30
Sep
T.G.I.F.
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Housekeeping Watch: Are we using the correct email for you? If you're not getting ZBLAST's or are getting them at the wrong address contact zman@zmansenergybrain.com
In today's post please find:
- the natural gas review (upper end of our range; next week look for a similar to slightly larger build),
- comments and a cheat sheet update for GNRC,
- and some other odds and ends.
Ecodata Watch:
- We get the PCE price index at 8:30 am EST (headline no forecast, last read was -0.1%; Core forecast = 0.5%, last read was 0.1%),
- We get YOY PCE at 8:30 am EST (no headline forecast, last read was 6.3%; Core forecast = 4.7%, vs prior read of 4.6%),
- We get Chicago PMI at 9:45 am EST (F = 51.8, last read was 52.2),
- We get consumer sentiment at 10 am EST (F = 59.5, last read was 59.5),
- We get UMich 5 year inflation (no forecast, last read was 2.8%).
In Today’s Post:
- Holdings Watch
- Commodity Watch - ST natural gas supply demand balance sheet, NGL prices, Price Cap Watch, OPEC+ Watch, Nordstream Watch
- Natural Gas Inventory Review
- Stuff We Care About Today - GNRC
- Odds & Ends
Holdings Watch:
ZLT
- Yesterday's Trades: None.
- The Blotter is updated.
Commodity Watch:
Crude oil closed off $0.92 yesterday at $81.23, moving lower with the general market sell off.
- OPEC+ Watch: We anticipate a 1+ MM bopd quota cut on October 5th.
- Price Cap Watch: G7 proposing to cap Russian prices. Thoughts:
- Mechanism - G7 and EU countries seeking to import volumes would need to adhere price cap to access shipping and insurance.
- Issues:
- EU / West trying to stave off price increases when EU full embargo goes into affect on December 5th.
- Top 3 Russian oil importers (China, India, Turkey) have increased flows, taking steep discounts that would still be presumably above price caps.
- Russia is thought to be pushing at least a 1 mm bopd production curb next week.
- Russia has seen the benefits of group discipline over the last couple of years, making more by selling less.
- OPEC+ wants higher prices.
- In the past Saudi has shouldered a "voluntary share" of addition curbs.
- Russia could do this too as they retaliate for the "cap".
- This could and we think would in effect circumvent a price cap by raising average global prices meaning the discount China, India and others are paying for Russian oil is still above current realized price levels (wins for Russia on price but also for China and India as they continue to get sub market prices).
- This morning crude is trading up slightly.
Natural gas closed off $0.081 at $6.874 as:
- The storage build was well above expectations for a second week,
- Next week look for a build of +100 to +110 Bcf.
- We see no reason to change our EOS range of 3.2 to 3.65 Bcf at this time. Given storage is at 2,977 Bcf with 5 to 6 weeks likely until peak we will need to see R&C demand rise a littele more quickly as Generation declines with cooling degree day readings to make our mid point of 3.425.
- Production yesterday was reported as edging up to a new record of 101.4 Bcfgpd (note in the table below that last week, which also saw a spike over 101 still managed a somewhat lower weekly average of 99.2 Bcfgpd.
- LNG continued to run above recent month's levels at just over 12 Bcfgpd this week (12.2) yesterday.
- Nordstream Watch: Interesting comments on the NS pipeline.
- Reports of a 4th explosion.
- Repair to take a very long time:
- Exterior is triple coated to prevent corrosion overtopped with concrete.
- Interior is single coated for friction reduction.
- Kilometers of pipe flooded with seawater with some estimating pitting within weeks required replacement. Limited options for steel for this pipe and Russia would be in charge of repairs and potentially limited by current sanctions from obtaining replacement pipe (likely they get a pass on that) but again, Russia would do repairs.
- Not a short or apparently medium term fix.
- This morning gas is trading up slightly.
NGL Price Watch:
Short Term Supply / Demand Balance Sheet:
Natural Gas Storage Review
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Stuff We Care About Today
GNRC (Unowned) - 2nd update
Our last review of GNRC was done in mid 2020 here, at $112. We liked the name at the time, but failed to take a position and it promptly turned into a 5 bagger we didn't buy. Since the time of that initial piece, quarterly revenue and EBITDA have grown substantially and were at record levels in 2Q22 ... but margins dipped in part due to supply chain issues.
