Tag Archives: utilities

Dominion Resources: A Little Patience May Go A Long Way

Summary Dominion Resources has been discussed for its strong fundamentals and various initiatives underway to drive future growth. The data supports that view: book value, earnings, cash and revenue have all grown slowly but steadily in the past and likely will continue growth going forward. However, shares are currently at a premium; investors might be well-advised to wait for a more favorable entry point. There were opportunities before – there likely will be again. Introduction An insightful contributor to SA recently wrote about the strong business fundamentals and growth prospects of Dominion Resources, Inc. (NYSE: D ). The author did a thorough job describing the various initiatives which may drive growth in the future and offered the opinion that the current premium pricing is justified. While the growth initiatives have been well documented, it seems appropriate to more fully explore the current price-to-value relationship of this company. At the current price of about $70, are shares fairly valued? If not, are they priced at a premium right now, or a discount? This article seeks to contribute to the Dominion conversation by exploring a valuation methodology for consideration. The analysis is presented in two-steps: 1) A review of company fundamental metric performance, and 2) a PE valuation calculation. The idea is to assess a company’s historical performance as a guideline for possible future results. The assumption is that solid fundamentals lend themselves to relative predictability over longer periods of time. Then, for high-quality companies with strong track records, over time pricing matches valuation. So the question at hand is to assess the pricing-to-valuation situation right now for Dominion. Step 1: Dominion Resources, Inc. – Historical Trends in Fundamental Metrics In order to assess fundamental performance, it is reasonable to review trends in book value per share, earnings per share, cash flow per share and revenue per share. Book Value Per Share Like always, F.A.S.T. Graphs provides a useful visual. As shown on the graphic below, D has delivered slow and steady balance sheet growth over the period studied. (click to enlarge) source: www.fastgraphs.com Earnings Per Share In my opinion, D has delivered fairly modest earnings per share growth over time. Single-digit growth, while growth, is nothing extraordinary. The graph below indicates this trend is solid, but certainly not spectacular. (click to enlarge) source: www.fastgraphs.com Cash Flow Per Share From my perspective, the data suggests that Dominion management has done an effective job managing cash successfully over long periods of time. Substantial capital investments have increased the earnings capabilities of the company as evidenced by the data. (click to enlarge) source: www.fastgraphs.com Revenue Per Share IMHO, the data again suggests modest revenue growth over periods of time. This seems to suggest a solid position in the market place, but nothing exceptionally over and above the peer group to suggest premium pricing. (click to enlarge) source: fastgraphs.com Based on a review of the data, in my opinion Dominion is a quality company with a track record of success and a variety of initiatives to grow earnings going forward. Results are not spectacular; modest would be a better description. The next step is to determine: at current price levels, are D shares fairly valued, at a premium, or a discount? Step 2: A Possible Valuation When valuing a company, I like to compare that company against its own historical valuation. As usual, F.A.S.T. Graphs comes in very handy. In the chart below, the orange line represents earnings history and what could be considered “fair valuation” at a price/earnings multiple of 15X. The blue line represents a historic normalized average P/E. Finally, the black line is the market price of D. Looking carefully at the graphic below, we can observe that the historical normal PE for D is 15.8X earnings. Today D is priced at 19.5X earnings or more. This is portrayed by the black price line currently above the blue and orange line. (click to enlarge) source: fastgraphs.com So it appears that shares are priced at a premium right now. Just how much of a premium? To purchase D today an investor would be paying nearly 20X earnings when the norm is for an investor to pay 15.8X earnings. And it is noticeable that PE multiples have been growing steadily for this company for that past 5+ years. We can also note there were times in 2011, 2012 and 2013 where this company was available for 15-17X earnings if a person was patient and willing to buy at price levels below the average PE. So what might be a reasonable target entry point? If we apply the average PE multiple to 2015 estimated EPS, an entry point around $58 seems to offer a margin of safety. This may be especially important in a skittish market overall. IMHO, even though the company has a number of initiatives underway, there is downside risk when paying at prices above historical valuation norms. Over time the price tends to revert to the average valuations. In this case, buying above the average may present downside risk. Conclusion This article was intended to add to the conversation by looking at trended financial fundamentals and a closer look at valuation. IMHO, Dominion is a quality company with initiatives and investments under way to generate future earnings growth. However, at current price levels shares are priced at a premium. Investors may be well-served to be patient and wait for pullbacks to at least normal PE levels, or perhaps consider selling puts as a way to enter a position at an even better entry point. As always, all of the above opinions offered for your consideration as you make your own investment decisions. Commentary is intended simply as a contribution to the discussion only. Thank you very much for reading. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

