time:

1/ $5.5m profit gain of Emission Unit Trading gains.
2/ $6.9m profit gain on revaluation of Turbine parts.
3/ $15.5m cashflow gain from reducing coal stock pile.
4/ $138m of bottom line net profit generation from asset revaluation (not a cash item but apparently good for generating imputation credits).

Then post FY2017, the Kupe field production starts to drop off.

The only way I can see the dividend being 'sustainable' is via Genesis giving shareholders the capital they already own back in small parcels with an accompanying tax bill. The 'Fisher Funds' approach.

SNOOPY

discl: Former shareholder, now watching from the sidelines for the Genesis Loco to gradually lose steam.

[Beagle]

Plenty of that remaining coal stockpile to chew their way through :) If it ever stops raining they might use even more than $15m worth in FY18.

[Snoopy]

Plenty of that remaining coal stockpile to chew their way through :)

Granted, I see that $46.9m worth of fuel (mainly consisting of coal for electricity production) was still on the balance sheet at EOFY2016.


If it ever stops raining they might use even more than $15m worth in FY18.

Yes but that is still $15m worth of value that shareholders already own. No new capital is generated by running down the coal stack. Paying it back as the unimputed part of a dividend is not sustainable longer term, and means that the value of what you have left in Genesis has declined by $15m.

SNOOPY

[tim23]

Well HBL didn't go gangbusters market got most of lift via XRO and FBU. Most yield stocks got a boost mainly i.e property trusts and gentailers.


Everything went gangbusters yesterday ... not just GNE :)

[bull....]

On fire today. Anyone care to speculate why ?
Dividend yield?

might have been to do with there bond issue.

[Beagle]

http://www.4-traders.com/GENESIS-ENERGY-LTD-17595957/financials/

Snoopy, all those factors are known to the market but analysts are forecasting increasing earnings and dividends and the RBNZ are saying interest rates are staying very low untill 2020, at least, possibly longer.

[macduffy]

might have been to do with there bond issue.

I thought the same, bull, but found it difficult to see why that should influence the shareprice - unless of course the terms were so much in favour of the company that it indicated a stronger than expected profitability/financial strength.

[Snoopy]

http://www.4-traders.com/GENESIS-ENERGY-LTD-17595957/financials/

Snoopy, all those factors are known to the market but analysts are forecasting increasing earnings and dividends and the RBNZ are saying interest rates are staying very low untill 2020, at least, possibly longer.


Roger, if you want to know what is really going to happen to Kupe, you need to look at the NZOG annual report for FY2016.

https://www.nzog.com/dmsdocument/209

The relevant information is on page 4.

By 2020, Kupe field production (oil production in particular) will be on the decline from FY2016. These are using the latest assessment of reserves, only upgraded last year. The 4-traders article you reference, which conveniently only goes to 2019, stops just shy of the significant fall in Kupe field production. Yet even as Kupe production falls, 4 traders shows Genesis sales increasing from $2011m (2016) to $2,140m (2019). To achieve that, there is going to have to be higher than market average increse in electricity sales. Factor in a large capital requirement when the Rankine units at Huntly are finally retired (Genesis will have to build a replacement something somewhere) and I see lots of net cash required ahead.

Of course if the oil price gioes sky high, that will help Genesis in the next 3-4 years. But no true investor could automatically assume that this will happen and be credible.

Genesis themselves have never published the production outlook for Kupe. Analysts for the big firms rarely research comanies outof the top 50, like NZOG. So I think the Genesis analysts who complied that 4-traders report, probably haven't seen the NZOG information on Kupe.

The only way Genesis are going to meet those dividend forecasts (rising from 16.4cps in 2016 to 17.8cps in 2019) is if they start giving shareholders an ever increasing amount of their own capital back, complete with a tax bill, and call it an unimputed dividend. But there is a much more capital efficient way for a shareholder to get their own capital back. That is to sell the shares now in 2017. And that is what I have done.

SNOOPY

discl: former holder

PS Not predicting a disater for Genesis going on from here. I just think there are other Gentailers out there that should be better medium term performers.

[Beagle]

Appreciate your input Snoopy. This is a small holding for me bought very recently for $2.13. Partly its a hedge against a 5x bigger position in AIR, (oil prices) and partly as a hedge against them being my supplier of LPG. Their run-down of Kupe oil is well known but the reserves of LPG and Gas are far more durable. I'm happy that the recent SP rise is supported by their 5% EPS accretive NOVA purchase and benign long term interest rate outlook that's now foreseen as lower for longer by RBNZ. Take these two factors both announced post my acquisition out of the equation I see Gen at todays price of $2.28 as much the same value as when I recently bought. I know some of the dividend won't be imputed and I'm okay with that.

