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Market Sentiment Watch:

• Late in the quarter but a busy day in the greater energy space for us. Comments may be briefer than usual. If something isn't clear please ask. 

In today's post please find:

• the oil inventory review (neutral report),
• the natural gas preview (consensus in line with our thoughts; smaller build next week, end of storage 2021 continues to shape as price supportive for 2022 strip),
• OPEC Monthly,
• comments on several reporting names of interest,
• and some other odds and ends. 

Ecodata Watch:

• We get jobless claims at 8:30 am EST (F = 375,000, last read was 385,000),
• We get PPI at 8:30 am EST (F = 0.6%, last read was 1.0%),
• We get the EIA Natural Gas Storage Report at 10:30 am EST. 
  

In Today’s Post:

1. Holdings Watch
2. Commodity Watc​h
3. Oil Inventory Review - OPEC Monthly
4. Stuff We Care About Today - STEM, PTRA, ARRY, MCF, NIO, Calendar
   
5. Odds & Ends

 

Holdings Watch:   

ZLT

• Yesterday's Trades: None, but seriously expect trades to resume very soon, likely this week. 
• The Blotter is updated.

Commodity Watch:

Crude oil closed up $0.96 yesterday at $69.25 after EIA reported what we viewed as a fairly neutral report as weeklies go (just not much there to sway oil either way though it's nice to see the move in gasoline inventories (see table at the top of the Oil Inventory Review section below). 

• The OPEC Monthly update (see below) is not bullish from a numbers standpoint but also underscores current OPEC+ production recovery cadence discipline.
• IEA cut their view of demand on Covid today.
• This morning crude is trading slightly.

OPEC Monthly Watch: 

• 2021 and 2022 Global Demand:  Unchanged.
• 2021 Non OPEC Liquids: Revised up 0.27 mm bopd to 64.0 mm bopd (up 1.1 from 2020)
  • growth from Canada, Russia, China, U.S., Norway, and Brazil.
• 2022 Non OPEC Liquids: Revised up 0.84 mm bopd to grow 2.9 to 66.9 mm bopd.
  • growth led by Russia, U.S., Brazil, Norway, Canada, Kazakhstan, and Guyana.
  • notably, peak Non OPEC liquids production was 66.9 mm bopd registered in 1Q20 before Covid tanked it.
• 2021 Call on OPEC:   Revised Down 0.2 mm bopd to 27.4 mm bopd (up 4.7 from 2020)
• 2022 Call on OPEC:   Revised Down 1.1 mm bopd to 27.6.
  • OPEC production in July was 26.657 mm bopd, up 0.637 mm bopd vs June and ostensibly stepping higher monthly from here (somewhere below < 0.4 mm bopd month).
  • While we see a plethora of calls for $80 to $100 oil as U.S. stocks and OECD stocks fall it should be noted that just-about-all depends on the pace of OPEC+ production recovery cadence given ready excess supply there.
  • On the price supportive side Iran negotiations appear stalled.
• June level OECD crude stocks at 63.6 days of supply are 16.3% below year ago and 1.5% below the 5 year average but notably 3.2% above the likely more relevant 2015 to 2019 5 year average (the pre Covid 5 yr).

Natural gas closed down 3 cents at $4.06 on a minor shift in next week's forecast (slightly cooler). We continue to see natural gas as a bit over heated but also see the coming peak and troughs as price supportive for the 2022 strip and we note strong discipline sentiment continues among the larger gas players. This morning gas is trading down 3 cents. 

Natural Gas Storage Preview

Street is at +50 Bcf (Reuters survey) to +47 Bcf (Bloom) for today's report. 

• Last Week: +13 Bcf
• Last Year: +54 Bcf
• 5 Year Average: +42 Bcf

Oil Inventory Review

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Stuff We Care About Today

STEM (Smart Storage) Reports Solid 2Q21 Results; Reaffirms Guidance

• Revenue of $19.3 mm vs $18.7 mm expected,
  • $15.4 mm in 1Q21
  • Majority of the growth is from front of meter hardware sales.
• Non GAAP Gross margin of 11% vs 5% year ago:
  • With each sale they add hardware and networking revenues (expected to be 10 to 30% margins) but also deferred revenues for the Athena system often for 20 years which carries "north of 80%" gross margins.
• EBITDA of ($8.6 mm) (no estimate for EBITDA was available),

Note that it may be helpful to refer to our initial write up here. 

