Daily Brief Energy/Materials: Tata Steel Ltd, Independence Contract Drilling, Kinder Morgan, Lyondellbasell Indu Cl A, Ppg Industries and more

Tata Steel’s Q1/23-24 results were weaker than expected, as the European business dragged down profitability. On a standalone basis, Tata Steel India performed well, registering a strong EBITDA margin (c. 22%) which was slightly better than that of JSW Steel. However, the EBITDA loss in the European business, particularly the UK business, affected profitability. The company’s financial risk profile deteriorated, with Net Debt/EBITDA increasing to higher than management’s guided range. Liquidity remains sound. However, management is committed to deleveraging its balance sheet and aims for Net Debt/EBITDA to be 2-2.5x by FYE 2023-24.

Tata Steel India’s business remained solid. Compared to its closest peer, JSW Steel, Tata Steel India is 100% self-sufficient in terms of iron ores with huge reserves (500-550 mn tonnes), and 30% in terms of coking coal. It also has a lower dependence on exports (which is pressured by increasing Chinese exports), with exports typically accounting for c. 10-15% of sales (vs. 25-30% for JSW Steel).

The group’s future will depend on the decisive action that management takes towards the UK business, which is highly uncompetitive, mainly due to: [1] increased energy costs in the UK; and [2] high capex required for a green transition. Energy costs in the country were already twice those in Europe before the Russia-Ukraine war, and are now at elevated levels. Plants in the region are also reaching end-of-life, and production levels have hence become less stable (with unplanned outages). Any long-term solution for the UK business must address rising carbon costs and local emissions reduction goals. Tata Steel UK has asked the government to subsidise 50% of capex for its green transition. Management said it will continue to run Tata Steel UK optimally for cash, with minimal support from Tata Steel in India.

• The US rig count has declined in recent months as operators have curtailed activity in the face of declining oil and natural gas prices.

• According to the Baker Hughes rig count, total US working rigs had declined to 669 on July 21, 2023, from 755 on March 31, 2023.

• ICD’s fleet of pad-optimal super-spec rigs primarily serves customers in the Haynesville, Permian, and Eagle Ford regions.

• Kinder Morgan had a disappointing performance in the last quarter with revenues below Wall Street expectations.
• The natural gas and terminals businesses outperformed with increased transport and gathering volumes, while the CO2 business beat the production plan.
• Kinder Morgan’s strong performance in various segments and ability to adapt to market dynamics demonstrate its resilience and expertise in the energy industry.

• LyondellBasell stock offers a high dividend yield of 5.5% and improving cash flow coverage.
• Some major headwinds are dissipating and this puts LyondllBasell in a very good position to improve its profitability profile.
• LyondellBasell (NYSE:LYB) delivered nearly 16% total return since December of last year, when I took a deep dive into the company’s operations and explained why the stock is attractive for anyone looking for attractive risk-reward opportunities.

• PPG Industries managed to exceed analyst expectations in terms of revenue as well as earnings.
• PPG’s strong posture in these end-use areas resulted in significant second-quarter sales in aerospace, automotive, automotive refinish, PPG Comex, and its protection and marine coatings division.
• We give PPG Industries, Inc. a ‘Hold’ rating with a revised target price.