[Joshuatree]

Anyone got an informed opinion on these new bonds thanks

Terms Sheet linked here (http://www.craigsip.com/~/media/Files/Investment%20Banking/%20Genesis-Energy-Capital-Bonds-Terms%20Sheet)

[macduffy]

Anyone got an informed opinion on these new bonds thanks

Terms Sheet linked here (http://www.craigsip.com/~/media/Files/Investment%20Banking/%20Genesis-Energy-Capital-Bonds-Terms%20Sheet)

I love that word "informed". Aren't all opinions on this forum "informed"?

;)

[Joshuatree]

Nope ;only yours:)

[Beagle]

Well Snoopy, see post #2161 above. Less than a month into this and $2.13 to $2.37 isn't too shabby in a sideways market. As suggested earlier my beagle friend, I expect interest rates to be a lot lower for a lot longer than most on here so good old fashioned yield investing is still a good way to build wealth slowly IMO.

[Snoopy]

I have been reviewing my portfolio of high yielding shares, and for each one asking the question:
"As interest rates rise, can this company provide sustainable growth to boost dividends?"

I think looking further than twelve months out, the answer for Genesis Energy is 'no'. So I am now off the share register, having effectively preinvested my original Genesis Energy capital back into Contact Energy over the last couple of years.

All the best to shareholders that remain. Genesis has become much more a play on the price of oil and gas going forwards, so my $2.10 exit may yet prove premature. But I didn't buy Genesis Energy to start speculating on the oil price myself.




Well Snoopy, see post #2161 above. Less than a month into this and $2.13 to $2.37 isn't too shabby in a sideways market. As suggested earlier my beagle friend, I expect interest rates to be a lot lower for a lot longer than most on here so good old fashioned yield investing is still a good way to build wealth slowly IMO.


Glad to see at least one hound still doing well with Genesis. As I explained at the time, I never assumed that I would be selling out at the top. $2.10 had been a long standing resistance point, so happy to sell out at $2.10 at the time. I usually try to leave something for the for the next guy. In this instance, the other hound has had a good hunt.

Since I sold, Genesis have acquired the Nova Energy gas business (with a positive implication for overall gas margins). Also oil prices have risen, boosting the value of Kupe reserves. And a shortage of hydro inflow to the South Island lakes has improved the economics of more thermal generation from Huntly So the share price rise over the last month or so is not unexplained.

My main regret with GNE is not being allocated enough shares on day 1. Then not being knowledgable enough at the time to appreciate the post listing price weakness. Since I have got a handle on the company, it hasn't been obvious, in my judgement, that there was more upside than downside risk. So I felt comfortable in my decision not to increase my holding. Given it was one of my smaller holdings it became vulnerable when I started taking an axe to my shareholding positions, and there was not going back from a single stout chop.

As I said before, good luck to those who remain with Genesis. I am happy to remain with Contact Energy and Mercury Energy.

SNOOPY

[Beagle]

Thanks for your kind words Snoopy. I think the recent rise fully encapsulates the renewed lower interest rates for longer outlook and the Nova gas acquisition and accordingly with oil heading sharply lower again I took profits on this one this morning. Good quick rewarding hunt, time to dig for more value elsewhere.

[Snoopy]

I have been running the numbers for income statement comparison purposes.



FY2016 31% Kupe owned as publishedDifferenceFY2016 46% Kupe owned (future retrospective)


EBITDAF$335.3m+$39.0m (Genesis given)$374.3m


Depletion, Depreciation & Amortisation($127.7m)-$14.9m (proportional increase on Kupe Assets)($142.4m)


Revaluation of Generation Assets$138.0m$138.0m


Change in Fair Value of Financial Instruments($26.6m)($26.6m)


Other gains (losses)($3.0m)($3.0m)


EBIT (sub-total)$316.2m$340.3m


Finance Revenue$2.0m$2.0m


Finance Expense($65.2m)-$5.6m (adjustment made to fit)($70.8m)


EBT (sub-total)$253.0m$271.5m


Income tax (calculated at 28%)($68.8m)-$7.2m (calculated difference)($76.0m)


NPAT (total)$184.2m+11.3m+$11.3m (Genesis given)$195.5m




The above table I created was to produce a representative NPAT figure had the Kupe stake been increased to 46% for the whole of FY2016. I compiled it so that I could use those figures to compare with what might happen in FY2017. It does not take into account the supply chain synergies available from the subsequent acquisition of 'Nova Gas', nor what would happen if FY2016 had a similar 'low water inflow to South Island lakes' as appears to be likely in FY2017.

Nevertheless it is still relevant in highlighting the 'profit effect' of a portion of the generation asset revaluations that went to the bottom line in FY2016. $138m (or $105m after tax) was over 50% of the declared NPAT for FY2016. How on earth are Genesis going to replace that 'one off' profit in FY2017? Are the recent, and probably transient for FY2017, favourable market changes for thermal power generation going to be worth $105m to Genesis in FY2017? It seems very unlikely. This is the principal reason why I sold out, albeit too early with the benefit of hindsight.