Guidance:   Reaffirmed

• Revenue: Reaffirmed prior guidance of $147 mm; revenue expectation calls for a back end loaded year with 20 to 30% in 3Q21 and 50 to 60% in 4Q21 (consistent with prior comments).
  • This is a highly seasonal business in terms of installs and the back end loaded nature of the year is normal for them but they do expect seasonality to flatten over time as software becomes a larger portion of total revenues.
• EBITDA: Reaffirmed vs prior guidance of ($25 mm).  They saw inflation coming and locked in some supplier prices in January.

Highlights: (the call was last night and notes are included in this section)

• Contracted backlog: $250 mm vs $221 mm at end of 1Q21.  This gives them confidence in the 2021 guidance and momentum into 2022.
• 12-Month Pipeline:  $1.7 B vs $1.4 B at end of 1Q21 that could convert to backlog in the next 12 months. 2/3 of the growth is from front of market adds.
• Contracted Assets Under Management (AUM) - 1.2 GWh, up 9% from 1.1 GWh last quarter.
• Favorite Quote Watch: "Since mid-June 2021, Stem has consistently dispatched more than 500 MWh daily in multiple markets across the United States and Canada in response to heat waves, increased grid interconnections from renewables and wildfires that have caused widespread stress on power grids. Stem’s demand response and grid services programs are designed to use virtual power plants powered by the Athena software platform to flatten electricity usage peaks and deliver power to the most constrained parts of the grid."
• They are replacing other competitors' software management systems with their Athena AI system and showing strong performance gains for clients.
• They have a 100% attach rate for their Athena software with battery hardware sales.
• Demand :
  • Corporate demand on the rise (noted Home Depot and UPS) as they become more focused on ESG which drives a higher mix of renewable energy.
  • Independent Power Producers, Cooperative, and Community market demand is rising sharply.  Currently pursuing projects in 26 states.
• STEM University online platform has minted over 1,100 individuals (from 180 companies) who are credentialed to execute customer contracts and serve as deployment specialists.
• Stand-alone storage ITC, if passed would increase base line estimates for their market by 25% according to WoodMac (this is seen as a $1.2 T market).  They note several states are not waiting on the feds but adopting their own measures to accelerate smart storage.

Balance Sheet:  No debt; $474 mm cash. They are working to further simplify their capital structure and note the PIPE shares have been sold into the market and they plan to redeem their outstanding warrants in late January.

Nutshell: Quarterly meet with a reaffirmation of guidance. Good call and presentation. This is a rapid growth segment.  Our sense is we want to own a little more of this one for the long term as well.

PTRA Reports Record 2Q21 Results; Announces Deal with LG to secure battery supply for future growth; Reaffirms 2021 Gudiance

• We show no quarterly consensus estimates for the company yet.
• They reported:
  • Revenue of $58.5 mm, up 39% YoY and a quarterly record.
    • Bus deliveries up 50% at 54 buses, mostly to existing customers.
    • Delivered power systems for 30 vehicles.
    • Noting the recent deals for offroad vehicles.
  • Gross margin of 2% (6th quarter to be on the plus side).  The quarter was impacted by about 200 bips by two events in the quarter.  They're not scaled up yet but do believe they can do better and have been impacted by Covid related logistics issues and inefficiencies in start up at the LA battery facility.   They see margins driving higher in the wake of Covid and over the next few years.
  • EBITDA of ($21 mm).
  • Capex of $4 mm.

Guidance: Reaffirmed 

• Revenue reaffirmed at $246 mm, up 25% from 2020 levels.  1H21 totals to 46% of that.
• Gross margin expected to remain positive rest of year despite challenges of supply chain.
• Street consensus for 2021 consists of just one estimate at this time with Revenue of $234 mm and EBITDA of ($82) mm.

