GNE - Genesis Energy

[Snoopy]

Below is my assessment of the present value of Genesis's 31% holding in the Kupe gas field.

Year	Kupe Gas	Value	Resource Depreciation	Net
	(GJ)	Received	and Amortization	Proceeds
2015	6.5E06	$48,360,000	$23,018,794	$25,341,206
2016	5.3E06	$36,671,760	$21,407,478	$15,264,282
2017	6.1E06	$39,252,622	$19,908,955	$19,343,667
2018	6.1E06	$36,504,938	$18,515,328	$17,989,610
2019	5.3E06	$29,497,187	$17,219,255	$12,277,932
2020	5.3E06	$27,432,384	$16,013,907	$11,418,477
2021	5.3E06	$25,512,117	$0	$25,512,117
2022	5.3E06	$23,720,269	$0	$23,726,269
2023	5.3E06	$22,065,430	$0	$22,065,430
2024	5.3E06	$20,520,850	$0	$20,520,850
2025	5.3E06	$19,084,390	$0	$19,084,390
2026	5.3E06	$17,748,483	$0	$17,748,483
2027	5.3E06	$16,506,089	$0	$16,506,089
Total	7.17E07	$362,882,518	$116,083,717	$246,798,801
PV per share				$0.25
PV per share (tax paid)				$0.18

That last figure on the right is the important one. Genesis's 31% share of Kupe means that every Genesis share today contains 18c of 'value' directly attributable to the equity holding that Genesis has in Kupe. Because that value is positive, we can conclude that Genesis is making money (not losing money) from the natural gas attributable to their shareholding in Kupe. 18c is the wholesale market value to Genesis. This wholesale gas can be resold, and Genesis can clip the ticket again on this.

The above is my estimate of the value of Kupe gas to Genesis Energy shareholders. But what about Kupe Oil? Oil and LPG condensate are bracketed together from a reporting perspective.

Year	No. of Oil & LPG	Oil Barrel	Kupe Condensate	Resource Depreciation	Net
	Equiv barrels	Price USD	Revenue	and Amortization	Proceeds
2015	60000	60	$55,384,615	$33,381,206	$22,003,409
2016	44000	60	$37,772,308	$31,044,522	$6,727,786
2017	44000	60	$35,128,246	$28,871,405	$6,256,841
2018	44000	60	$32,669,269	$26,850,407	$5,818,862
2019	42000	60	$29,001,401	$24,970,878	$4,030,523
2020	46000	60	$29,539,998	$23,222,917	$6,317,082
2021	44000	60	$26,277,755		$26,277,755
2022	44000	60	$24,438,312		$24,438,312
2023	42000	60	$21,694,556		$21,694,556
2024	44000	60	$21,136,696		$21,136,696
2025	46000	60	$20,550,633		$20,550,633
2026	44000	60	$18,281,129		$18,281,129
2027	42000	60	$16,228,636
Total	5.86E06		$368,103,576	$168,431,335	$199,762,244
PV per share					$0.20
PV per share (tax paid)					$0.14

Notes:

1/ All dollar calculated amounts in the table are $NZ. USD oil prices are converted to NZD using $NZ1 = $US0.65.
2/ 'Discounted earnings flow factor' for subsequent years: (1-0.07)= 0.93
3/ No. of shares on issue for Genesis Energy: 1,000,000,000.

SNOOPY

[xafalcon]

Doing a straight line non discounted cashflow would effectively mean the gas price is increasing year on year at the discount rate I am using: 7%! Do you really think wholesale gas prices will increase at a 7% compounding rate for twelve years?

SNOOPY

You asked for feedback on your calculations

What I have said is that I don't think energy prices will remain static over your 12 year forecast timeframe, gave you a few reasons why I think they will rise, and suggested your model should consider that. You asked for an idea of how, and I gave you a very simple one that offsets your "time value of money" (which I think is too steep @ 7%pa compounding in a 1-3% inflation targeted economy, that has run sub-1% for a number of years)

If you don't agree with my suggestion, that's fine. I really don't take it personally. Forums are a good way of discussing differing opinions and me learning something along the way. I have some GNE in my collection, and the more background info I can analyse the better my decisions will be

[Snoopy]

I can't multi-quote, don't know how.

Just click the icon on the bottom RH corner of each message you want to mulitquote. Unlike the 'Reply' and 'Reply with Quote' options, there is no english text to tell you what this icon does. Not sure why.