I have done a separate analysis on cashflow (my post 2132) which shows that Genesis will likely have enough cashflow to keep paying dividends for the next year or two at FY2016 levels, or a bit higher. But after that? Eventually an underlying profit worth only half the current dividend payments must catch up with shareholders. And that implies a medium term decline in share price from about $2.30 today to around $1.15 - a very serious risk for those who can't see past the current dividend payment rate.


Thanks for your kind words Snoopy. I think the recent rise fully encapsulates the renewed lower interest rates for longer outlook and the Nova gas acquisition and accordingly with oil heading sharply lower again I took profits on this one this morning. Good quick rewarding hunt, time to dig for more value elsewhere.

Roger's nerves were steadier than mine. That was what allowed him to make a superior 'great escape' from the hypnotic GNE dividend genie!

SNOOPY

[Beagle]

Not really steady nerves mate, just a quick hound hunt and found a juicy rabbit to eat, (got lucky with the timing of the EPS accretive Nova acquisition) and get the sense there's better hunting grounds out there now. My sense is there's pockets of real value coming into the market in SUM places.

[Xerof]

switch the power off and retire Roger :D

[fish]

switch the power off and retire Roger :D

Thats a good joke and i am sure Roger is having too good a time to retire and die prematurely.
At least he can sit more comfortably into AIR seats now he has lost so much weight.

[Xerof]

Should I say 'switch the power off (sell GNE) and enter retirement (buy SUM) Roger to make the message a little clearer?

[Beagle]

Thats a good joke and i am sure Roger is having too good a time to retire and die prematurely.
At least he can sit more comfortably into AIR seats now he has lost so much weight.
Feeling really good now, much too good to retire early at 55. Want to keep working till I'm 70 before finding SUM nice place to retire.
SUM stocks are on super special and others are full retail.
Thanks for your kind words and yes, AIR economy seats are now very comfortable...kind of like getting a free upgrade to premium economy LOL.

[sideline]

Have you seen those spot prices for power:


8894

[Jantar]

Have you seen those spot prices for power:


8894

Good for the gentailers. Not so good for Flick customers.

[arc]

Should I say 'switch the power off (sell GNE) and enter retirement (buy SUM) Roger to make the message a little clearer?

Looking at the graph, she's downhill.
Perhaps you have additional knowledge on this one..

[peat]

Looks suspiciously like a triple top to me
8895

[arc]

Looks suspiciously like a triple top to me
8895

GNE Yearly cycle ?.
I should have clarified, SUM is the one that's trending down at the moment.

[Bobdn]

In these times of low hydro lake inflows, looks like Genesis's Huntly Power Station and good old fashioned coal and gas, will keep the show on the road for every one. Thanks Genesis:)

[trader_jackson]

I have been a holder since IPO (and ever since had the case of the old 'never brought enough').

I have been a very happy holder, but believe at my sell price today on the close of $2.40, an all time high, there is a now a higher chance the shares will go down over the short to medium term, than what they will go up further.. ie returns may not be that great (compared to other opportunities). Aside from being a bit too reliant (for my liking) on weather conditions to perform well, GNE also now has a fairly bit oil/gas operation, and I am not so sure if the price of oil will be (I believe it will be stagnant at best).

Like when I sold out of HBL at $1.71 a few months back, I believe GNE is also a pretty solid company, I just think there are sum other better opportunities potentially worth considering ;).

It is funny... my portfolio started out with my largest holdings being in the power sector... now this has move into financials/retirement companies.

Good luck to all the holders, it has been a great 3+ years, and may the odds continue to be ever in your favor :t_up:

[macduffy]

Thanks, t j . I'm confident that we'll continue to prosper under the dame's astute leadership. Just don't mention Mainzea.....ssshhh.
:mellow:

[Beagle]

I have been a holder since IPO (and ever since had the case of the old 'never brought enough').

I have been a very happy holder, but believe at my sell price today on the close of $2.40, an all time high, there is a now a higher chance the shares will go down over the short to medium term, than what they will go up further.. ie returns may not be that great (compared to other opportunities). Aside from being a bit too reliant (for my liking) on weather conditions to perform well, GNE also now has a fairly bit oil/gas operation, and I am not so sure if the price of oil will be (I believe it will be stagnant at best).

Like when I sold out of HBL at $1.71 a few months back, I believe GNE is also a pretty solid company, I just think there are sum other better opportunities potentially worth considering ;).

It is funny... my portfolio started out with my largest holdings being in the power sector... now this has move into financials/retirement companies.

Good luck to all the holders, it has been a great 3+ years, and may the odds continue to be ever in your favor :t_up:

Did the same and also looking at sum other opportunity.

[bull....]

sold the last of my genesis last week to but wont be looking at sum other stock who looks decidely riskier than gne.

[Bobdn]

http://www.stuff.co.nz/business/93856274/power-price-surge-too-hot-for-some-customers

Article notes (see RNZ item) that Genesis's gas/coal fired Rankine units have come to the rescue and its two units have been running full steam ahead for the last week, 24 hours a day. Coal generation kicked in six weeks ago. Thermal generation will always be necessary as a back up.

