GNE - Genesis Energy

[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]	18c	17c
per share value Kupe Gas (pre tax)[B]	22c	19c
per share value all Kupe (pre tax) [A]+[B]	40c	36c
per share value all Kupe (after income tax)	30c	26c

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]	18c	16c
per share value Kupe Gas (pre tax)[B]	22c	22c
per share value all Kupe (pre tax) [A]+[B]	40c	38c
per share value all Kupe (after income tax)	30c	28c

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)[B]	22c	19c
per share value all Kupe (pre tax) [A]+[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.

Year	No. of Oil & LPG	Oil Barrel	Kupe Condensate	Resource Depreciation	Net
	Equiv barrels	Price USD	Revenue	and Amortization	Proceeds
2017	640000	57.01	$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.

Year	Kupe Gas	Value	Resource Depreciation	Net
	(GJ)	Received	and Amortization	Proceeds
2017	5.80E06	$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