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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Genesis Energy</h2>
Kupe Key to Cover Fuel Cost Rises — 2Q20 Operating Performance
Genesis Energy’s (GNE) 2Q20 featured a strong retail performance, with netbacks increasing across all energy products, offset by high generation fuel costs and the planned Kupe outage. GNE also indicated 1H20 EBITDAF is likely to be ~$167m, ~-15% lower than the pcp. This was worse than we had expected, with fuel costs the main issue.
What’s changed?
<ul>
<li>Earnings: FY20 EBITDAF -$4m lower to $362m</li>
<li>Target Price: Reduced -8cps (-2.5%) to $3.15</li>
<li>Rating: OUTPERFORM rating unchanged</li>
</ul>
Retail performance shines again
GNE’s retail segment continues to perform well. Sales volumes were generally strong (electricity up +2.8%, LPG up +16.9%), and netbacks, an indicator of profitability, were up across electricity (+1.6%), gas (+11.4%) and LPG (+23.9%). GNE has been increasing prices, which has had a small negative effect on connection numbers.
Generation fuel cost increases and Kupe volumes the negatives
Whilst we knew fuel costs were increasing, the magnitude of the increase was greater than expected. The combined cost of coal/gas generation increased +20% vs. the pcp to $82/MWh and the mix change was favourable for 2Q20 (more gas generation than coal). The other headwind was reduced Kupe production volumes due to a planned maintenance shut-down. The shut-down had been well signalled and its effect expected.
These headwinds have combined to lower 1H20 EBITDAF ~-15% below the pcp to ~$167m. GNE will be reporting its 1H20 result on Friday, 21 February.
Forecast changes reflect higher costs and increase Kupe production
Whilst 2Q20 Kupe production was suppressed, GNE has indicated that work in 3Q20 will hopefully boost production for the last four months of the year. We believe GNE needs these volumes to come through to meet its current FY20 EBIDAF guidance range of $360m to $380m.
We have lowered our FY20 EBITDAF forecast -$4m to $362m. Most of the decrease is due to higher fuel costs (up +$13m) offset by increased Kupe production, boosting Kupe earnings +$6m. Higher fuel costs and Kupe production is a feature of the changes in later year forecasts too.&nbsp;
<div class="content-highlight">
Investment View
Our rating is OUTPERFORM. GNE is trading on the sector leading dividend yield and market multiples. It also has the strongest near-term growth profile, aided by high cost gas contracts rolling off from FY21 onwards. Its downside risks to NZAS closing are also amongst the lowest in the sector.&nbsp;
</div>
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185

Genesis Energy
Kupe Key to Cover Fuel Cost Rises — 2Q20 Operating Performance
Genesis Energy’s (GNE) 2Q20 featured a strong retail performance, with netbacks increasing across all energy products, offset by high generation fuel costs and the planned Kupe outage. GNE also indicated 1H20 EBITDAF is likely to be ~$167m, ~-15% lower than the pcp. This was worse than we had expected, with fuel costs the main issue.
What’s changed?

Earnings: FY20 EBITDAF -$4m lower to $362m
Target Price: Reduced -8cps (-2.5%) to $3.15
Rating: OUTPERFORM rating unchanged

Retail performance shines again
GNE’s retail segment continues to perform well. Sales volumes were generally strong (electricity up +2.8%, LPG up +16.9%), and netbacks, an indicator of profitability, were up across electricity (+1.6%), gas (+11.4%) and LPG (+23.9%). GNE has been increasing prices, which has had a small negative effect on connection numbers.
Generation fuel cost increases and Kupe volumes the negatives
Whilst we knew fuel costs were increasing, the magnitude of the increase was greater than expected. The combined cost of coal/gas generation increased +20% vs. the pcp to $82/MWh and the mix change was favourable for 2Q20 (more gas generation than coal). The other headwind was reduced Kupe production volumes due to a planned maintenance shut-down. The shut-down had been well signalled and its effect expected.
These headwinds have combined to lower 1H20 EBITDAF ~-15% below the pcp to ~$167m. GNE will be reporting its 1H20 result on Friday, 21 February.
Forecast changes reflect higher costs and increase Kupe production
Whilst 2Q20 Kupe production was suppressed, GNE has indicated that work in 3Q20 will hopefully boost production for the last four months of the year. We believe GNE needs these volumes to come through to meet its current FY20 EBIDAF guidance range of $360m to $380m.
We have lowered our FY20 EBITDAF forecast -$4m to $362m. Most of the decrease is due to higher fuel costs (up +$13m) offset by increased Kupe production, boosting Kupe earnings +$6m. Higher fuel costs and Kupe production is a feature of the changes in later year forecasts too.&nbsp;

Investment View
Our rating is OUTPERFORM. GNE is trading on the sector leading dividend yield and market multiples. It also has the strongest near-term growth profile, aided by high cost gas contracts rolling off from FY21 onwards. Its downside risks to NZAS closing are also amongst the lowest in the sector.&nbsp;

Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185

Genesis Energy: Kupe Key to Cover Fuel Cost Rises — 2Q20 Operating Performance