Meridian must be relieved that they are still able to tap into good old coal burners. Looking at the live data, clean and green wind doesn't seem to be making much of a contribution at the moment.

https://www.transpower.co.nz/power-system-live-data

[sideline]

http://www.stuff.co.nz/business/93856274/power-price-surge-too-hot-for-some-customers

Article notes (see RNZ item) that Genesis's gas/coal fired Rankine units have come to the rescue and its two units have been running full steam ahead for the last week, 24 hours a day. Coal generation kicked in six weeks ago. Thermal generation will always be necessary as a back up.

Meridian must be relieved that they are still able to tap into good old coal burners. Looking at the live data, clean and green wind doesn't seem to be making much of a contribution at the moment.

https://www.transpower.co.nz/power-system-live-data

Two crazy spot prices today: (350$+ a MWH in SI)

8930



and at 5pm: (free power in SI ???)

8931

[Bobdn]

Gee, that is interesting, what a contrast. That site, along with Transpower live data and EM6 make for good viewing.

[sideline]

Gee, that is interesting, what a contrast. That site, along with Transpower live data and EM6 make for good viewing.

It's a big improvement on the TV program, hahaha.

[trader_jackson]

http://www.stuff.co.nz/business/93856274/power-price-surge-too-hot-for-some-customers

Article notes (see RNZ item) that Genesis's gas/coal fired Rankine units have come to the rescue and its two units have been running full steam ahead for the last week, 24 hours a day. Coal generation kicked in six weeks ago. Thermal generation will always be necessary as a back up.

Meridian must be relieved that they are still able to tap into good old coal burners. Looking at the live data, clean and green wind doesn't seem to be making much of a contribution at the moment.

https://www.transpower.co.nz/power-system-live-data

Wow very interesting what radio NZ said... sounds like GNE is creaming it lately... so much so they had to actual get more coal... could even benefit Bathurst Resources maybe if things remain a little dry (GNE mentioned they prefer to buy local but waiting for OIO approval)>

Disclosure: Previous holder of GNE, still holding BRL

[sideline]

Wow very interesting what radio NZ said... sounds like GNE is creaming it lately... so much so they had to actual get more coal... could even benefit Bathurst Resources maybe if things remain a little dry (GNE mentioned they prefer to buy local but waiting for OIO approval)>

Disclosure: Previous holder of GNE, still holding BRL

Well, that's anyone's guess how long the party will last. Niwa's seasonal forecast was for a normal winter, not a dry one. We'll just have to
wait and see what the next weather system brings.

[Jantar]

Well, that's anyone's guess how long the party will last. Niwa's seasonal forecast was for a normal winter, not a dry one. We'll just have to
wait and see what the next weather system brings. The lower South Island has seen no significant rain since early February and is now in a moderate drought. The problem with a normal winter is that it is cold and rain comes as snow so the water doesn't flow into the lakes until October. A normal winter does not signal normal river flows, a normal autumn would do that.

[Joshuatree]

Looks like a big wet windy two days coming but that could be a lot of snow down south as you say.

[fish]

The lower South Island has seen no significant rain since early February and is now in a moderate drought. The problem with a normal winter is that it is cold and rain comes as snow so the water doesn't flow into the lakes until October. A normal winter does not signal normal river flows, a normal autumn would do that.
I notice also SI power prices very high.
So I guess this will persist for at least 4 months with high power prices in both Islands-more in south though.
So is Genesis the only company that can increase generation.
I wonder if the market has forgotten about contact-normally they generate more than they have customers-the opposite to GEN.
Who will do the best out of this situation-?trustpower ?contact ?genesis?

[sideline]

I notice also SI power prices very high.
So I guess this will persist for at least 4 months with high power prices in both Islands-more in south though.
So is Genesis the only company that can increase generation.
I wonder if the market has forgotten about contact-normally they generate more than they have customers-the opposite to GEN.
Who will do the best out of this situation-?trustpower ?contact ?genesis?

I suspect with the rain coming at least in the north island it will mostly be MCY. Their shareprice seems to have that factored in already, I think.
Contact will be kicking their own asses for having decommissioned their Otahuhu B gas fired power station a year or two too early.
They are however running full tilt with whatever they have left in gas - I noticed that they are drawing down gas from their storage facility.

[fish]

I suspect with the rain coming at least in the north island it will mostly be MCY. Their shareprice seems to have that factored in already, I think.
Contact will be kicking their own asses for having decommissioned their Otahuhu B gas fired power station a year or two too early.
They are however running full tilt with whatever they have left in gas - I noticed that they are drawing down gas from their storage facility.

I wonder if decommissioning Otahuhu was a long-term strategic move.power prices were too low.Taking it out has put up prices to their advantage.
As for Genesis are they being forced to burn coal as they have too many customers/contacts too supply.
Has the market taken the wrong message?
Maybe Jantar or snoopy can work this one out?
I certainly dont know

[Bobdn]

I don't know either. I'm assuming (guessing) they've been supplying power to Meridian and Contact as per last year's agreement over the rankine units.

