Genesis Energy: Lower Earnings as Normalizing Rainfall Offsets Higher Retail Prices

Genesis Energy’s GNE September-quarter update shows it is tracking broadly in line with guidance for fiscal 2024 EBITDA of NZD 430 million. We estimate that September-quarter EBITDA was about 12% below the previous corresponding period, excluding insurance proceeds relating to the Huntly power station outage. We maintain our earnings forecasts and NZD 2.60 per share fair value estimate. The narrow-moat-rated firm’s share price is down nearly 40% from early 2021 highs and now trades at a small discount to our valuation. While the forecast dividend yield of 7.2% appears attractive, Genesis faces long-term earnings headwinds from the gradual depletion of the Kupe oil and gas field and the closure of coal and gas power stations. Overall, we forecast a five-year EBITDA CAGR of negative 2%.

Normalization of rainfall, following last year’s downpour, saw hydroelectric production fall 22% in the September quarter and lake storage end the quarter at 102% of the average, compared with 165% of the average at the same time last year. Lower hydroelectric volumes forced Genesis to rely more heavily on gas-fired power stations, with matters made worse by the unplanned outage at Huntly Unit 5. These factors resulted in generation costs rising 73%. Kupe was also disappointing, with lower production and sales because of the natural field decline and the timing of shipments.

However, the quarter wasn’t all bad. Commercial and industrial electricity prices increased 23% and residential prices increased 4%. Genesis and competitors are increasing retail electricity prices to reflect elevated wholesale prices, which are caused by high gas, coal, and carbon prices pushing up the cost of running thermal power stations. This boosts profits from cheap renewable sources, including Genesis’ hydroelectric schemes. Despite higher retail electricity prices, customer numbers increased by 2% and sales volumes increased by 4%. Gas and LPG retail prices also increased, up 7% and 14%, respectively.