- Genesis Energy 2Q22 beat: Every business unit ahead of forecast leading to 21% segment margin beat and 22% Adjusted EBITDA beat.
- Guidance raised 10%: For the first time in years, management raised guidance mid-year to Adjusted EBITDA of $670-$680M from $605-$625M (including asset sales on both figures).
- Preliminary 2023 Outlook Introduced: Despite a global recession, management indicated Adjusted EBITDA to achieve low to mid $700M range, BS leverage to fall below 4.0x by YE2023.
- Another offshore oil transport opportunity in the next 2-4 years: On top of 160k bpd contracted for early 2025 announced last Q, management in discussions for another 200k bpd which could mean incremental $100M EBITDA by 2026.
- Above average return opportunity over next two years in our view: We forecast units to reach $14-$17 (40-70% upside) by end of 2022 and $20-$26 (100-160% upside) by end of 2023 based on 8-9x Adj. EBITDA which is more than one standard deviation below avg. multiple.
One of the best earnings reports in years
Despite a strengthening outlook, Genesis Energy ( GEL ) units have pulled back sharply (-15%) since our May 26 th update. Yet GEL’s 2Q results were far better than forecast and the accompanying narrative on the earnings release and on the conference-call was one of the most positive in years. Consider the following list of positives:
- Not only did GEL deliver a huge 20+% beat in both segment margin and Adjusted EBITDA,
- It also introduced next year’s preliminary guidance earlier than usual,
- Raised guidance mid-year for the first time in years,
- After announcing 160,000 b/d volume contracts for its offshore pipelines for early 2025 with their 1Q22 release, announced they were in commercial discussions for another 200,000 b/d to be realized the next 2-4 years.
- Another positive incremental data point was the mention of 50,000 bbl/d of additional in field production via five or six subsea tie-back wells under contract to flow through a 100% GEL owned lateral prior to transport on the 64% owned Poseidon or CHOPS pipelines that are expected to be realized over the coming months.
- The announcement of the incremental 200,000 bbl/d is significant because GEL management bias is to be non-promotional and conservative.
- Balance sheet leverage dropped to 4.5x the lowest leverage since 4Q2014.
To put this in perspective, one or two of these announcements would be positive, but to have seven positives makes this quarter’s earnings release truly remarkable.
Moreover, GEL's business units have little exposure to recession risk given the tight supply/demand set up for its soda ash and NaHS business, GEL's offshore pipelines are fully contracted, and volume flows are not impacted by changes in the price of crude oil. While GEL's onshore facilities and marine shipping beat expectations, they are relatively small contributors to overall results (13% combined to 2Q22).
Some details on the quarter’s results that bodes well for future
- All of the business units posted results above forecast
- The largest beat ($21M or 44% in margin) from Sodium Minerals and Sulfur Services as both volume and pricing was well above forecast.
- Marine transportation was surprisingly strong with GEL’s barge utilization running at 98-99.6% and margin/bbl of oil transported sharply higher Q/Q.
- Onshore Facilities was also surprisingly strong with both volumes and margin much higher than forecast and we note a sharp increase in rail unloading volumes.
Company filings, Principal Street estimates
Outlook for 2022-2024
Regarding our outlook, we have tried to be conservative in light of the updated guidance. Put another way, to keep estimates near guidance, I had to make very conservative assumptions. Thus, my bias is that estimates have a higher probability than in the past of upside revisions.
Given that the Argos platform has been slow to connect we trimmed our forecast on offshore pipelines by 6%, 7%, 5% for 2022-2024. But we have raised our estimates for the other segments given the surprising strength and positive narrative accompanying the 2Q earnings release. For example, the global market for soda ash is in short supply as a result of 2mm tons per year that has been taken offline since 2019 as well as force majeure events experienced by other producers that have occurred over the last 6 months. This shortfall combined with expensive synthetic producers having to be relied upon to balance the market suggests that price risk is likely to skew to the upside. Furthermore, in the 35M ton/year global market, China demand has a long-term normalized growth of 700k-1M tons/year and another 500,000 tons/year of incremental demand coming from solar panel and lithium battery makers. Global soda ash inventories have plunged by 80% since the end of 2021 in China and suggests that prices for 3Q22 are likely to be higher than in 2Q22. The inventory situation as well as the supply shortage is likely to bode well for GEL as they head into price redetermination discussions for 2023 later this year. As a result, we are raising our estimate for Sodium minerals by 22%, 20%, 20% for 2022-2024. Given the low base the increases for Onshore Facilities and Marine Transport are less material. We note that the rail unloading has experienced a sharp increase in volumes which contributed to our increase in our estimate.
Bottom line is we raise our Adjusted EBITDA estimate by 10%, 2%, 4% for 2022, 2023, 2024 to $681M, $755M, $839M. Our estimate compares to guidance for 2022 and 2023 of $670M-$680M for 2022 and low to mid $700s for 2023.
Valuation Outlook Continues to Suggest More than a Double Over the Next Two Years
We arrive at a target price outlook (' TP' ) of $17, $23, $29 by the end of 2022, 2023, 2024 respectively on a multiple of 8-9x EV/EBITDA (down from 9-10x). If we average EV/EBITDA multiples and sum of the parts TPs go to $19, $28, $34 compared to $21, $34, $38 previously. Also note as we show in the chart further below that the average EV/EBITDA multiple over the last 5 years is 10x but bear in mind that when GEL sold a stake in its CHOPS pipeline it received approximately 11x EBITDA. We point out that 8.75x EBITDA is 1 standard deviation below the 5-year average and even if we applied an 8x multiple, GEL units have a 40% upside from its current unit price.
Factset, Company filings, Principal Street estimates Principal Street Estimates Factset, Principal Street estimates
Balance sheet outlook
From updating our model, we provide an update on the outlook for the Genesis Energy balance sheet. For purposes of computing the Debt/EBITDA ratios we have included the Alkali notes even though they are excluded for purposes of complying with bank covenants for its credit facility. Note that GEL’s prospects continue to mean that the balance sheet is likely to de-leverage rapidly. Note that leverage drops below 4.0x during the 2H23 and below 3x by YE25.
As a result of the balance sheet improvement, we have assumed that the distribution would rise from $0.15/unit/Q to $0.50/unit/Q with the declaration attributable to 4Q23 consistent with our prior forecast. We believe that there is a strong probability of this occurring given the high degree of insider ownership. While we are seeing a 6.0% yield today, we believe that based on today’s unit price, the yield would be over 20% in approximately two years.
Note in the chart below that given how strong the balance sheet is likely to be, the distribution is likely to be growing. We have increased our forecast as we now assume high single digit growth until 2025, followed by low double-digit growth. The double-digit growth is one year sooner than our prior forecast. Based on an annualized distribution of $2.16 by the end of 2024 and $2.80 by the end of 2025 and applying a yield-based value of ~8.0% would translate into GEL unit valuation of ~$27/unit by the end of 2024 and ~$35/share, more than double the current value by the end of 2024 and nearly triple the current unit price by the end of 2025.
Company filings, Principal Street estimates
Conclusion
The 2Q22 results were among the best we have seen from Genesis Energy in years and supports the thesis we have been writing about for nearly a year. That is that while Genesis has struggled the last few years, the company’s future was on the road to significant positive change.
While no company is perfect, we continue to believe that an investment in Genesis Energy units remains compelling and could deliver returns that outperform the broader market averages all while delivering attractive income to investors.
For further details see:
Genesis Energy: Huge Q2 Beat And Other Opportunities Affirm Our Bullish Stance