Earnings Notes II (Q4 2023)

Arch Resources Inc. (ARCH)
The market capitalization of Arch is $3 billion versus $2.8 billion last quarter. Their total liabilities less current assets are now $87 million, and current assets exceed current liabilities plus long term debt by $550 million. We would put the enterprise value at $3.1 billion now. Adjusted EBITDA was $180 million for the fourth quarter and $714 million for the whole year, which puts the EV/EBITDA at 4.3x using either mrq (annualized) or the full year.

For the full year 2023, Arch had cash from operations of $635 million. (Their net income plus depreciation, depletion, and amortization was $610 million.) Capital expenditures and investments in affiliates were $193 million. That gives free cash flow of about $430 million, which is a 14% yield on the enterprise value. They paid $206 million of dividends, bought back $125 million of stock, repaid $80 million of debt, and built their cash balance by $52 million.

Cenovus Energy Inc. (CVE)
The market capitalization of Cenovus is $33 billion (at a $17.5 share price) and their enterprise value is $40 billion. The upstream segment earned $1.8 billion of operating margin during the fourth quarter (compared with $1.6 billion the prior year) and the downstream (refining) segment lost $225 million (compared with $413 million earned the prior year). (See 2023 release and financials.)

For the full year, cash from operations was $5.5 billion versus $8.4 billion in 2022. Capital expenditures were $3.2 billion versus $2.7 billion the prior year. The "free funds flow," as they define it, was $3.3 billion versus $5.4 billion in 2022. The 2023 free funds flow is an 8.3% yield on the enterprise value. (There is room for this to be better if they get the downstream/refining operations straightened out.)

Capital expenditures for in their upstream segment were up flat year-over-year in the fourth quarter and were up 42% for the full year 2023 versus 2022. Liquids production in Q4 was flat versus the prior year, and liquids production for the full year was up 1%. Total upstream production (including natural gas) was flat in the fourth quarter and down 1% for 2023 versus 2022.
 
For the year, the company spent $950 million on debt repayment, $1.3 billion buying back shares and warrants, and $730 million on common share dividends. The share count (fully diluted) was down 4% year over year. The $3 billion returned is a 9% shareholder yield; however the company drew down its cash by $1.7 billion.

Net debt at the end of the year was $3.8 billion. Management has said that they will increase shareholder returns (from 50% of "excess free funds flow" to 100%) once net debt drops below $3 billion.

Genesis Energy LP (GEL)
This is a new midstream investment idea. Genesis has four segments: offshore pipelines in the Gulf of Mexico, carrying crude and natural gas produced offshore to refineries along the Gulf Coast; a soda ash business in Wyoming (like the business where NRP owns an interest); sulfur services (which removes sulfur from refinery inputs and sells it as sodium hydrosulfide); onshore pipelines and terminals; and a marine transportation business with boats and barges to transport crude oil and refined products.

The offshore pipelines contributed $407 million of operating income for 2023, soda and sulfur contributed $282 million, marine transportation did $110 million, and the onshore pipelines and terminals $28 million. Adjusted EBITDA for 2023 was $756 million. The market capitalization (@ $11) is $1.35 billion. Genesis has quite a bit of leverage: $3.75 billion of debt, and $814 million of convertible preferred units. (The distribution rate on the preferred units is 11.24%.) The enterprise value is thus $5.9 billion, and the EV/EBITDA is 7.8x. Guidance for 2024 is $680-$740 million of EBITDA and $200-$250 million of capex, which would mean anywhere from $430 to $540 of cash flow, which is a range of 7% to 9% on the enterprise value. 

Management thinks that cash flow is going to "ramp" from 2025 onwards as offshore volumes grow (with two new platforms coming online) as well as additional soda ash earnings. 

In addition to our record results in 2023, we also achieved some significant project milestones that will continue to benefit the partnership for many decades to come. First and foremost, we reached substantial completion and commissioned our Granger expansion project. This almost four-and-a-half-year construction project overcame many challenges and delays as a result of the Covid-19 pandemic, but I could not be prouder of our team on the ground in Green River, WY for their tireless effort getting this project to the finish line. This project will add approximately 750,000 short tons per year of additional soda ash production capacity at Granger, bringing its total production capacity to approximately 1.25 million short tons per year, and significantly lower Granger’s operating cost per ton, making it one of the most efficient and lowest cost production facilities in the world. I would also point out that Granger has multiple decades of reserves in the current seam at these new production rates along with hundreds of millions of tons of additional measured and indicated trona resources in those same seams.

As we mentioned last quarter, we also successfully laid the 105 miles of the SYNC pipeline in over 5,000 feet of water, which as many of you can imagine is an engineering marvel. This was a tremendous achievement and a testament to our offshore engineering, construction and operation’s teams that helped complete this portion of the project on schedule. In addition, we made significant strides in advancing our CHOPS expansion project, which includes installing pumps at certain strategic junction platforms. These offshore projects are long-term investments that are underpinned by existing upstream developments which have production profiles going out multiple decades, not years, and have ample capacity to handle much more than the currently discovered and contracted volumes.

Regarding uses of capital:

We opportunistically accessed the capital markets on two separate occasions in 2023 and successfully issued $500 million in new 8.875% notes due 2030 in January and $600 million in new 8.25% notes due 2029 in December, which allowed us to re-finance our 2024 and 2025 unsecured maturities, respectively. More importantly, the combination of these two re-financings ultimately triggered an automatic 12-month extension of our senior secured facility’s maturity date, which now expires in February 2026. These transactions have provided us with the financial flexibility and liquidity to complete our remaining spend on our major capital growth projects in 2024 and bridge us to 2025 when we expect to begin harvesting increasing amounts of free cash flow driven by both earnings’ growth and materially reduced growth capital expenditures. In addition, we utilized a portion of our available liquidity to opportunistically re-purchase $75 million of our Class A convertible preferred units throughout the year at a discount to the contracted call premium as well as purchase 114,900 of our Class A common units at an average price of $9.09 per unit.

Concluding an investment cycle is very powerful if it works: you get higher earnings and the capital expenditures decline, resulting in a big increase in free cash flow.

Lithia Motors, Inc. (LAD)
Thought this was interesting - Lithia announced that they are getting less interested in acquisitions:

Past practices prioritized acquisitions as more beneficial strategically than buybacks, but at our current size and scale, we are now returning to a balanced deployment of free cash flows to drive the strongest possible returns. We continue to monitor valuations of both, being patient for strong assets priced within our acquisition hurdle rates. We expect pricing to take some time to normalize and now estimate annual acquired revenues, excluding the Pendragon acquisition, in the range of $2 billion to $4 billion a year. Our near-term target of $50 billion in revenue remains within our sights, and our team is confident in our ability to achieve this while doing so in the most prudent fashion possible. Our team is experienced in executing and integrating acquisitions, and we remain committed to achieving strong returns as we build out our network.

Current market capitalization is $8.4 billion. They earned $1 billion for the full year. Something amazing is that LAD stock is up 165x from the 2009 low. That's compounding at 41%!