[sideline]

I wonder if decommissioning Otahuhu was a long-term strategic move.power prices were too low.Taking it out has put up prices to their advantage.
As for Genesis are they being forced to burn coal as they have too many customers/contacts too supply.
Has the market taken the wrong message?
Maybe Jantar or snoopy can work this one out?
I certainly dont know

Genesis have a lot of retail customers - if they are on a fixed contract the current high spot prices are no advantage to Genesis there.
I also remember that Genesis is long retail in the South island - so they will need to buy in power from other generators in SI.

[Jantar]

I wonder if decommissioning Otahuhu was a long-term strategic move.power prices were too low.Taking it out has put up prices to their advantage.
As for Genesis are they being forced to burn coal as they have too many customers/contacts too supply.
Has the market taken the wrong message?
Maybe Jantar or snoopy can work this one out?
I certainly dont know
I can not comment on how the companies may be placed. Let's just say that over the past couple of weeks I have reduced my holdings in two of the gentailers

[fish]

I can not comment on how the companies may be placed. Let's just say that over the past couple of weeks I have reduced my holdings in two of the gentailers

Thanks everyone for comments.
I will be frank and open-I have sold a lot of GEN over the past 2 weeks after making good profits and feeling the market had over-reacted with thoughts of big profits for GEN.
I have put that money into CEN mainly but also SUM.
I wonder about MRP making big profits and meridian struggling.
Could you be more specific Jantar as I do value your opinion

[Jantar]

.....
Could you be more specific Jantar as I do value your opinion Unfortunately I cannot be more specific as events over the past two weeks would mean it would be insider trading. Even I cannot now trade in any of the energy companies for the next 7 - 8 weeks.

[fish]

Unfortunately I cannot be more specific as events over the past two weeks would mean it would be insider trading. Even I cannot now trade in any of the energy companies for the next 7 - 8 weeks.

Jantar I would have thought posting on a public forum information that should be known would be the opposite to insider trading.You clearly know things that should be known by all.Morally wouldnt it be good?

I feel you would be safe to post here but respectfully have to leave it to you

[peat]

I feel you would be safe to post here but respectfully have to leave it to you

I would tend to think that he has already breached the rules, by acting on what he has described as inside information.
Its even possible that people acting on his information could also be in trouble, though thats a bit vague because they dont know what the actual information is

[kiwico]

I would have thought posting on a public forum information that should be known would be the opposite to insider trading.

But a public forum very likely followed only by a minority of shareholders. It would likely be deemed to be insider trading unless advised to NZX.

[macduffy]

But a public forum very likely followed only by a minority of shareholders. It would likely be deemed to be insider trading unless advised to NZX.

..... and by an authorised officer of the relevant company?

[Jantar]

I would tend to think that he has already breached the rules, by acting on what he has described as inside information. ....No. I traded before certain events occurred, and only on knowledge that was available to the general public about lake levels etc.

[Joshuatree]

Really appreciate your posting from the Dam face so to speak Jantar. Certainly helped me understand the Gentailers a little deeper.

[Marilyn Munroe]

A useful site for spot electricity prices;

https://www1.electricityinfo.co.nz

Boop boop de do
Marilyn

[peat]

No. I traded before certain events occurred, and only on knowledge that was available to the general public about lake levels etc.

thats good to hear Jantar.

[fish]

A useful site for spot electricity prices;

https://www1.electricityinfo.co.nz

Boop boop de do
Marilyn

looks easier than wits free to air-which recently changed so i cant see lake levels and comparitive yearly monthly levels
Thanks.
The real question to be asked is which companies do well with spot prices looking high until the spring?

[fish]

No. I traded before certain events occurred, and only on knowledge that was available to the general public about lake levels etc.

So I guess you sold meridian?

[Onion]

So I guess you sold meridian?

If selling some of the generators is a smart move why are they all trading above their 50/100/200 moving averages? Is it that the CERTAIN drop just hasn't happened yet?

And why would selling Meridian in particular be clever?

[Snoopy]

If selling some of the generators is a smart move why are they all trading above their 50/100/200 moving averages? Is it that the CERTAIN drop just hasn't happened yet?

And why would selling Meridian in particular be clever?

Can I suggest that you listen to this radio item that was broadcast on RNZ this morning if you wish to be better informed.

http://www.radionz.co.nz/national/programmes/morningreport/audio/201848580/full-north-island-dams-send-power-south

SNOOPY

[Onion]

Can I suggest that you listen to this radio item that was broadcast on RNZ this morning if you wish to be better informed.

http://www.radionz.co.nz/national/programmes/morningreport/audio/201848580/full-north-island-dams-send-power-south

SNOOPY

Thanks Snoopy -- a very comprehensive report from RNZ -- but my point was that it (the lack of water in South Island lakes) hasn't flowed through to the MEL shareprice -- hence the ironic question about just how CERTAIN is it that Meridian is a SELL?

