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Morningstar | Flexible Portfolio Helps Genesis Weather Tough Quarter. See Updated Analyst Note from 23 Apr 2019

Narrow-moat Genesis Energy is on track to hit the bottom end of its fiscal 2019 EBITDA guidance of NZD 360 million-375 million, according to management. Its third quarter was mixed, with higher wholesale electricity prices and increased thermal output making up for lower hydroelectric volume. The outlook for the New Zealand gentailers is benign. The electricity market is back in balance, and the major players, including Genesis, are exploring growth options. Our fiscal 2019 EBITDA forecast is largely unchanged at NZD 266 million. We upgrade our medium-term earnings forecasts on stronger expected electricity prices and lift our fair value estimate 4% to NZD 2.30 per share. At current prices, the stock appears moderately overvalued. Our main concerns with Genesis are its oil and gas price exposure, the eventual depletion of Kupe, and the firm’s relatively aggressive financial leverage.

The March 2019 quarter was challenging, with low North Island rainfall and gas supply shortages curtailing industrywide electricity production. This resulted in a wholesale price spike, with average electricity price up 83% in the quarter. The firm’s diverse and flexible generation fleet showed its worth by increasing electricity output during this tough quarter through increased use of imported coal. Good generation plant reliability also helped.

Third-quarter generation volume rose 9% as increased output from the gas- and coal-fired Huntly power station offset lower hydroelectric generation. Swaption calls also worked against Genesis' own generation, as the company was forced to provide power to peers under contract. The large increase in output from Huntly coal generators had an obvious impact on fuel costs, which rose 32%. Paying for expensive coal was justified by the high wholesale electricity price.

The retail business was mixed, with customer numbers falling 1.4% and residential sales falling 2% because of tough competition. However, netback--a measure of profitability per unit of volume--increased across all fuels, up 4% for electricity, 14% for gas, and 13% for liquefied petroleum gas. Mass-market churn continues to fall as the number of stickier dual-fuel customers increases. This should reduce the cost to acquire and retain customers. Business sales increased 1%, and commercial and industrial sales increased 11%.

Kupe gas production rose 2.5% and LPG production rose 12%, but oil production fell 9% due to natural field decline.