EUR 850.00 For Business Accounts Only

Morningstar | Soft 4Q for Genesis; But Still On Track for Good FY18

Narrow-moat Genesis Energy appears on track to meet guidance of NZD 350 to 360 million in fiscal 2018. Operating results for the third and fourth quarters were soft due to an unplanned outage of the Tekapo B hydroelectric power station, plant outages at Kupe, and tough retail conditions. But these headwinds were well-flagged by management at the interim result in February. We maintain our EBITDA forecast of NZD 358 million, representing growth of 7% from last year thanks to a good first half performance. Our NZD 2.10 (AUD 1.90) fair value estimate is unchanged and we consider Genesis modestly overvalued at current prices. We forecast mid-single-digit EBITDA growth for the medium term on recent acquisitions, cost-out initiatives, roll-off of unfavourable gas contracts, and growth of the LPG business. Our main concerns are risks to earnings from oil price exposure, the eventual decline of Kupe and above-average gearing.

Renewable generation in the fourth quarter was down 13% on the previous corresponding period, or pcp, as the unplanned Tekapo B outage continued to take its toll. But it returned to service in early June, and with high lake storage levels, the generator should contribute strongly through the rest of winter. For the full financial year, renewable generation volumes were down 3%. Despite this, the generation division should report a strong fiscal 2018 result thanks to a 51% increase in wholesale prices and a 24% increase in gas- and coal-fired power generation.

The retail division isn't performing as strongly. Electricity and gas customer numbers are down 2% on last year, and modest price increases are unlikely to offset higher marketing and sales costs. Fourth-quarter retail netback fell 5% to NZD 81.92 per megawatt hour, while fiscal 2018 netback fell 4% to NZD 80.33 per MWh. The main highlights were 36% growth in commercial and industrial sales volumes and 134% growth in bottled LPG sales following the Nova acquisition.

Kupe's fourth-quarter performance was soft, with gas production down 13% on the pcp due a plant outage and lower generation demand. Oil production was also weaker. Despite this, full-year earnings should grow strongly because of the increased stake in the oil and gas field. For the full year, gas production rose 26% and oil sales rose 12%.

Unfortunately, Genesis won't benefit materially from recent oil price strength given its policy of hedging most future oil sales. We estimate it will receive an average price of around USD 57 per barrel in fiscal 2018, leaving plenty of upside to earnings if the oil price stays near current levels of USD 71, though existing hedges will continue to drag on earnings for another couple of years. While hedging is costing the firm at present, we see it as a prudent strategy.