[macduffy]

Thanks Snoopy -- a very comprehensive report from RNZ -- but my point was that it (the lack of water in South Island lakes) hasn't flowed through to the MEL shareprice -- hence the ironic question about just how CERTAIN is it that Meridian is a SELL?

I think we know just what is certain in life - and it's certainly not shareprices! Selling MEL at this stage would be taking into account some new publicly- available information which is now likely to be reflected in the price.

[fish]

Can I suggest that you listen to this radio item that was broadcast on RNZ this morning if you wish to be better informed.

http://www.radionz.co.nz/national/programmes/morningreport/audio/201848580/full-north-island-dams-send-power-south

SNOOPY

Just listened to above link-thanks snoopy.
No mention of mercury though which I have been buying

[Bobdn]

Rankine units still working at capacity. Just now (see Transpower live data) they are producing 440 MW. All the wind turbines across the country combined are producing...33 MW.

Anyone who thinks wind is the answer to our energy needs may wish to to think again.

[huxley]

Early days my friend.. wind only accounts for about 5% of total NZ installed capacity.

Not sure if there's much benefit in comparing base load and peaking generation anyway.. they each have their role to play.

Today is just GNE's time in the sun..

:)

[peat]

Today is just GNE's time in the sun..

:)

I didnt realise it did solar power! :p

[Jantar]

Early days my friend.. wind only accounts for about 5% of total NZ installed capacity. ....

:)
A bit more than that. At 693 MW it is around 8% of installed capacity and supplies around 5% of the country's energy. The main problem with wind is that it is intermittant and controllable in a single direction, i.e. downwards.

[huxley]

A bit more than that. At 693 MW it is around 8% of installed capacity and supplies around 5% of the country's energy.

....and growing! Cheers for the clarification.

Main point was regarding base load/ peaking - It's not like it's either all.

Anyway wind looks like it has a strong future in places where older gas/coal stations - like the rankine units - are used as base load. Think Australia?

[Jantar]

....and growing! Cheers for the clarification.

Main point was regarding base load/ peaking - It's not like it's either all.

Anyway wind looks like it has a strong future in places where older gas/coal stations - like the rankine units - are used as base load. Think Australia?
At the EUG conference in Vienna this year, it was noted that Europe, with its widely interconnected grid system is starting to notice similar issues to what we have been seeing in New Zealand for some time around mixing wind with other forms of generatiom. Wind does not mix well with thermal or other base load plant, but is a good mix with hydro and fast start GT plant. Europe is considering introducing load shifting, similar to NZ's ripple control, to reduce demand when the wind isn't blowing. Many at the conference were surprised to learn that we have been doing that for decades for load control rather than load shift.

Without further fast start plant Europe is almost at the stage of experiencing grid instability due to excess installed wind capacity, just like South Australia already has on a couple of occassions. We still have a bit of room to move in this regard, but if NZ wishes to go fully renewable then we will need to look at alternatives such as pumped storage hydro. Every MW of installed pumped storage allows for more than 2 MW of additional wind capacity.

[fish]

At the EUG conference in Vienna this year, it was noted that Europe, with its widely interconnected grid system is starting to notice similar issues to what we have been seeing in New Zealand for some time around mixing wind with other forms of generatiom. Wind does not mix well with thermal or other base load plant, but is a good mix with hydro and fast start GT plant. Europe is considering introducing load shifting, similar to NZ's ripple control, to reduce demand when the wind isn't blowing. Many at the conference were surprised to learn that we have been doing that for decades for load control rather than load shift.

Without further fast start plant Europe is almost at the stage of experiencing grid instability due to excess installed wind capacity, just like South Australia already has on a couple of occassions. We still have a bit of room to move in this regard, but if NZ wishes to go fully renewable then we will need to look at alternatives such as pumped storage hydro. Every MW of installed pumped storage allows for more than 2 MW of additional wind capacity.

Jantar pumped storage sounds good in theory but how efficient is it-how much energy would be lost in the process?

[Jantar]

Jantar pumped storage sounds good in theory but how efficient is it-how much energy would be lost in the process?
Generation effiencies are:
Hydro 91%
Pumped storage 71%
Combined Cycle GT 55%
High efficiency GT 44%
Conventional thermal 40%
Conventional GT 35%
Wind 30%
Solar 25%

Consider also that the amount of energy lost by pumping gas back into the ground to recover later resultss around a 30% loss as well. We are already doing that.

[fish]

Generation effiencies are:
Hydro 91%
Pumped storage 71%
Combined Cycle GT 55%
High efficiency GT 44%
Conventional thermal 40%
Conventional GT 35%
Wind 30%
Solar 25%

Consider also that the amount of energy lost by pumping gas back into the ground to recover later resultss around a 30% loss as well. We are already doing that.

Thanks.
Pumped storage I would imagine would be relatively cheap to build and apart from allowing more wind generation could also be used on the waikato hydro-system to buy electricity when it is cheap to refill dams?

