GNE - Genesis Energy

[Snoopy]

Joshuatree wrote: "Fascinating thread; thanks all. Am trying but struggling to convert this info into buy , hold or sell"

So am I Joshuatree! More stoking of my steam powered abacus I have yet to do. But in a nutshell:

1/ I think I am going to pull the petrol and LPG revenue stream out of the published results (somehow). This will probably be by taking a discounted cashflow view of Kupe reserves off the share price.
2/ What is left will be the electricity generating and retailing side of the business. And that should give a better yardstick to measure up against those other NZ gentailers.
<snip>

I sit on the doghouse ready to be corrected for this approach. But from where I sit, it seems to me to be the most promising road to follow.

A bit of consumer advice first. If you are sitting an examination, don't take a steam calculator in with you. Shovelling the coal into the boiler will only get your fellow students covered in coal dust and it will take about three months come up with an answer. So I expect your examiner will have gone home by then. The good side is that after a couple of hundred years of development steam calculators have become quite reliable. So here is the 'first iteration' answer to the question that I posed to the machine back in early May.

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 Value	Earnings Dividend	Capital Return Dividend
Gentailer	$1.24.6 + $0.034	$0.09-$0.026=$0.064	$0.034+$0.036
Kupe	$0.19 + $0.25	$0.026	0
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!

SNOOPY

[Joshuatree]

So a fairly valued($1.72 on NZX today) great yield play with no growth.? Perfect place in a market correction and or a deflationary environment.

Your steam calculator stories need to be published Snoopy. For some reason i keep seeing the Titus Groan novels by Mervyn Peakenot sure which character though

[fish]

[QUOTE=Joshuatree;583535]So a fairly valued($1.72 on NZX today) great yield play with no growth.? Perfect place in a market correction and or a deflationary environment.
I am grateful for snoopys valuation but am optimistic about future growth.
Bought more yesterday at 170-dividend of 8c plus imp credits soon just too attractive.
There are signs of increased demand and the world and nz is growing.

[couta1]

Will be back to $2 soon if Tiwai decision favourable.

[Snoopy]

So a fairly valued($1.72 on NZX today) great yield play with no growth.? Perfect place in a market correction and or a deflationary environment.

The problem with running a steam calculator Joshuatree, is that sometimes the clouds of coal dust that are a by product of running it settle into little black piles of ash that with the right imagination can resemble figures. Figures that some may see as important, when in fact they have little value. That $1.72 in my 'Divisional earnings' table is one such figure.

Remember the whole point of the great steam calculation was to 'backwards engineer' the value of the underlying gentailer business. $1.72 is not (necessarily) my valuation of GNE. It is the market valuation of GNE, the point the shareprice was hanging at when I drew up the table. No, the really interesting figure is one above that which I expressed as a sum, and which I have now highlighted in bold:

$1.24.6 + $0.034 = $1.28

We can work out the Gentailer's earnings by taking the mid point of projected NPAT ($90m, 9cps), and subtracting from that the Kupe earnings (2.6cps). So the Genesis Gentailer earnings are projected to be:

9cps - 2.6cps = 6.4cps

Underlying Gross Earnings yield is: (6.4/0.72)/128 = 6.9%

Underlying GNE PE ratio is 128/6.9 = 18.6

The question you need to ask yourself is, is GNE a buy given those ratios?

SNOOPY

[Snoopy]

We can work out the Gentailer's earnings by taking the mid point of projected NPAT ($90m, 9cps), and subtracting from that the Kupe earnings (2.6cps). So the Genesis Gentailer earnings are projected to be:

9cps - 2.6cps = 6.4cps

Underlying Gross Earnings yield is: (6.4/0.72)/128 = 6.9%

Underlying GNE PE ratio is 128/6.9 = 18.6

The question you need to ask yourself is, is GNE a buy given those ratios?

