Falling methanol and oil prices create challenges for Genesis Energy

UPDATED: Genesis Energy [NZX: GNE] faces declining earnings beyond the current financial year from its 31 percent share in the Kupe oil and gas field unless there's a turnaround in global oil and methanol prices or a lift from higher earnings or acquisitions elsewhere in the business.

A media briefing on the electricity and gas producer and retailer heard that the price Genesis is getting from the Methanex methanol plants in Taranaki - the country's largest single user of natural gas - is currently near the 'floor' price in the contracts governing those sales.

A two year rolling hedge policy is shielding Genesis from most of the impact of plummeting oil prices, with some 82 percent of Kupe oil hedged at US$81 a barrel through the second half of the current financial year, but that drops to 49 percent hedged at US$67 a barrel in 2017 and tails off further in 2018. The company is likely to choose to hedge less if lower oil prices persist, said chief financial officer Andrew Donaldson.

"We haven't started to indicate guidance for next year but obviously there will be an increased price-driven reduction rolling into next year's result, assuming it stays the same. Who knows what will happen to oil prices?" he said.

Low gas prices are seeing Genesis taking increasing quantities of natural gas for its own use at its gas and coal-fired power plant at Huntly, helping to preserve coal stockpiles being eked out until the planned closure of 500 Megawatts of ageing equipment in September 2018.

Company officers were adamant Genesis would shut the two 250MW Rankine units at Huntly unless discussions with various electricity industry players were to reveal a commercially viable reason to keep them available for back-up generation in the case of electricity shortages, most commonly caused by low inflows into hydro storage lakes.

Asked whether the outlook for Genesis was declining returns without an improvement in oil prices, Donaldson said the company was growing its customer base, cutting costs and that the Kupe field's reserves had recently been judged to be up to 40 percent larger than previously thought, with decisions on expanded production due later this year. Volatility in Kupe's earnings was falling as gas, which is priced in the local market, now accounted for an increased share of earnings from the field, which it jointly owns with operator Origin Energy and New Zealand Oil & Gas.

Outgoing chief executive Albert Brantley also drew attention to a question he'd been unwilling to discuss earlier in the briefing - the potential for Genesis for bid for the customer base of an existing power company, such as Trustpower, which is currently splitting its assets into two separate companies: one to own its customers and hydro assets and a second owning its New Zealand and Australian windfarms.

"Don't forget the question you asked me that I didn't want to talk to you about," said Brantley, who is leaving the company after eight years at the helm. "The company is always looking at additional sources of ebitdaf (operating earnings) going forward. We don't just view ourselves as standing still."

On sales to Methanex, whose Taranaki plants have been hit by a slide in global methanol prices, Donaldson said contracted volumes of gas remained high in the current financial year, but "taper off significantly from next year."

"Volumes have been pretty similar year on year up until now. Price reductions-wise, we're not far off the floor. We've taken that into account in our forecasts for the rest of the year. Volumes have been similar. It's really prices that have tanked, along with oil."

Genesis shares rose 0.3 percent in trading today to $1.875. The 51 percent Crown-owned company reported first-half earnings before interest, tax, depreciation, amortisation and fair value movements (ebitdaf), a favoured measure by power companies, rose 1.5 percent to $175.5 million in the six months ended Dec. 31. It expects annual ebitdaf will be similar to the $344.8 million reported in 2015. 

The result was achieved partly by capitalising higher costs of customer acquisition over the the estimated two to three year commercial life of a customer to create a $7.5 million improvement on the bottom line. A lesser second-half impact was expected from this tactic, which is not employed by all power companies.

Revenue fell 2 percent to $1.04 billion, even as total customer customer numbers increased 1 percent to 643,721. The company had stabilised customer losses and was showing strong growth in its secondary brand, Energy Online, said Brantley.

(BusinessDesk)