I suggest you straight-line the cashflow rather then decreasing over time as you outlined

Year	Kupe Gas	Value	Resource Depreciation	Net
	(GJ)	Received	and Amortization	Proceeds
2015	6.5E06	$48,360,000	$23,018,794	$25,341,206
2016	5.3E06	$39,432,000	$21,407,478	$18,024,522
2017	6.1E06	$45,384,000	$19,908,955	$25,475,045
2018	6.1E06	$45,384,000	$18,515,328	$26,868,672
2019	5.3E06	$39,432,000	$17,219,255	$22,212,745
2020	5.3E06	$39,432,000	$16,013,907	$23,418,093
2021	5.3E06	$39,432,000	$0	$39,432,000
2022	5.3E06	$39,432,000	$0	$39,432,000
2023	5.3E06	$39,432,000	$0	$39,432,000
2024	5.3E06	$39,432,000	$0	$39,432,000
2025	5.3E06	$39,432,000	$0	$39,432,000
2026	5.3E06	$39,432,000	$0	$39,432,000
2027	5.3E06	$39,432,000	$0	$39,432,000
Total	7.17E07	$533,448,000	$116,083,717	$417,364,283
PV per share				$0.42
PV per share (tax paid)				$0.30

You asked for feedback on your calculations

What I have said is that I don't think energy prices will remain static over your 12 year forecast timeframe, gave you a few reasons why I think they will rise, and suggested your model should consider that. You asked for an idea of how, and I gave you a very simple one that offsets your "time value of money" (which I think is too steep @ 7%pa compounding in a 1-3% inflation targeted economy, that has run sub-1% for a number of years)

Interesting POV on my time value of money discount factor. When I used 7%, I was bracing myself for a cascade of criticism for using such a low figure! Perhaps one thing I should have made clear is that my time value of money discount does not assume these future earnings flows are certain. I was also trying to build in some business execution risk. By this I mean some hardware failure on the Kupe platform that stops all field output for a period. Or some casatrophic failure that spills oil off the coast and closes the well for years, maybe permanently. I don't see the probability of such events as high, particularly the latter. However, particularly with the latter, and paying for environmental damage, the consequences could be very severe. Genesis would probably collapse and all shareholders funds could be lost under that scenario. So although unlikely, these possibilities do have to be considered in the form of a higher time value of money discount factor.

If you don't agree with my suggestion, that's fine. I really don't take it personally. Forums are a good way of discussing differing opinions and me learning something along the way. I have some GNE in my collection, and the more background info I can analyse the better my decisions will be

This isn't a question of agreeing or disagreeing. No one knows exactly what the future earning flows will be. It is usually a good idea to run different scenarios to put some boundaries on the range of possibilities. I ran with your suggestion on my model before I replied to you the first time. I didn't publish the result though, until now (see above). Perhaps my earnings assumptions, based on the future whoelsale price of gas being static , are too low? Perhaps your earnings assumptions, based on the future whoelsale price of gas rising 7% per year, are too high? Perhaps the real result will be somewhere between the two?

SNOOPY

[Snoopy]

Kupe Oil: Oil and LPG condensate are bracketed together from a reporting perspective.

Year	No. of Oil & LPG	Oil Barrel	Kupe Condensate	Resource Depreciation	Net
	Equiv barrels	Price USD	Revenue	and Amortization	Proceeds
2015	60000	60	$55,384,615	$33,381,206	$22,003,409
2016	44000	60	$37,772,308	$31,044,522	$6,727,786
2017	44000	60	$35,128,246	$28,871,405	$6,256,841
2018	44000	60	$32,669,269	$26,850,407	$5,818,862
2019	42000	60	$29,001,401	$24,970,878	$4,030,523
2020	46000	60	$29,539,998	$23,222,917	$6,317,082
2021	44000	60	$26,277,755		$26,277,755
2022	44000	60	$24,438,312		$24,438,312
2023	42000	60	$21,694,556		$21,694,556
2024	44000	60	$21,136,696		$21,136,696
2025	46000	60	$20,550,633		$20,550,633
2026	44000	60	$18,281,129		$18,281,129
2027	42000	60	$16,228,636		$16,228,636
Total	5.86E06		$368,103,576	$168,431,335	$199,762,244
PV per share					$0.20
PV per share (tax paid)					$0.14

Notes:

1/ All dollar calculated amounts in the table are $NZ. USD oil prices are converted to NZD using $NZ1 = $US0.65.
2/ 'Discounted earnings flow factor' for subsequent years: (1-0.07)= 0.93
3/ No. of shares on issue for Genesis Energy: 1,000,000,000.

