What does everyone think?
https://www.nzx.com/companies/GNE/announcements/267560
Printable View
What does everyone think?
https://www.nzx.com/companies/GNE/announcements/267560
Underwhelmed. Good that they broadly maintained retail level customers, wholesale generation a disappointment and Kupe obviously in a state of reasonably steep decline. Watch out for Kupe sales in FY16 and FY17 when their previously locked in forward cover on the oil price expires. Ongoing Kupe decline is one thing but even BIGGER is the dramatic sea change in the current oil price v what they've been achieving historically. There quite a BIG risk to future earnings right there !!!
Snooper - Craigs generally use about 11% discount rate in their DCF model's 4.4% risk free rate and a market risk rate of about 6.6%.
NPV in their model, as you would expect is the NPV of future cash flows discounted back to today's dollar's. They might be assuming higher values for the Kupe gas / LPG due to GNE's ability to on-sell some of same at a retail level.
Disc, don't own and not looking for an entry price at this stage.
My initial thoughts
Positives:
-Renewable generation up (higher generation margins)
-Seem to be running a smart storage management set up, i.e keep Tekapo low.
-The losses in retail have reduced. Will be very keen to hear at the full year report what plans they have to improve their retail offering. Currently seems to be large $$ incentives so not great from a s/holder perspective. Customer satisfaction up to a north korean-esque 96% - but is this real? Seems hard to believe.
Negatives:
Gas average selling price well down - anyone know why this could be?
Would this do it ??? https://signup.genesisenergy.co.nz/gaspackages/
An 11% discount rate sounds like it might be appropriate for the whole of Genesis Energy, with all the vicissitudes of the wholesale and retail gas and energy markets that implies. Personally I would choose a much lower discount rate for just Kupe (and did, an indicative interest rate just 7%).
Oil prices have plunged in value so I believe the discount factor should be less than if oil was priced near the top of the market (as it was at Genesis float time). Also if production is interrupted the resource stays in the ground for later extraction. In practice that might mean pushing the cashflow out for a year, but it is still very likely that all of the resource orginally chased wil be recovered. I realise all of this is sacrilige to real accountants. But in a very low interest rate environment, and with proven demand for a resource that has been through its development uncertainties, I think an 11% discount factor applied to each year of future earnings of Kupe alone is way too high.
The valuation of Kupe gas I regard as a separate question to the valuation of Kupe oil & LPG.Quote:
They might be assuming higher values for the Kupe gas / LPG due to GNE's ability to on-sell some of same at a retail level.
I believe the correct treatment for valuing Kupe gas from a Genesis perspective is to ask:
"What price would Genesis have to pay today to acquire that gas if the Genesis share of Kupe was suddenly cut off?"
My answer to that question is $7.44/GJ, my closest estimate of the wholesale gas price from last years published market figures. But this is a contrestable view.
Some might argue that Genesis has an excess of wholesale gas in the portfolio. With the current situation in the electricity market, if Genesis had less gas, then they would not have to run Unit 5 at Huntly (burning gas at below book value) so often. But I am taking a longer term view that just this winter's outlook. It is very easy to become overwhelmed by today's market conditions and project them into the future ad infinitum. Longer term, I still think the Kupe gas resource has value, outside of being an oil by product.
SNOOPY
Not sure too much to be read into that line - see note 7, says excludes impact of derivatives. Only they will know what impact that might have. I get dazed and confused trying to suss out those reports, so don't look too hard at them. But overall, for the year, higher price achieved?, on higher volumes produced? (at a lesser higher cost?) And not too much to glean re Kupe result, as no prices proffered.
Boringly steady to me. They really do seem to be able to play around with their options for generation and distribution to achieve steady results. They had downgraded the forecast, but seem a little upbeat in this report? Don't know......
The real show is the annual result, preceded by Aug 3rd TP announcement
A OK, thanks Trader X - I see it now. If I may quote from p24 of AR2014
"On 24 June 2014, the board approved the sale of 27PJ of gas to Contact Energy between 2015 and 2020 (average 5.4PJ per year). This sale reduces Genesis Energy's over supply of gas during the period of the agreement."
No doubt this gas sale was at a pretty good 'wholesale rate'. So with this sale contract rolling into FY2015 now, we might expect a lower volume average selling price when compared with the pcp in FY2014. That would be my explanation for your observation.
SNOOPY