[Jantar]

Thanks.
Pumped storage I would imagine would be relatively cheap to build and apart from allowing more wind generation could also be used on the waikato hydro-system to buy electricity when it is cheap to refill dams? Unfortunately, you have just hit on the downside. The Waikato is not suitable as the lakes are all too small. There are only three places in New Zealand that are suitable:
Lake Onslow would be the best at 1200 MW and would treble NZ's current hydro storage at a cost of around $3.5B.
The Neck, between Hawea and Wanaka at 120 MW would provide inter-seasonal storage at a cost of around $350M
Convert one machine at Tokaanu for 50 MW and provide intra-day storage at a cost of around $20M

[Marilyn Munroe]

Holly tripping circuit breakers. Spot price at Benmore at 9.30 this evening, $235Mw/h.

Boop boop de do
Marilyn

[trader_jackson]

Holly tripping circuit breakers. Spot price at Benmore at 9.30 this evening, $235Mw/h.

Boop boop de do
Marilyn

I just had a thought, all those people that jumped onto Flick (flick I think? - and maybe some other power retailers) in the hope of 'not being ripped' no more by the big gentailers like Genesis... now finding out the hard way the risks of jumping ship to save a few dollars... (I think I even saw an add guaranteeing you'd save $200 or something in your first year on flick)

(at least this is my crude understanding... please correct me if I am wrong)

[Bobdn]

Great that companies like Flick exist and shows just how competitive the electricity industry is. But how painful it would be monitoring spot prices all the time and being too frightened to turn the oven on from 5pm to 9 pm (the only time you actually want to turn the oven on).

Looking at the Transpower website, wholesale spot prices have been on average 3x what they were last year over the last few weeks. This might not be the big dry of 2008 but it still seems significant to me.

[mfd]

I just had a thought, all those people that jumped onto Flick (flick I think? - and maybe some other power retailers) in the hope of 'not being ripped' no more by the big gentailers like Genesis... now finding out the hard way the risks of jumping ship to save a few dollars... (I think I even saw an add guaranteeing you'd save $200 or something in your first year on flick)

(at least this is my crude understanding... please correct me if I am wrong)

I'm with flick, the last month has been ~$10 a week more than with my previous provider, the 7 months before that were ~$10 a month cheaper. I still expect to save a significant amount over the year.

[Bobdn]

I see just now the Rankine units are maxed out and diesel/oil generaters have been deployed. Is this also Genesis owned?

Not a good time to be baking a cake by the way if you're on wholesale spot prices.

[Raz]

One of properties has been on flick, substantial savings and you can just change suppliers anytime, switched over a month back and will return when the market returns to previous pricing...

[sideline]

I see just now the Rankine units are maxed out and diesel/oil generaters have been deployed. Is this also Genesis owned?

Not a good time to be baking a cake by the way if you're on wholesale spot prices.

Diesel is mostly Contact (Whirinaki, 155MW capacity). It is rarely used and only for a few hours.

[trader_jackson]

I see just now the Rankine units are maxed out and diesel/oil generaters have been deployed. Is this also Genesis owned?

Not a good time to be baking a cake by the way if you're on wholesale spot prices.

Is 100% of GNE's Huntly capacity being used??

(you are saying that 2x Rankine units are being used + Unit 5 [gas] + Unit 6 [gas/diesel] = nearly 954 MW of generation)

... this is amazing if so! and the first time in years! (I think?)

[Bobdn]

Ah ok, unit 6 was going. Transpower represents it as 50 mw diesel/oil. Sideline, I think that's what is was.

Unit 6 was producing just 17 mw when I posted, but it was the first time I noted it in use over the last couple of weeks. Gas was operating across NZ at 90 percent and the Rankine Units at 97.5 per cent. It was all go.

[Bobdn]

Hold on a minute, just rechecked: diesel/oil is 155mw so I guess as Sideline said it's Contact.

[Bobdn]

https://www.stuff.co.nz/timaru-herald/news/94152746/Dropping-hydro-lake-levels-could-see-wholesale-power-prices-rise

[huxley]

https://www.stuff.co.nz/timaru-herald/news/94152746/Dropping-hydro-lake-levels-could-see-wholesale-power-prices-rise


Hey Bobdn, if you want a laugh you should check out the visitor posts on flick electric's Facebook page..

[Bobdn]

Thanks Huxley, I'll check it out now. Today, my focus was on my BHP and ANZ shares. Man, been doing it tough there but today was a rare happy day...

just looked, yes, some people are suffering alright. I'd be prepared to give Flick a go, seems like a good company. However I have gas heating, cooking and water and with Genesis's dual fuel discount (plus a few Fly Buys thrown in) its just not worth it. It's a better deal for me to stay put.

Found these graphs fascinating:

https://www.transpower.co.nz/system-operator/security-supply/wholesale-pricing

look how low spot prices were this time last year. No wonder some people on spot wholesale pricing are feeling dazed and confused.

[Bobdn]

Thank God Huntly Power Station is on duty, keeping us safe and warm. Bless you Huntly and your beautiful coal burning Rankine Units. I love you.

