GNE - Genesis Energy

[Beagle]

Now the guessing game commences, what's their sustainable dividend going forward ?

No takers ?

Okay I'll speculate. IIRC they're paying out about 80% of free cash flow so my guess seeing as they stated in the IPO documentation that they wanted to grow divvy's inline with inflation and seeing as inflation is basically zero my guess is notwithstanding lower after tax profit this year, (mid point of their guidance range is $90M = 9 cps) they'll try and maintain that 16 cps going forward by ramping up the pay-out ratio to whatever percentage of free cash flow it needs to be to save face and maintain 16 cps.

In the meantime however the lower forecasted profit exacerbates the aforementioned imputation issue and if they can maintain $90m going forward, (I am really not sure if they can or not) if we ignore short term creative strategies to impute as much as they can in the medium term they will only be able to impute 9 cents of the forecast 16 cps or 56.25% imputation.

The trusty abacus therefore calculates their gross yield at 16 / .8425, (note the new higher denominator level reflecting lower medium term imputation credit) = 18.99 cps gross.

This suggests someone like myself looking to get a 10% gross return, (to compensate for no growth, Tiwai point risk and the fact that high divvy's are only possible till Kupe runs out in 2027 ?) would want to see the price at $1.90 before considering re-entry.

Thoughts folks ?

[BIRMANBOY]

Wanting to get a 10% gross return is all well and good but that's approaching the realm of gross expectations as well. Its nice when it happens but realistically not that common. It could well make your 1.90 but I have a feeling there will be a lot of buyers ahead of you. I see it settling in the 2 to 2.10 range. The yield at that level is still substantial...but I'm not that greedy so I would say that.

[xafalcon]

The future dividend potential will be materially effected by the international crude oil price & NZD:USD exchange rate. Changes in these (up or down) effect income from oil sales, but neither adds cost (except by changing royalties). Both are impossible to predicted with any certainty. Hedging only goes so far in deferring the effects, doesn't eliminate them.

For example. Approx 535,000 barrels of oil sold in the past 12 months. @ US$45/barrel & US$0.80 exch = NZ$30M. The same 535,000 barrels @ US$100/barrel & US$0.70 exch = NZ$77M. The difference is NZ$47M/1B shares = 4.7cps, less tax & royalties = significant dividend contributor which can't be predicted

On this basis my thoughts are that future dividends will decrease, stay roughly similar, or increase. I say this with complete certainty........

[Snoopy]

The future dividend potential will be materially effected by the international crude oil price & NZD:USD exchange rate. Changes in these (up or down) effect income from oil sales, but neither adds cost (except by changing royalties). Both are impossible to predicted with any certainty. Hedging only goes so far in deferring the effects, doesn't eliminate them.

For example. Approx 535,000 barrels of oil sold in the past 12 months.
<snip>

Ok I know my header question is impossible to answer. Kupe has the ability to scale up production if oil prices are favourable. Genesis made them cut back production when the gas hungry "Unit 5" at Huntly was taken out of service for a routine inspection. But my question relates to the long term average extraction rate.

p20 of AR2008 predicts 14.7million barrels of concentrate over the life of the field. FY2011 was the first year of full production, Best guess is that Kupe will last until 2027. So over 16 years, the average extraction rate should be:

14,700,000/16 = 918,750 or 920,000 barrels in round figures.

Why have only 535,000 barrels been sold over the last twelve months?

SNOOPY

[Snoopy]

IIRC they're paying out about 80% of free cash flow so my guess seeing as they stated in the IPO documentation that they wanted to grow divvy's inline with inflation and seeing as inflation is basically zero my guess is notwithstanding lower after tax profit this year, (mid point of their guidance range is $90M = 9 cps) they'll try and maintain that 16 cps going forward by ramping up the pay-out ratio to whatever percentage of free cash flow it needs to be to save face and maintain 16 cps.

In the meantime however the lower forecasted profit exacerbates the aforementioned imputation issue and if they can maintain $90m going forward, (I am really not sure if they can or not) if we ignore short term creative strategies to impute as much as they can in the medium term they will only be able to impute 9 cents of the forecast 16 cps or 56.25% imputation.

The trusty abacus therefore calculates their gross yield at 16 / .8425, (note the new higher denominator level reflecting lower medium term imputation credit) = 18.99 cps gross.

This suggests someone like myself looking to get a 10% gross return, (to compensate for no growth, Tiwai point risk and the fact that high divvy's are only possible till Kupe runs out in 2027 ?) would want to see the price at $1.90 before considering re-entry.

Thoughts folks ?

I am currently working on the same problem with my steam abacus Roger. It is rather slower than yours, and I tend to get hot under the collar using is. Also, if anyone else comes in to look at the results it produces, much steam is let off, but not from the abacus! But at the risk of annoying you here is what I am feeding into it.