Highlights: (the call was last night and notes are included in this section)

• Transit - Federal bus electrification funding expands (if the bill passes) from $182 mm in 2021 to > $800 mm per year for the next 5 years.
  • Market: 5 to 6,000 buses purchased in NAM each year.
    • 400 were electric last year.
    • Proterra is targeting > 1,000 buses per year.
• Power - Wide range of vehicle types in process with 10 partnerships in place and more are expected this year and next but revenue only coming from one customer so far. Just getting started with these now.
• Energy - 55 MW of charging installed now for buses and other vehicles.
• In light of the recent announcements for partnering in the commercial and industrial space, they announced a supply agreement with LG Energy Solution securing a long term supply of cylindrical batteries made at the LG facility in the U.S. describing it as a 9 figure dollar sum to secure gigawatt-hours of capacity.  This is made in USA and USMC compliant (no tariffs).
  • This helps LG pioneer domestic production.
  • Also extends existing supply agreement ahead of first U.S. production at this new facility.
• They will begin reporting separate business units next quarter (transit, powered, energy).
• Cash on the balance sheet is $762 mm.
• There was more interest on this call that we expected with multiple analysts who are not in print on the name asking modeling questions on the call (at present we only know of Citi who has only posted annual figures to date).

Nutshell:  Solid quarterly growth that keeps them on track to meet guidance made prior to the SPAC merger. Company painting a picture of strong growth along multiple lines with in transit as well as in the power and energy segments.  Scale is going to help a lot here. Look for more partnership announcements in coming months. Good to see the battery agreement. Good to see the high level of interest ... look for more initiations of coverage soon.

ARRY Reported Decent 2Q21 Results (Revenue Below, EBITDA and EPS Above); Re-Establishes Guidance Below Consensus (not shocking); Notes Positive Renegotiation of Contracts and Change in Order Taking Methodology; Announces Blackstone Preferred Share Deal ($350 mm expandable to $500 mm) To Revamp The Balance Sheet. 

Favorite Quote Watch: "“I am pleased to report that given the hard work of our team to negotiate with our customers and suppliers over the past several months, we are now able to reintroduce guidance for the full year.   More importantly, we have changed our business processes to reduce our exposure to future increases in commodity prices and shipping costs.   That hard work and those changes are reflected in the profitability of the orders we have booked since May which have gross margins in line with what we generated last year.   I am confident we are on a path to restore our gross margin to historical levels, but the improvement will be gradual as we still have legacy backlog at lower prices to burn off.”

2Q21 Number of Note

• Gross margins of 13.2%, down 610 basis points from year ago's 19.3% due to higher input costs including hot rolled coil steel up > 3x from 2Q20 to 2Q21, a doubling of ocean freight expense, and a 60% increase in aluminum.
• How They Are Addressing Inflation:
  • They have cut times from order confirmation to ordering materials (from a prior 90 day cycle from quote to ordering to 7 or 30 days).
    • Historically the 90 day period between order and parts ordering often resulted in lower, not higher costs.
    • Now they offer a 7 day quote or a 30 day quote with materials collars and require a down payment and LOI signage.
  • They have locked in 85% of supplier costs and almost 100% of steel costs for the rest of 2021,
  • As noted in the quote above, 2Q21 orders will have gross margins more in line with and in some cases above historical norms (lower 20%'s).
• Gross margins are expected to climb back from the 2Q21 trough but it will take time to burn off some lower margin business (modest improvement in 3Q, more in 4Q and then back to more normalized as we move into 2022).

2021 Guidance: Regaining the confidence to guide. 

• Previously suspended.
• Re-established at Revenue of $850 to $940 mm
  • Vs current Street of $1,000 mm which will come down.
  • The range is a function of the current macro (still could see some more delays).
• Expect 3Q revenue to be flat to slightly down.
• Re-established EBITDA in a range of $55 to $75 mm
  • Vs current Street of $92 mm
  • Range here is a function of potentially higher logistics costs.
• 3Q21 EBITDA is now expected to be the low point for 2021 before recovering in 4Q and 2022.

