D - Dominion Energy: Losing Energy

Summary

• Dominion Energy continues to struggle as a result of a non-consistent long-term strategy.
• M&A is costly at times, as growth is hard to come by, while leverage is quite high.
• I see no real appeal at these levels, despite a soft share price performance, on the back of structural underperformance here.

In the summer of 2020, I concluded that no earnings meant no energy for the shares of Dominion Energy ( D ) as it sold gas assets to Berkshire Hathaway at a price which did not particularly convince me. Ever since, it has been continued stagnation, as a built-up in leverage and higher interest rates do not make that I see great appeal here, in fact the contrary.

A Recap

Dominion is a large regulated and regulated-like utility, which serves some 7 million customers across 18 states, at least during the pandemic. The company counted almost an equal number of electrical as well as gas customers.

By mid-2020 the company reached a deal to sell its gas transmission and storage activities to Berkshire in a $9.7 billion deal to focus more on the regulated business model and on renewable energy sources. That deal was substantial, yet had a large impact on the business as well, with the new earnings guidance of $3.50 per share being down nearly a dollar from the previous guidance, as the dividend was cut by around a third to $2.50 per share.

The cut in profitability and dividend was huge in response to a deal which came in just below the $10 billion mark, as Dominion commanded a $70 billion equity valuation at $82 per share, all while net debt approached the $40 billion mark, for a sky high enterprise valuation of around $110 billion. In that light, the divestment was equal to just 10% of the valuation, while a much larger percentage in terms of earnings power was leaving the door.

Shares fell 10% in response to the news announcement, shedding some $7 billion in value, which was not just reflective of the deal, but also as a reaction to the reduced earnings power and dividend cut, as well as news that the company was cancelling its Atlantic Coast Pipeline project. I understood that cautious reaction as I have been quite skeptical on the utility model, with production getting more decentralized, and while the strategic direction made sense, the price simply felt too low to see appeal.

Hence, I saw absolutely no reason to get involved here, as I am very glad that I have reached that conclusion.

Stagnation

Since the summer of 2020, about two and a half years ago by now, shares of Dominion have mostly traded in a $60-$90 range, and by now are actually trading near the very lower limit of the range, at $61 per share.

2021 was another year of a mixed bag as revenues were largely stable around $14 billion on which net earnings of $3.3 billion, or $3.98 per share were reported , or $3.19 per share if we account for discontinued operations as the company continues to be highly indebted.

Despite the many moving parts, but overall, no clear direction of travel, the company guided for 2022 earnings between $3.95 and $4.25 per share, badly needed as growth was hard to find, and the lower dividend commitment still need to be maintained.

After two rather uneventful quarters so far this year, Dominion posted its third quarter results early in November, as the company so far earned $3.05 per share, ten cents ahead of last year. GAAP earnings only came in at $1.17 per share, with large reconciliations being made related to hedging activities, storm damages, decommissioning funds contributions, among others.

Amidst aggressive reconciliation of reported earnings, a high dividend payout and large capital spending requirements of the business, net debt rose to roughly $43 billion here, a huge amount. This is certainly the case in relation to the earnings power, free cash flow generation and amidst rapidly rising interest rates. The company has furthermore incurred some dilution over time, now reporting a share count of 833 million shares, as the resulting $51 billion market value rises to $94 billion if we factor in net debt.

Alongside the release of the results, the company announced a strategic review of the operations and at the same time CFO Chapman announced his departure, as that combination is never very favorable in terms of timing.

What Now?

Truth is that shares have seen a poor performance, down 30% over a time frame of about two and half years' time, for good reasons. The (capital allocation) strategy sees continued movement, as the alterations do not help in making a consistent strategy, while the resulting capital allocation decisions at times prove to be quite costly.

While a 15 times earnings multiple looks reasonable, the issue is that earnings are quite adjusted and that growth is hard to come by. Even more so, the company continues to rack up debt, with leverage on the increase, making for a very tough situation given the current higher interest rate environment.

Some management turnover and costly M&A makes me very cautious here, as I see no reason to get involved here, even as shares have been lagging quite a bit not just versus the market, but also versus some peers. The current dividend yield is at par with risk-free rates, as lack of strong dividend growth, and leverage situation, simply makes that the risk-reward does not look too compelling.

For further details see: