Zenith Energy Market Update
On 29 July 2019, independent power producer, Zenith Energy Limited (Zenith), announced that its Manage, Operate and Maintain (MOM) contract with Incitec Pivot’s Phosphate Hill Project will complete on 17 August 2019 and will not be extended. Since the beginning of this contract in 2015, Zenith has focussed its efforts on its Build, Own, Operate (BOO) segment portfolio and as such, we do not see this contract termination as surprising given our view that BOO contracts have inherently higher probability of renewal given that Zenith retains ownership of the power generation assets, unlike MOM contracts where the assets remain owned by the client.
Zenith announced that the contract expiry will impact its FY20 forecasted EBITDA by less than AUD200,000 and maintained its FY20 guidance of approximately AUD59m-AUD62m in revenue and AUD24.5m-AUD26.5m of EBITDA.
Armour Energy CEO Resignation
On 24 July 2019, Armour Energy Limited (AJQ) announced that Roger Cressey had resigned from his role as CEO. Mr Cressey will remain in his position until a replacement Chief Executive is found and transitioned into the role. We are comfortable that this resignation is not performance related and our view is supported by Mr Cressey’s 8 year tenure at AJQ and his willingness to remain working at the company during the replacement process.
Transocean 2Q19 Results
On 29 July 2019, Transocean reported its results for the quarter ended 30 June 2019 (2Q19). Contract drilling revenues sequentially increased USD4m to USD758m. Adjusted EBITDA marginally increased quarter on quarter to USD257m from USD254m in 1Q18. However this was still below the USD260m reported in 4Q18. The company reported a net loss of USD209m for the quarter (1Q19: USD171m). In 2Q19, cash flows provided by operating activities were USD153m, compared to cash used in operating activities of USD51m in the prior quarter, primarily due to increased collections from customers.
The results release follows Transocean’s release of its Quarterly Fleet Status report in which it detailed that it has been awarded three new contracts and had two customers exercise contract extensions or amendments in the Company’s favour. Over the quarter, Transocean further enhanced its market leading backlog pipeline through the addition of approximately USD158m in contract backlog. As at 25 July 2019, Transocean’s total contract backlog was USD11.4bn, equivalent to approximately 3.5 years of revenue, based on FY18 levels.
Ensco Rowan plc Changes Name to Valaris plc
On 31 July 2019, offshore drilling services provider, Ensco Rowan plc, announced it had changed its name to Varalis plc (Varalis).
On 1 August 2019, Valaris announced its second quarter 2019 (2Q19) results for the period ended 30 June 2019. During the quarter, Valaris reported USD584m in revenues which compared favourably with the USD459m recorded in the prior corresponding period (pcp), primarily due to the addition of USD147 m of revenue from legacy Rowan rigs, partially offset by the sale of two Ensco rigs which operated in the pcp. In 2Q19, Adjusted EBITDA was USD59m, down USD26.2m from 2Q18. Contract drilling expense increased to USD500m in 2Q19 from USD344m a year ago primarily due to USD133m of costs associated with legacy Rowan rigs and USD12m of integration related transaction costs.
The company remains focussed on managing its debt maturities and reducing total debt. Over 2Q19, Valaris tendered USD952m of its outstanding senior notes. As at 30 June 2019, Valaris has USD959m in cash and equivalents.
Peabody 2Q19 Results
On 31 July 2019, Peabody Corporation (Peabody) announced its results for the quarter ended 30 June 2019 (2Q19). Revenues for the period totalled USD1.15bn compared to USD1.31bn in 2Q18, primarily resulting from a 28% reduction in metallurgical coal sales volumes and a 14% reduction in realised seaborne thermal coal pricing. In 2Q19, Adjusted EBITDA was USD228m, down USD168m from the prior corresponding period (pcp). This reduction is primarily as a result of lower coal prices which was partially offset by a USD91.3m decrease in US and Seaborne mining costs.
Free Cash Flow (FCF) for the quarter was USD153.5m. However, Peabody continues to return a significant amount of capital to shareholders, announcing its third dividend increase this year. Year to date through June, Peabody has returned USD385.3m in cash to shareholders, representing 122% of its FCF through its repurchase program, supplemental dividend and quarterly dividend. As a result, we expect that the company’s debt will continue to tick up, off a relatively low base. Peabody’s net leverage is currently below 1x. Peabody maintains its strong liquidity position, ending 2Q19 with USD853m in cash and equivalents.
Nufarm Trading Update
On 1 August 2019, Nufarm announced it has completed the placement of AUD97.5m of preference shares to strategic business partner (and existing shareholder) Sumitomo Chemical Company. Management commented “Sumitomo has been a long-term supporter and business partner and today’s agreement is a strong endorsement of the strength of our relationship”.
Nufarm also advised that the Group’s financial performance had been impacted by adverse seasonal weather conditions and supply related impacts and provided further updates on FY19 guidance. This included a revision of Underlying EBITDA for FY19 to approximately AUD420m (previous guidance AUD440m-AUD470m). Management noted that FY19 had been a difficult year for the company, with external headwinds impacting performance in three of four major markets. Management also reiterated its focus on deleveraging the balance sheet despite poorer than expected performance.
Further details of Nufarm’s earnings performance and outlook will be provided on 30 September 2019 when the company reports financial results for the year ended 31 July 2019.
Kinross Gold Corporation 2Q19 Results
On 31 July 2019, Kinross Gold Corporation (Kinross) announced strong second quarter results. Revenue from metal sales was USD837.8 m in2Q19, compared with USD775m during the same period in 2018, mainly due to an increase in gold equivalent ounces sold. Production increased to 648,251 attributable gold equivalent ounces (Au eq. oz), up 46,202 Au eq. oz from 2Q18. Production cost of sales per Au eq. oz was USD663 for the second quarter of 2019, compared with USD767 for the second quarter of 2018.Kinross also reported an improvement in its all-in sustaining cost (AISC) which fell to USD925 per Au eq. oz in 2Q19 from USD1,018 in the pcp, leaving a significant margin against Kinross’ realised price of USD1,307 per Au eq. oz.