While the name peaked at a whopping $524 in November 2021 (coinciding with the timing of the 3Q21 call which saw much weaker free cash flow), their shares have been retreating pretty much without break since then to arrive at the current $174 level and we thought this would make a good time for updated thoughts. Note also they held an investor day in August which also failed to buoy the shares.
The Basic Story: Generac is still a midcap Residential and Commercial/Industrial back up and portable generator name with a storage segment and growing smart control presence.
- Revenues have really taken off on the Residential side (248% revenue growth since our mid 2020 update) while C/I applications have grown more slowly (up 80%). As such, while they were roughly evenly split at the time of our initial look, the sales mix is now skewed nearly 70% to the Residential side with the company marketing and distributing via a broad variety of channels and 85% of sales are domestic.
- Margins peaked a couple of quarters after our review
- and once high flying free cash flow contracted as they were forced to invest heavily in working capital.
- Their focus remains on clean on-demand power using natural gas sometimes coupled with battery backup but have moved into the solar space (invertors) with battery backup.
- Sales benefit from:
- the fear of power outage events (wildfires, hurricanes, grid overload).
- rising power costs,
- the "electrification of everything" - greater personal control trends.
- The balance sheet is in good shape and they're using cash on the balance sheet and now recovering free cash flow to buy back shares.
Product Offering:
- Home standby (HSB) generators. While they don't break out revenues by product this is the big one.
- They see the market as only 5.5% penetrated (compared to 17.5% of homes with portable generators 27% with burglar alarms and 87% with AC) and each 1% add being equal to $3 B of market opportunity.
- HSB is driving overall company results.
- Demand is exceptional and they have and will continue to have a backlog which is not really normal for them. As lead times fall from high levels early this year this will come down but it gives them better than normal visibility on medium term revenues.
- Home consultations for HSB is up 4x over what it was in 2019 pre Covid.
- Labor constraints have been an issue for installs and order times to install are longer than they want due to this, utility delays, and some parts availability issues. They see labor easing now as new home construction softens and some labor is redirected.
- Other Stuff:
- Battery backup storage
- Micro Inverters,
- Micro grid and grid services,
- EV charging,
- Smart thermostats (they own Ecobee) and share home monitoring devices.
- Commercial/Industrial products include generators, critical telecom network power.
- Company believes their SAM (served addressable market) will be up 5x from 2018 by 2025 to $72 B.
A few comments and then some graphs:
- Revenue and EBITDA just set quarterly records.
- Margins in 2Q22 were above company expectations and they believe margins bottomed in 1Q22.
- They have instituted price increases and a cost cutting program and expect improving second half 2022 results.
- Upside for this year is constrained by capacity to install but they're working on this in terms of install time reduction and wider sourcing of partners.
Historic Revenue Growth:
Revenue Forecast Growth: Street in line on 2022 with company guidance.
Margins - comments ----
Margins and end of quarter Share Price: In the renewable space we've noted margin directionality has often been well correlated with share prices. They don't guide for gross margins in prints but they see gross margins returning to 1Q21 levels by 4Q22 (in 40% territory). For EBITDA margin guidance they recently reiterated 22% for 2022 which implies further recovery in 3Q and 4Q22.
Balance Sheet:
- In good shape < 1x leverage,
- Liquidity is more than adequate.
Return of capital
- The company normally kicks off significant FCF but this was impacted in recent quarters by higher than normal working capital investment.
- They do not pay a dividend at this time.
- They bought back shares as recently as this quarter ($124 mm or about 0.5 mm shares wrapping up the last authorization and management then authorized an additional $0.5 B repurchase program.
Nutshell:
- This is another common sense story within the renewable space with a well established business/brand and an expanding product line.
- Margins are solid vs many renewable hardware names strong and set to recover to target levels.
- Balance sheet is strong.
- Valuation is not expensive for a name in the space.
- They appear to be attempting to follow in ENPH's footsteps with their Concerto software platform (control everything from one point).
- We plan to open a position relatively near term, small to start as always (this one is as volatile as ENPH so we will bite in small increments). We note that the chart has a gap to fill from 7/2022 back down to $141 which would be a nice level from which we could start to build. We may in the interim trade the name around earnings calls as we did for a period with ENPH (now a core position).
Odds & Ends
Analyst Watch:
- TBA in comments