Just a few minutes ago the spot price appeared to reach $108,000 per mwh (glitch I assume, seems high). I wouldn't have wanted to be paying that spot price and baking my hoki fillets in the oven.

[Jantar]

....
Just a few minutes ago the spot price appeared to reach $108,000 per mwh (glitch I assume, seems high). I wouldn't have wanted to be paying that spot price and baking my hoki fillets in the oven.
Not a glitch, but not the spot price either. Anything with a six figure spot price signifies an infeasibility in the market and is an indication that the reconcilliation manager will have to calculate the prices manually. In this case it shaows that there is insufficient reserve capacity and that all plant is being dispatched. The final prices should come out somewhere around $5000 depending on location.
I'm not at work at the moment, but I don't think there are any offers to the market above $10,000 per MWh

[Bobdn]

Not a glitch, but not the spot price either. Anything with a six figure spot price signifies an infeasibility in the market and is an indication that the reconcilliation manager will have to calculate the prices manually. In this case it shaows that there is insufficient reserve capacity and that all plant is being dispatched. The final prices should come out somewhere around $5000 depending on location.
I'm not at work at the moment, but I don't think there are any offers to the market above $10,000 per MWh

Thanks very much for the explanation Jantar, that's really interesting. Sounds likes a complicated business. It's so interesting watching the charts at the moment!

[Dassets]

Jantar is right about the final pricing, will probably come in. However there are real stresses in the system. Basically Meridian squandered its water and the South Island has been caught short going into winter. While the South Island hydro storage will probably avoid 10% on the hydro risk curve the market is likely to go in summer very short storage.So if we don't get a solid rain period next year's winter could get really interesting.

It would be very interesting to know how big the coal stockpile at Huntley is and whether it can switch to gas without a delay.

[trader_jackson]

Jantar is right about the final pricing, will probably come in. However there are real stresses in the system. Basically Meridian squandered its water and the South Island has been caught short going into winter. While the South Island hydro storage will probably avoid 10% on the hydro risk curve the market is likely to go in summer very short storage.So if we don't get a solid rain period next year's winter could get really interesting.

It would be very interesting to know how big the coal stockpile at Huntley is and whether it can switch to gas without a delay.

They have already brought coal from Indonesia, although I don't think they have run out of the stockpile itself yet, just preparing to. By the end of this month the local coal mine (who genesis have mentioned they would rather buy from) should be in Bathurst Resources coal and they should be able to supply GNE coal, if required. Right now SE's assets are in 'no mans land' as they await OIO approval for Bathurst to purchase them (so not a done deal, but I can see no reason for OIO to object). Ultimately good for both GNE and BRL = good for jobs in that area.

[Rabbi]

GNE having quite a stellar run for a dividend stock. I can't imagine the rise is all down to using the rankine units as this is only creates a temporary spike in earnings.
. GNE doing as well if not better than MCY which has lifted its full year profit guidance twice.

[Beagle]

Jantar is right about the final pricing, will probably come in. However there are real stresses in the system. Basically Meridian squandered its water and the South Island has been caught short going into winter. While the South Island hydro storage will probably avoid 10% on the hydro risk curve the market is likely to go in summer very short storage.So if we don't get a solid rain period next year's winter could get really interesting.

It would be very interesting to know how big the coal stockpile at Huntley is and whether it can switch to gas without a delay.

Fair bit of rain over some parts of the South Island, in the right area's though ?

[peat]

Fair bit of rain over some parts of the South Island, in the right area's though ?

soon to be posted Beagle

the deluge that hit eastern coastal parts of the South Island over the weekend all but missed the southern hydro lakes, which remain at critically low levels for the time of year.

[boysy]

http://www.metservice.com/maps-radar/rain-forecast/rain-forecast-3-day

Would suggest the weather over the next few days should dump a fair bit of rain in various SI hydro catchments

[Beagle]

soon to be posted Beagle

the deluge that hit eastern coastal parts of the South Island over the weekend all but missed the southern hydro lakes, which remain at critically low levels for the time of year.

Pretty unfortunate really isn't it in more ways than one !

[Bobdn]

Peat, is that right? I see on the Transpower Security of Supply update that there appears to be some pretty jucicy inflows into South Island hydro lakes. However, electricity is still heading south over the Cook Straight and the coal burners at Huntly are still operating, albeit at lower levels now. All very interesting.

Today GNE continues to grind upwards. We're looking at iincrease of 25 per cent over the last three months.

[Raz]

Pretty unfortunate really isn't it in more ways than one !

They did get some snow accumulation in the area which will help very slightly during the spring snow thaw..no fear the current weather forecast later this week is...

"Further east, Central Otago and the Southern Lakes District would also get some scattered showers but rain accumulation would hit about 1 millimetre"

[boysy]

Which data is correct the past 24 hours rain fall indicates 20-50mm through large areas of SI hydro catchment

http://www.metservice.com/maps-radar/local-observations/cumulative-rainfall-24-hours