Highlights: (the call was last night and notes are included in this section)

• Demand remains strong:
  • Order book at $882 mm, new record, up 45% from year ago's $606 mm.
    • On the look back at the 100 or so contracts they were in negotiations on as of the 1Q21 call they lost none and the impacts are reflected in the current guidance.
  • And 18 new projects were awarded in July for a total of $135 mm.
  • Cost increases are not stopping solar demand.
  • They see the big award growth as evidence of market share gains.
• Noting the bipartisan infrastructure bill includes $73 B for electric grid upgrades.
• They are adding talent to sell into new markets.
• SmarTrack 2.0 will be released soon (solution to address severe weather).

Other Items:  The Blackstone Deal

• Blackstone committed to buy up to $500 mm in preferred stock ($350 mm to start and another $150 mm potentially) at 5.75% cash dividend.
  • The dividend is payable in common shares (6.25% rate) or cash (the 5.75% rate).
  • These are not convertible preferred shares.
  • The preferred is callable at ARRY's discretion.
• Blackstone will also receive 5.8% of the company in the form of 7.875 mm common shares.
• Blackstone will take a board seat.
• ARRY will use proceeds to reduce debt (paying off the revolver as well as prepaying $100 mm of the term loan while putting $136 mm cash on the balance sheet) and "fund growth initiatives".
  • Blackstone Quote Watch: "“Investing in Array is an opportunity for us to partner with an established solar industry leader and highlights Blackstone’s commitment to investing in companies that are enabling the transition to clean energy. We believe Array will be one of the long-term winners in the solar equipment market and that this investment will allow the company to accelerate its internal and external growth plans. We are very excited about what we will be able to achieve working together in the coming years,”
• Blackstone is an investor in solar projects and EPCs and they see this deal opening up sell through opportunities for Array and as well as other benefits of being closely aligned with the supply chain leverage Blackstone has.
• Lastly, they see Blackstone's investment as a validation of their technology and company.

Balance Sheet: 

• Before the Blackstone deal net debt to annualized EBITDA moved to an uncomfortable 7.3x on a big jump in debt from 1Q to 2Q as they burned cash and registered negative free cash flow of $92.6 mm in the quarter.
• Pro forma the initial $350 mm from Blackstone they go from $513 mm of net debt to $175 mm
• The revolver is paid off, the term note is reduced by $100 mm and they will have $136 mm in cash on the balance sheet.  As such liquidity expands from $87 mm to $325 mm.
• Pro forma net debt to TTM EBITDA improves to a more digestible 2.0x from a current 5.9x.
• This puts them in a position to make acquisitions to accelerate growth.

Nutshell: Solid quarter. Guidance could have been worse. Fundamentally we think they are at or near the bottom and put in place strong measures to prevent a reoccurance from a margin standpoint (demand of course could get hit/delayed on further cost spikes).   The Blackstone deal is clever and gives them optionality.  We want to add more while it's weak and will attempt to time an add this morning if it sells off early or is otherwise particularly sloppy.

MCF Reports Solid 2Q21 Results; Reiterates Plan to Low Multiple Acquire and Exploit Strategy

• Production of 24.1 MBOEpd (62% liquids and slightly above guidance) vs 22.7 MBOEpd (40% oil) expected,
• EBITDAX of $31.1 mm vs $30.3 mm expected,
• Borrowing base expanded from $120 mm to $250 mm,
• The June 7th announced Independence merger is set for a 4Q close while the asset deal with COP is expected to close in 3Q21.
• Conference call was last night and we have not been on the replay yet.
• We own a smallest-in-portfolio position in the ZLT here.

Other Stuff

NIO (unowned) Reported Solid 2Q21 Results; Guides To Further Sequential Growth

• Car deliveries were 21,896 cars (previously announced), up 112% YoY and up 9% sequential, continuing a strong up and to the right pattern resumption.
• Revenue of $1.308 mm vs $1.28 B expected.
• Gross margins were off slightly sequentially.
• EPS of ($0.07) vs ($0.11) expected.
• Guidance:
  • 3Q21 Deliveries of 23 to 25,000 cars,
  • 3Q21 Revenues of $1.38 to $1.49 B.
    • Consensus is $1.38 B.
• We are just keeping tabs on the story at present but may own it this year and we plan to listen to the replay here today.  We'll do another cheat sheet update soon.

Calendar Update (adds MAXN- unowned)

Please see the calendar link at upper left or click here

Odds and Ends

Analyst Watch:

• TBA in comments