Time for the first 'base case' variation. The above table assumes all oil is sold at USD60 per barrel. But 56% of Genesis's sales for 2015 are hedged at USD99.60. Assuming everything else is sold at USD60, this gives an average sale price of:

0.56*USD99.60+0.44*USD60 = USD82.18

Year	No. of Oil & LPG	Oil Barrel	Kupe Condensate	Resource Depreciation	Net
	Equiv barrels	Price USD	Revenue	and Amortization	Proceeds
2015	60000	82.18	$75,854,769	$33,381,206	$41,473,563
2016	44000	60	$37,772,308	$31,044,522	$6,727,786
2017	44000	60	$35,128,246	$28,871,405	$6,256,841
2018	44000	60	$32,669,269	$26,850,407	$5,818,862
2019	42000	60	$29,001,401	$24,970,878	$4,030,523
2020	46000	60	$29,539,998	$23,222,917	$6,317,082
2021	44000	60	$26,277,755		$26,277,755
2022	44000	60	$24,438,312		$24,438,312
2023	42000	60	$21,694,556		$21,694,556
2024	44000	60	$21,136,696		$21,136,696
2025	46000	60	$20,550,633		$20,550,633
2026	44000	60	$18,281,129		$18,281,129
2027	42000	60	$16,228,636		$16,228,636
Total	5.86E06		$388,573,730	$168,431,335	$220,232,395
PV per share					$0.22
PV per share (tax paid)					$0.16

So Genesis's hedging for FY2015 has produced an after tax increase in earnings equivalent to 2c per share. Because this increase is all in the current year, the earnings from from the oil field in total over the field life is also 2cps.

SNOOPY

[Beagle]

Snoopy mate, sorry for being lazy but to save my brain getting microwaved trying to double check all that how do you see the hedging gains unwinding in FY16 and FY17.
2 cents extra EPS FY15 but what about the remaining hedges for FY16 and there's none in FY17 is that correct ? I see plenty of room for EPS decreases in FY16 and 17 due to previous favourable hedging running out, is that how you see it ? Assume oil is $55 barrel and currency is 65 cents U.S.

[Snoopy]

Snoopy mate, sorry for being lazy but to save my brain getting microwaved trying to double check all that how do you see the hedging gains unwinding in FY16 and FY17.
2 cents extra EPS FY15 but what about the remaining hedges for FY16 and there's none in FY17 is that correct ? I see plenty of room for EPS decreases in FY16 and 17 due to previous favourable hedging running out, is that how you see it ? Assume oil is $55 barrel and currency is 65 cents U.S.

Roger, p64 in AR2014 conytains the following information on Genesis's oil hedging policy:

----

Light crude oil sales

The Group manages price risk in respect of oil sales by entering into oil options which provide a minimum price for future oil sales or oil price swap contracts which provide a fixed price for future oil sales. The Group’s Treasury policy sets minimum and maximum control limits ranging from between 50 per cent and 75 per cent for the first 12 months to between 25 per cent and 50 per cent for months 13 to 24.

-----

The actual hedging for FY2014 was 68%. Move forward one year and the actual hedging for FY2015 is 56%. Both of these figures are in line with the hedging policy with a one year time horizon. If Genesis are true to their policy, then there will also be hedging in place for FY2016, of between 25 per cent and 50 percent of projected sales. However, I have not seen this figure published anywhere, nor the future price at which this hedging has been set. Have you? Has anyone? If so I am happy to put those figures into my model. At the moment I am being 'conservative' by leaving any FY2016 hedging adjustment out.

Iran coming into the market may see a permanent fall in what the oil producers get. So yes, I am happy to rerun my model with the USD oil price at $US55 if you like.

SNOOPY

[Snoopy]

Time for the first 'base case' variation. The above table assumes all oil is sold at USD60 per barrel. But 56% of Genesis's sales for 2015 are hedged at USD99.60. Assuming everything else is sold at USD60, this gives an average sale price of:

0.56*USD99.60+0.44*USD60 = USD82.18

Year	No. of Oil & LPG	Oil Barrel	Kupe Condensate	Resource Depreciation	Net
	Equiv barrels	Price USD	Revenue	and Amortization	Proceeds
2015	60000	82.18	$75,854,769	$33,381,206	$41,473,563
2016	44000	60	$37,772,308	$31,044,522	$6,727,786
2017	44000	60	$35,128,246	$28,871,405	$6,256,841
2018	44000	60	$32,669,269	$26,850,407	$5,818,862
2019	42000	60	$29,001,401	$24,970,878	$4,030,523
2020	46000	60	$29,539,998	$23,222,917	$6,317,082
2021	44000	60	$26,277,755		$26,277,755
2022	44000	60	$24,438,312		$24,438,312
2023	42000	60	$21,694,556		$21,694,556
2024	44000	60	$21,136,696		$21,136,696
2025	46000	60	$20,550,633		$20,550,633
2026	44000	60	$18,281,129		$18,281,129
2027	42000	60	$16,228,636		$16,228,636
Total	5.86E06		$388,573,730	$168,431,335	$220,232,395
PV per share					$0.22
PV per share (tax paid)					$0.16

So Genesis's hedging for FY2015 has produced an after tax increase in earnings equivalent to 2c per share. Because this increase is all in the current year, the earnings from from the oil field in total over the field life is also 2cps.

