Genesis Energy (GNE.ASX)

Fat Prophets

Monday 9th February 2015

Sharechat.co.nz – Hot Stock

Genesis Energy (GNE.ASX)

Quenching the thirst

What’s new?

The share price of Genesis Energy has marched on since our last buy recommendation in late September. Sentiment has been lifted by a ‘regulatory’ friendly result in the New Zealand election, and an increased flight to yield with the RBNZ cooling on the prospect of interest rate rises, and perhaps looking at heading the other way. The decision meanwhile by the RBA to cut rates earlier this week will also have upped the ante on its trans-Tasman counterpart.

Genesis has also been performing well operationally, and despite the highly competitive environment for electricity retailers. This was highlighted last week with the release of the company’s operational performance report for the second quarter to 31 December 2014, which was encouraging on a number of fronts. In particular, we note that the company continues to hold its own in a highly competitive electricity market, and has been able to mitigate the impact of low lake levels by having a diverse portfolio of generation assets.

The company reported that the number of electricity customer accounts has held firm since the first quarter at 517,492, thanks in the main to customers added in October and November. Competition remains extremely tough, though it appears that Genesis has been successful in gaining more than it has lost. The company’s electricity ‘switching rate’ of 17.8 percent for Q2 compared favourably to the 18.9 percent rate reported in the previous quarter. Kiwi electricity customers certainly continue to be hotly courted it would seem!

An attraction for many customers with Genesis remains the superior nature of the company’s dual fuel offering. While total gas customer accounts (108,217 at period end) declined by 6 percent on the previous corresponding period, the impact was offset by gas sales volumes rising 9 percent. Encouragingly for investors, time of use (TOU) gas volumes, which are typically higher margin, increased 87 percent and now account for 44 percent of retail gas sold (from 8 percent in FY2011).

The company also continues to benefit from its 31 percent stake in the Kupe oil and gas field, with this coming despite some outages and lower oil prices during the period. Oil, gas and LPG sales here were all up, with oil sales of 162kbbl up 63 percent year-on-year, and despite a 7 percent decline in production due to the timing of oil export shipments.

Outlook

We believe that a firm second quarter bodes well for when Genesis releases its interim result on the 24^th February. Over the medium term we also expect the company to benefit as intense competition within the NZ electricity market subsides and as the country’s economic recovery gains more traction. Meanwhile with the RBNZ set to switch towards a loosening stance Genesis will continue to retain high appeal on account of its strong yield.

Price

While the company’s shares are currently trading on 25 times 2015 earnings, we do not consider this to be overly demanding given our view that current earnings estimates are understating the potential upside to electricity and energy prices over the medium-term.

Worth buying?

Despite the recent re-rating of the company’s shares, we continue to believe that Genesis represents an attractive investment opportunity and a strong play on rising electricity (and energy) prices over the medium term. In our view, the shares also will satisfy a growing thirst for income in a low interest rate environment, with a current yield of around 6 percent.

Disclosure: Fat Prophets, and interests associated with the company, hold shares in Genesis Energy.

Greg Smith is the Head of Research at Fat Prophets share market research.

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