When Opportunity Reveals Itself: CMS Energy Corp.

Summary The uncertainty around the Fed’s action in September seems to be the highest driver of volatility. The correction caught up with the Utilities and REITs. Opportunities are popping up. Here is my CMS buy-point. Tuesday ended up in a red territory after being green most of the day. I have written about that couple of days ago: The sell-off will continue. Here is the end of day Tuesday summary. (click to enlarge) This time it was the REITs and Utilities (highlighted in yellow circles) that led the trading’s last hour free fall. This is completely aligned with the thesis that it is all about the interest rate hike. The China slowdown has some effect on the sentiment but the approaching interest rate hike leads to a significant sell off in sectors that are sensitive to the long term interest rate. For the first time in a while the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) also suffered from a pullback on Tuesday . This makes sense as the approaching interest rate hike should lead to higher yields, but as fear has a huge psychological impact people still rush back to bonds from time to time as it is considered a safe heaven. (click to enlarge) The drops in REITs and Utilities is probably just the beginning as there is some time until the Fed will announce its decision in September. In the meanwhile some opportunities might pop up. CMS Energy Corporation CMS Energy ( CMS ) was founded in 1987 and operates in the state of Michigan. The company is more of a holding company that integrates energy companies. Its primary business operations in the fields of electric and natural gas utility, natural gas pipeline systems, and independent power generation. CMS Enterprises, through its subsidiaries and equity investments, is engaged primarily independent power production and owns power generation facilities fueled mostly by natural gas and biomass. It has three business segments: electric utility, gas utility and enterprises. In the last seven years CMS has demonstrated EPS growth and a constant dividend growth. The next graph taken from nasdaq.com illustrates the growth seen since 2008. The yearly dividend went up from $0.4 per share to $1.1 per share. This is an average of 19% over a six years period of time. The full year 2015 EPS is expected to be at the range of $1.86-1.89. This is 5-7% higher year over year. The next chart illustrates the EPS walk in 2015. It was taken from CMS Q2 earning report presentation . (click to enlarge) CMS’ dividend payout target is at 62%. This leaves the cash required for the additional capital investments that the company plans to invest over the course of the next decade. (click to enlarge) The DGR: Though CMS demonstrated a strong dividend increase in the past, based on the company’s forecast the dividend growth rate is expected to be more modest as it should be aligned with the 5-7% EPS expected growth. I feel comfortable with 5-7% growth per year but would like to make sure that my entry point is at a relatively high dividend rate. My buy-point: CMS, like the rest of the Utilities sector is going suffer in the coming weeks, until there will be more clarity regarding the Fed’s action. The stock went down below $33 per share, which based on $1.16 is 3.5% dividend rate. I would prefer to buy the stock close to its lows that supported the stock during last summer at $28 per share. This price represents 4.1% dividend yield rate. Though the stock might drop even further afterwards I believe that $28 is a good long term buy for CMS. (click to enlarge) Conclusions: The uncertainties regarding the interest rate hike will continue to take its toll, especially on high dividend rate sectors like Utilities and REITs. Long term investors should take advantage of the correction and arrange their long term investment portfolios to generate more wealth. I plan to initiate a buy in CMS at $28. Happy investing! Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CMS over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decision.