I now want to wind back to prospectus time. We are only talking about early to mid 2014. But back then the outlook for oil was quite different. p70 in the prospectus contains the projected oil prices from that time. So I propose to rerun my oil earnings model using the data from that date.

Year	No. of Oil & LPG	Oil Barrel	Kupe Condensate	Resource Depreciation	Net
	Equiv barrels	Price USD	Revenue	and Amortization	Proceeds
2015	60000	100.88	$80,704,000	$33,381,206	$47,322,794
2016	44000	95.05	$51,859,200	$31,044,522	$20,814,758
2017	44000	94.28	$47,838,426	$28,871,405	$18,967,021
2018	44000	95.42	$45,027,690	$26,850,407	$18,177,284
2019	42000	97.37	$40,789,182	$24,970,878	$15,818,303
2020	46000	99.31	$42,378,738	$23,222,917	$19,155,821
2021	44000	101.3	$38,450,195		$38,450,195
2022	44000	103.3	$36,475,267		$36,475,267
2023	42000	105.4	$33,028,757		$33,028,257
2024	44000	107.5	$32,820,592		$32,820,592
2025	46000	109.65	$32,548,778		$32,548,778
2026	44000	111.85	$29,535,195		$29,535,195
2027	42000	114.08	$26,741,941		$26,741,941
Total	5.86E06		$538,198,041	$168,431,335	$369,856,706
PV per share					$0.37
PV per share (tax paid)					$0.27

My conclusion from comparing 'prospectus figures' and 'my forecast figures' one year later is that the 'intrinsic value' of Genesis shares have declined by around 9c since the company was floated, solely due to the changed outlook for oil.

SNOOPY

[Crackity]

I now want to wind back to prospectus time. We are only talking about early to mid 2014. But back then the outlook for oil was quite different. p70 in the prospectus contains the projected oil prices from that time. So I propose to rerun my oil earnings model using the data from that date.

Year	No. of Oil & LPG	Oil Barrel	Kupe Condensate	Resource Depreciation	Net
	Equiv barrels	Price USD	Revenue	and Amortization	Proceeds
2015	60000	100.88	$80,704,000	$33,381,206	$47,322,794
2016	44000	95.05	$51,859,200	$31,044,522	$20,814,758
2017	44000	94.28	$47,838,426	$28,871,405	$18,967,021
2018	44000	95.42	$45,027,690	$26,850,407	$18,177,284
2019	42000	97.37	$40,789,182	$24,970,878	$15,818,303
2020	46000	99.31	$42,378,738	$23,222,917	$19,155,821
2021	44000	101.3	$38,450,195		$38,450,195
2022	44000	103.3	$36,475,267		$36,475,267
2023	42000	105.4	$33,028,757		$33,028,257
2024	44000	107.5	$32,820,592		$32,820,592
2025	46000	109.65	$32,548,778		$32,548,778
2026	44000	111.85	$29,535,195		$29,535,195
2027	42000	114.08	$26,741,941		$26,741,941
Total	5.86E06		missing	$168,431,335	$369,856,706
PV per share					$0.37
PV per share (tax paid)					$0.27

My conclusion from comparing 'prospectus figures' and 'my forecast figures' one year later is that the 'intrinsic value' of Genesis shares have declined by around 9c since the company was floated, solely due to the changed outlook for oil.

SNOOPY

You are having fun today!

[Snoopy]

You are having fun today!

My painfully slow steam powered calculator is at last gathering some head. Shovelling some of that Huntly Coal into the boiler has done the trick!
All part of the longer game of valuing Genesis Energy.

My tactic is to

1/ pull the PV value of Kupe out of Genesis, then
2/ See how what is left relates to the value of the underlying energy and gas distribution business.

SNOOPY

[Crackity]

My painfully slow steam powered calculator is at last gathering some head. Shovelling some of that Huntly Coal into the boiler has done the trick!
All part of the longer game of valuing Genesis Energy.

My tactic is to

1/ pull the PV value of Kupe out of Genesis, then
2/ See how what is left relates to the value of the underlying energy and gas distribution business.

SNOOPY

sounds like a plan - I look forward to the future posts!