Disregarding FY2014 as a shocker, I am not sure you can regard say FY2013 as 'typical' or projectable into the future. We got a bit of a shock with the profit update today, but over the medium term (since FY2008) profitability at Genesis has been pretty rocky. So I think your projected dividend payout of 16cps is not sustainable in the medium term.

As for your insistence on a 10% gross return, I tend to side with Birmanboy. I think it is too high.

(Observation: Nevertheless if I use a lower projected dividend but a higher projected yield, these two effects tend to cancel each other out. That means when my abacus finishes cranking we may yet end up with a similar result).

The long term Genesis bond coupon yield, when set was 7.65%. This is the kind of gross yield I would be looking at if Genesis was a 'static' business.

You could make the argument that Genesis is not static because Kupe is running down and there are no plans to replace it. But 2027 is still a long way away, almost infinite in market terms!

I will let you know what price the steam abacus eventually throws up given all this!

SNOOPY

PS I note your concern about Tiwai point. Personally I don't think it will close. But as a long term investor I am prepared to look through the possibility that it does so. There are so many immigrants piling into Auckland the nationwide oversupply in power may not be as great as the market imagines!

[Snoopy]

I am sure Genesis have had to reduce their tariff's to somewhat compete with all the new retail entrants but it certainly puts price pressure on them indefinitely and competition will probably intensify further.

Given transmission costs are a major component of this retail 17 cents a kwh, (and granted we are paying a higher daily fixed rate), I believe this gives a graphic illustration of exactly how intense the retail competition has become. See announcement that wholesale rates we $92 mwh that's a wholesale cost of 9.2 cents a kwh plus GST = 10.58 cents per kwh incl GST so only another 6.4 cents per kwh incl GST to cover transmission costs and retail margin, crikey that's pretty efficient retail and transmission rate isn't it !!

Quote was:

"Despite the very low hydro inflows across New Zealand and the reduced hydro storage levels, the average wholesale electricity price at the Huntly node of $91.30 was 10% lower than in Q3 2014."

It is possible that the other gentailers are banking on lots of rain in May and June (historically that is not a bad bet) or that they are using some kind of financial hedging to mitigate their power price risk. If we don't get that rain then Genesis will be sitting pretty. In the past Genesis have made more money in the fourth quarter than in the other three combined, if the weather conditions are right.

SNOOPY

[Beagle]

https://nzx.com/companies/GNE/announcements/261012

Hey Snoopy,

I must confess I was out of steam this morning, despite two strong coffee's there seemed more fog than steam surrounding my aging slightly rusted abacus.
Applying as much oil and anti rust treatment as possible and a good lunch later I started to build some head of pressure but its been a tough day and this is an incredibly tough nut to crack.

There are so many swaps and derivative's around various aspects of the business it's hard to analyse.

But here's some numbers to plug into your abacus. IPO forecasted 434,800 barrel's of oil.

According to one of the major brokers as at 31 December 2014 Gen had hedged 76% of FY15 oil at circa U.S. $97 a barrel and 56% of FY16 oil at just under N.Z. $90 barrel.
I think its fair to say they are going to take a material earnings hit in 2016 from lower average realised oil revenues.

My abacus has spat out circa 1 cps before tax earnings hit based on current spot price for oil, after factoring in above hedges.

I agree that 2027 seems like forever away in the distance for most investors. That said, most of the risk at the moment seems to be too the downside.

It wasn't that long ago the stock was trading at $1.80 on an 8.9% net dividend yield, food for thought as to whether a 10% gross yield is an unrealistic expectation ?

Really seeing as the recent run-up was on some broker expectations that earnings would exceed IPO forecasts, now its going to be less and we have the prospect for lower realised oil prices reducing that further in FY16 is a return to the $1.80 baseline established just after the IPO really that outrageous ?

I'm going to be patient in regard to any possible re-entry to a meaningful position, (presently only hold a few thou to maintain some interest).

[Joshuatree]

I was shocked to see the s/p down to $1.92 late this arvo and put in a hasty buy with my brokers secretary. Next time i looked i realised i had been watching the ASX listing of GNE. I just saw the NZ on the end and missed the Aus at the beginning. sa la vie

[tim23]

Probably a bit of bonus share selling too so double whammy really still yield at $2 looks inviting.

[penn]

I was shocked to see the s/p down to $1.92 late this arvo and put in a hasty buy with my brokers secretary. Next time i looked i realised i had been watching the ASX listing of GNE. I just saw the NZ on the end and missed the Aus at the beginning. sa la vie

Yes GNE.asx is less liquid and I have been thinking of buying back in on the asx (no imputation credit) but does look like it could be in the $1.8? range by the end of the week over there.