My answer to the above question may not be the same as yours. Personally in a low interest rate environment, I value cash dividends highly. With bank interest rates hanging around 4%, I am prepared to entertain an investment with an underlying gross 6% yield, provided it is a utility type investment (Genesis is). So 'fair value' for 'Genesis Gentailer' for me would be:

$1.28 x (6.9/6.0)= $1.47

Of course you cannot buy 'Genesis Gentailer'. You have to buy 31% of Kupe thrown in with the package. At SOFY2016, I value Kupe as $0.17 (oil) and $0.26(gas), a total of 43c. So my fair value for GNE is currently:

$1.47 + $0.43 = $1.90

However, half of the dividend for FY2015 has already been paid. This won't affect the valuation provided the interim 'earnings dividend' for FY2016 remains the same. However I believe the interim fully imputed part of the dividend will reduce from 8cps to just 3.6cps. So we have to reduce today's valuation by the amount of the non imputed interim dividend difference: 4.4c. My overall valuation for Genesis Energy today is therefore: $1.90 - $0.044 = $1.86

SNOOPY

[Snoopy]

Bought more yesterday at 170-dividend of 8c plus imp credits soon just too attractive.

The problem with that reasoning from my POV, Fish, is that some investors have an unrealistic attachment to this 8c + 8c dividend with full imputation credits.

Ponder this: How can a company with a projected total tax paid profit of 8.5cps to 9.5 cps, pay out a dividend of 16cps with full imputation credits?

Answer: they can't unless some of those imputation credits are hanging around on the balance sheet already.

Once those imputation credits are gone, they can only be replaced by future tax paid from real earnings. So short of giving you your own capital back in the guise of a dividend (paying a dividend from capital will just see your capital reduced by the amount of withholding tax GNE deducts from that dividend and will not give you any imputation credits) my conclusion is that dividends will be substantially lower from FY2016 and not fully imputed.

Personally, even given the above, I see buying GNE as just worthwhile. But I am in the market for a bit more of a bargain than an implied yield of just over 6%. So I regard GNE as a hold at today's prices. There are better bargains to be had among some other gentailers at today's GNE prices IMO.

SNOOPY

[Beagle]

The problem with that reasoning from my POV, Fish, is that some investors have an unrealistic attachment to this 8c + 8c dividend with full imputation credits.

Ponder this: How can a company with a projected total tax paid profit of 8.5cps to 9.5 cps, pay out a dividend of 16cps with full imputation credits?

Answer: they can't unless some of those imputation credits are hanging around on the balance sheet already.

Once those imputation credits are gone, they can only be replaced by future tax paid from real earnings. So short of giving you your own capital back in the guise of a dividend (paying a dividend from capital will just see your capital reduced by the amount of withholding tax GNE deducts from that dividend and will not give you any imputation credits) my conclusion is that dividends will be substantially lower from FY2016 and not fully imputed.

Personally, even given the above, I see buying GNE as just worthwhile. But I am in the market for a bit more of a bargain than an implied yield of just over 6%. So I regard GNE as a hold at today's prices. There are better bargains to be had among some other gentailers at today's GNE prices IMO.

SNOOPY

You are bang on the money Snoopdog. The Imputation credit account cupboard is bare and they had to delay the first half dividend till after 31 March, (the annual date of reckoning as to when an ICA account must be in credit otherwise penalties apply) so as to ensure they didn't get their ICA overdrawn. IIRC while the directors some time back reiterated dividend guidance of 8 cps for the final divvy any mention of the term "fully imputed" was conspicuously absent.
In their IPO documentation they stated they wanted to maintain dividends of 16 cps per annum in real terms, i.e. suggesting / implying inflation adjustment. I understand the difference between free cash flow and after tax profit at least as well as the next hound out there but I still struggle to see them paying 16 cps in the medium term with the decline in Kupe revenues being the main culprit. Big sea change that oil price has been that's for sure !

Still with ultra low interest rates this stock still has its charms especially cum the 8 cent final divvy but I'm broadly with you that the stock is somewhere around fair value at the current price. Tiwai point resolution is an absolute requirement for the stock to gain any northwards traction whereas on the other hand if Tiwai goes down the gurgler, (I don't think it will), then

[Beagle]

As mentioned above I think its likely the Tiwai point smelter gets resolved satisfactorily and GNE has the most leverage to the upside. If my memory serves me correctly a decision on that is due very early next week.

I am a horse punter form earlier days so I couldn't help myself having a small wager so I'm back on board with this puppy now, in a modest way.

[sb9]

Monday 3rd Aug is the D day Roger.