Consolidated Energy – Looking for an improvement
All,
Please find our slightly updated analysis here.
The 24Q3 results from Consolidated Energy (CEF) continue to improve as disrupted quarters in 2023 runoff from the LTM numbers. However, the fourth quarter did see fresh disruption and downtime at Natgasoline, which will weigh on the improved operational performance. We continue to like the asset coverage at CEF and see significant operational upside in the name. The near-term risk is the future ownership of the Natgsasoline plant, and we could see further issuance at the CEF level to finance the purchase of the 50% equity currently owned by OCI. We do expect the loan to Proman to be extended beyond December 2025.
Investment Rationale:
In light of improving operational results, we want to take a long position in the USD 5.625% 2028 SUNs, but the run-up in bond prices means we will wait for a better entry point. At 86c/€, the bonds yield 10.5% and have an upside of 10 points in the next 12 months, representing an 18% return. The downside is 10 points if operational performance deteriorates or unexpected outages occur.
- Our forecast is for EBITDA of around $450m in 2024 and $500m in 2025, reducing leverage to 6.7x by the end of next year. The company has said that $700m is a reasonable target, but given the record of outages, turnarounds and outages we see that as on the high side. However, we do expect that EBITDA could surprise on the upside.
- There is significant asset cover here. Our DCF EV is $7bn and with $3.3bn of debt, the LTV is 47%.
- More debt could be raised to buy out the 50% of Natgasoline currently owned by OCI (with OCI selling its Methanol business to Methanex. We estimate that this could cost $600m.
- Falling oil prices harm methanol margins; the level of correlation is not clear from the public data.
- The relationship with the owner (Proman) is opaque. CE provides loans and guarantees to its parent but financial disclosure at the parent level is poor, and the bond docs are weak. The assets are well invested, but enforcing ownership in restructuring would be challenging in Trinidad and Tobago and Oman.
- Cash flow is volatile due to planned and unplanned outages => Even in strong markets the bonds will be volatile.
- Lower oil prices will lead to lower methane margins, and the recent Saudi messaging about seeking to prioritise market share over price is a negative for the bonds.
24Q3 had further outages, but EBITDA continues to rise.
- Revenue beat our expectations, but mix meant that gross margins were 30% vs our forecast of 35%. The lower gross profit meant that EBITDA was $110m vs our estimate of $128m. In September, the annual run rate EBITDA was $700m, which management believes is a reasonable expectation for 2025. However, this ignores the impact of turnarounds and outages, and in Q4, an explosion at Natgasoline caused such an outage; the boilers are now working again, but the issue underlines the volatility in results.
- The outage at Natgasoline will be covered by insurance.
- CEF sells its contracted natural gas supplies back to the grid if the plant is not working, so the net loss of EBITDA is around $5m a month vs. run rate EBITDA of around $23m a month.
- We expect EBITDA of $440m in 2024 and $640m in 2025, but we will fully update our model when we receive the 2024 result in March.
The sale of OCI’s methanol assets could prompt a purchase of the asset:
- CEF does not want to dispose of its stake in the Natgasoline asset or give up operational control. The transaction with OCI allows for Natgasoline to be lifted out if necessary.
- The terms of the shareholder agreement are non-public, but we would expect all parties to want an amicable agreement. It is unclear if Methanex can force a sale or take over operational control of the plant.
- If there is a stalemate with CEF, the outcome would be for the plant to be lifted out of the OCI asset sale. OCI would want to sell its stake to CEF and we would expect the $600m price to be funded via debt raised at the CEF level.
- CEF has a preference to keep the status quo and continue operating Natgasoline. Acquiring full control would also ramp up the pressure on Proman to repay the $253m loan in December 2025. We expect that this loan will be extended.
Another outage but the costs are limited.
- In September the Natgas plant generated $23m in EBITDA, but at the end of the month, there was an outage that took the plant offline until the beginning of December.
- The cash impact of the outage is modest as Natgasoline can sell natural gas purchased forward at contract prices to the grid. On the recent call, management said the impact on EBITDA was around $5m per month against run rate EBITDA of $23m.
- We are still a little sceptical of the sustainability of the $23m figure as it implies a quarterly run rate of $69m, which Natgasoline has only achieved a handful of times in the last 19 quarters. However, we see $50m+ as achievable regularly.
- The damage to the plant is an insurable event.
- Natgasoline had intended to refinance its $500m TLB (due November 2025), but due to the outage, this has been postponed until January to show 30 days of trading to prospective lenders.
Hedging focuses on Natgasoline.
- Adjusted EBITDA excludes unrealised hedging losses which can be significant. IFRS results include the unrealised losses in operating profit (and by extension the non-IFRS term EBITDA).
- We have included a reconciliation in our model driver to help reconcile the differences.
- The cost of Natural Gas provided to the plants in Trinidad and Tobago is linked to the methanol and fertilizer prices, so hedging is not necessary for most operations.
Aengus
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