Birchcliff Energy – Waiting For A Higher Gas Price

Summary Birchcliff’s production rate is higher than anticipated and has reached a new quarterly record. This allows the company to increase its production guidance and to reduce its capex guidance. I’m hoping for a long and harsh winter that will cause the natgas prices to spike, providing relief for Birchcliff’s balance sheet. Introduction As I remain convinced the oil and gas price won’t stay forever at the current levels (I even expect the gas price to increase a bit due to the construction of LNG plants to ship the gas to Europe and Asia where the price is 3-4 times higher), I have started to look for some interesting oil and gas companies. I came across Birchcliff Energy (OTCPK: BIREF ), a Canadian gas company (with some oil production as well) and decided to dig a bit deeper in this relatively large producer. Birchcliff is a Canadian company and has its main listing on the Toronto Stock Exchange with BIR as its ticker symbol. The average daily volume is almost 300,000 shares and the current market capitalization is approximately US$610M. The production rate continues to increase, but so does is the net debt Birchcliff had a pretty decent second quarter of this year as the average production during the quarter was almost 38,500 boe per day at an operating cost of just $4.53 per boe. This production rate is a new record for the company and emphasizes it’s still very focusing on expanding its production rate in order to build shareholder value. Source: press release In fact, the production growth was so impressive, Birchcliff’s management team has now increased the average production guidance for the fourth quarter of this year. Instead of producing an average of 39,000 boe per day, Birchcliff now expects to produce 41,000 barrels per day, a 5% increase. On top of that, I’m also expecting the production cost to continue to decrease a bit. I’m not complaining at all about the current cost of C$4.53 (US$3.4) per boe (which is an amazing result compared to the $5.25/boe in Q2 2014 and the $5.11/boe in Q1 2015), as the weak Canadian Dollar is definitely an advantage for Birchcliff Energy. (click to enlarge) Source: press release Despite the crash in the oil price (and the weaker gas price which is more important for the company as 86% of its production is natural gas), Birchcliff was able to realize a funds flow netback of just over $13 per boe which isn’t bad at all, considering the circumstances. Additionally, Birchcliff has now reduced its capital expenditure guidance from C$267M to C$250M (US$190M). This won’t be covered by the operating cash flow though as I’m not expecting the operating cash flow to be higher than C$175M (US$130M), so Birchcliff’s debt will very likely continue to increase. As of at the end of the second quarter, Birchcliff had drawn down roughly C$600M from its C$800M ($600M) credit facility, so it can draw down another C$200M (US$150M) to cover for the shortfall. The stronger-than-expected output provides a solid basis for next year Not only was Birchcliff able to increase its production guidance for the fourth quarter of the current year, this also bodes very well for next year. The increased production guidance for Q4 of 41,000 barrels per day is an ‘average’ daily production, and Birchcliff is expecting the exit production to be 41,000-42,000 boe per day, and this production increase will be underpinned by an updated of the company’s oil and gas reserves after seeing excellent production results from the horizontal wells drilled in the past 18 months. In fact, Birchcliff isn’t just hinting at a reserve increase, it says it expects the reserve increase to be ‘material’, so that should also have a positive impact on the NPV of the company as a whole. The winter season is coming closer, and those months are usually the best months for the gas price which could see a substantial price increase, boosting Birchcliff’s financial performance. It will be very interesting to see how the gas price will behave in the run-up to 2016, as a weak gas price will probably mean Birchcliff might have to defer some more capital expenditures as it knows it cannot stretch its balance sheet too much. Investment thesis Birchcliff’s financial performance will almost entirely be determined by the strength of the gas price in the upcoming winter. Whereas the gas price (Henry Hub) for delivery in September is trading at $2.64 , the futures for natural gas with delivery for January and February is trading at $3 and this will help Birchcliff’s financial performance. (click to enlarge) Source: CME Group I like Birchcliff’s limited exposure to oil (10% of its production) and focus on natural gas (86% of its output) and the next few quarters will be crucial for the company. I’m hoping for a long and harsh winter as that should bode well for all natural gas producers and result in a decent relief for its balance sheets. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BIREF over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.