Kinross reported adjusted operating cash flow of USD287.7m for 2Q19, which again compared favourably with USD231.5m in 2Q18, primarily due to an increase in margins. Kinross ended the quarter with cash and cash equivalents of USD475.4m and total liquidity of approximately USD1.9bn. The company has no debt maturities until 2021.
HCA Announces 2Q19 Results
On 30 July 2019, HCA Healthcare, Inc. (HCA, Company) announced 2Q19 results for the three months ending 30 June 2019, with results broadly in line with 1Q19. HCA reported revenue of USD12.6bn (1Q19 USD12.5bn), EBITDA of USD2.2bn (1Q19 USD2.5bn) and net income of USD927m (1Q19 USD1.1bn). The Company’s credit metrics remain strong. The Company generated cash from its operations of USD1.9bn, whilst maintaining a strong cash position of USD2.4bn.
Despite potential regulatory headwinds from Centres for Medicare and Medicaid Services (CMS), HCA revised its FY2019 guidance upwards. The rule would require hospitals to disclose standard prices for their medical services, as well as any discounted rates paid by health insurers. However, last quarters acquisition of Mission Health should provide additional earnings during 2H19.
Western Digital Announces 4Q19 and FY19 Results
On 31 July 2019, Western Digital Corp. (Western Digital, Company) announced FY19 for the twelve months ending 30 June 2019. Western Digital reported revenue of USD16.5bn (FY18 USD20.6bn), EBITDA of 2.0bn (FY18 USD5.8bn) and net loss of USD754m (FY18 USD675m).
Leverage and liquidity remain strong. Western Digital generated USD1.5bn in cash from operations, while maintaining a strong balance sheet. In conjunction with cash of USD3.4bn, the Company also has an undrawn credit revolver of USD2.25bn.
Western Digital faced a number of headwinds during fiscal year 2019. Firstly, in June 2019, an unexpected power outage in Yokkaichi, Japan forced the Company to write off some of its inventory pertaining to its flash-based memory products. Secondly, the average selling price (ASP) of its hard disk drives (HDD) continue to decline, eroding EBITDA margins by almost 16%. Finally, overcapacity in the solid state drive (SSD) market segment led to margin compression.
While operating conditions were tough during fiscal year 2019, Western Digital has reiterated its strategy. In recent years, the Company has shifted its strategy to producing and selling high capacity drives, developing HDDs with storage capacity in excess of 14 terabytes. Additionally, the Company is increasing its focus on flash-based storage devices (SSDs); demand for SSDs has continued to increase in-line with declining ASP.
Mercer Announces 2Q19 Results
On 1 August 2019, Mercer International Inc. (Mercer, Company) announced 2Q19 results for the three months ending 30 June 2019. Results were slightly weaker than 1Q19 with Mercer reporting lower revenue, EBITDA and net income. Historically, earnings reach a seasonal low during 2Q. The Company reported revenue of USD425m, EBITDA of USD69m and net income of USD10.2m. Sales from pulp operating segment, which account for approximately 90% of its revenue, declined from USD431m (1Q19) to USD384m The Company reported stronger cash flow from operations (CFO) of USD88m, compared to 1Q19 CFO of USD42m.
Quarterly results were hampered by weaker demand for certain paper grades in China, which account for almost a quarter of Mercer’s revenue. Additionally, there was also weaker demand from the Company’s other geographic segments. U.S. lumber markets were softer due to higher customer inventory levels, whilst lumber prices in Europe declined due to supply of lumber processed from beetle and storm-damaged wood.
Mercer expects earnings to rebound during 2H19 as pulp prices are expected to moderately strengthen later in the year due to declining inventories. Additionally, increased demand in Europe and North America in conjunction with moderately higher demand from paper producers in China should provide a tailwind for earnings.
Avon Announces 2Q19 Results
On 1 August 2019, Avon Products, Inc. (Avon, Company) announced 2Q19 results for the three months ending 30 June 2019. Results were softer than prior comparative period. Avon has shifted its strategy to focus on emerging markets such as Latin America and Africa, as well as Europe and the Middle East. The Company, which is in the process of being purchased by Natura Cosmeticos, reported lower revenue and operating profit. However, it recorded a smaller net loss and stronger cash flow from its operations.
Avon reported revenue of USD1.1bn (USD1.3bn 2Q18), operating income of USD30.5m (USD53.0m 2Q18), and net loss of USD19.1m (USD37.0m 2Q18). Liquidity remains adequate, with cash on hand of USD421.0m.
Dean Foods Market Update
On 26 July 2019, Dean Foods Company (Dean, Company) announced the appointment of Eric Beringause as its new CEO. Mr Beringause replaced Ralph Scozzafava on 29 July 2019. Mr Scozzafava has also stepped down from the board. Dean is due to report results next week, on the 6 August 2019.
Sprint and T-Mobile M&A Update
On 26 July 2019, the Department of Justice (DOJ) approved the merger between Sprint Corporation (Sprint) and T-Mobile US, Inc. (T-Mobile). Makan Delrahim approved the USD26.5bn merger between the two telecommunications companies. In May 2019, Federal Communications Commission (FCC) Chairman Ajit Pai had also approved the merger between the two companies. The approval from the DOJ is major regulatory win for Sprint and T-Mobile, as they edge closer to creating the third largest telecommunications company in the U.S. However, there are still a number of hurdles to overcome namely, a lawsuit filed by a group of attorneys suing to block the deal on antitrust grounds.