We’re right in the middle of earnings season. If you’ve been a member here for any amount of time, you know that means jam-packed newsletters with the most up-to-date commentary on the companies you own and love.
We’ve got a ton to cover, so let’s dive into it, starting with Foundational Stocks and then moving on to the Bull List.
Keep in mind we won’t get to all the companies in this week’s newsletter. It would simply be too much content all at once. However, if you have any questions about a particular company, just log in and drop on to the Q&A, we’ll be happy to answer.
Foundational Stocks
Brookfield Renewables (TSE:BEP.UN)
Faced with a difficult macroenvironment, Brookfield Renewables reported a second quarter that missed estimates. As a reminder, BEP reports in USD, so all numbers that follow are reflected as such.
Fiscal Q2’23 funds from operations (FFO) of $0.48 per share missed by a penny, while revenue of $1.058B missed by $210M. The misses were primarily a result of lower energy generation due to weather-related events.
The company grew FFO by 10% year-over-year, in line with the company’s targeted double-digit range. In the quarter, it signed transactions for $1.3B ($300M net to Brookfield Renewable). Following the end of the quarter, it announced a deal to acquire Duke Energy for $1.5B ($265M net to Brookfield Renewable).
It issued equity to fund the Duke Energy acquisition as it raised $650M. This is out of the norm for the company (first equity raise in 7 years), but it felt that it was a good opportunity. The company expects to continue funding its “long-term growth targets through a mix of our normal course funding sources.” In other words, this was a one-off to take advantage of being able to acquire an attractive asset at reasonable valuations.
Regarding borrowings and impacts, the company’s weighted average interest rate jumped by 60 basis points YoY to 5.3% (from 4.7% last year). As we’ve said many times before, rising rates impact a company like BEP and likely factored into their decision to issue equity for the Duke Energy acquisition.
The company’s current portfolio is 90% contracted, with a weighted average contract duration of more than 14 years. To reassure investors of their ability to navigate inflationary and high-rate pressures effectively, it is important to note that 70% of the company’s revenues are indexed to inflation. It only has a 3% exposure to variable debt (97% fixed rates). This provides reliable cash flows and some certainty in an environment that is anything but.
Franco Nevada (TSE:FNV)
It was a mixed Q2 for Franco-Nevada, which beat on the top and bottom lines. Earnings of $0.95 per share beat by $0.04, and revenue of $329.9M beat by $5.74M. While the beats are nice, year-over-year (YoY) results dropped once again.
This time it wasn’t due to lower precious metal Gold Equivalent Ounces (GEOs) as both Cobre Panama and Antapaccay were back producing at full capacity. The drop was mainly a result of lower oil and gas GEOs.
Total precious metals GEOs increased by 0.3% YoY while their diversified segment GEOs (which includes oil/gas) dropped by 35.5% YoY. The primary decline factors were lower YoY average oil ($73.78 a barrel WTI vs $108.41) and gas ($2.32/mcf vs $7.49). The good news is that we again see Cobre Panama and Antapaccay operating at full capacity.
In the quarter, Franco-Nevada was also busy in terms of acquisitions. It announced 7 acquisitions for total considerations of $160M+.
While the company reiterated guidance, it did say that it now expects “total GEOs for the year to be at the low end of our guidance range provided.”
Fiscal 2023 Guidance
- GEO Sales of 490,000 and 530,000 (flat YoY)
- Total GEO Sales of 640,000 and 700,000 (-8.2% at mid-range)
Franco-Nevada remains debt free, generates strong cash flows ($261.9M in operating cash flow in Q2), and exited the quarter with $2.3B in capital, which included $1.3B in cash. This will provide it with ample flexibility to pursue growth opportunities.
Canadian Natural Resources (TSE:CNQ)
Canadian Natural Resources reported first-quarter earnings that topped estimates. Earnings of $1.14 per share beat by $1.06, and adjusted funds from operations per share came in at $2.48 vs the $2.39 expected. On a year-over-year basis, both revenue and earnings are down. However, this is expected as the company is realizing much lower prices per barrel.
In Q2 of Fiscal 2022, benchmark WTI prices were $108.42 per barrel. This quarter, benchmark prices were $73.75. The same goes for natural gas ($2.53 vs $7.93). Both are material differences. Overall production was strong, coming in at 1.194 million barrels per day – in line with estimates. The company produced $0.4B in free cash flow (net of dividends and CAPEX) on the quarter. Canadian Natural also repurchased 6.4 million shares for cancellation at an average price of $76.57 per share. The company has completed all maintenance capital expenditures for the year in Q2, so barring any operational setbacks, it is well-positioned to deliver strong free cash flow in the second half of the year. The company currently has net debt of $12B and $5.6B in liquidity. Debt did rise quarter over quarter (+$0.1B). Still, as mentioned, this was primarily a result of higher CAPEX, and we can look forward to decreasing debt in the coming quarters. As per the company’s free cash flow policy, when debt is between $10-$15B, it will return 50% of free cash flow back to shareholders. When that debt level hits $10B or less, that allocation policy shifts to 100% of free cash flow being returned to investors.
We expect Canadian Natural to hit this mark sometime in late 2023 or early 2024. We are pushing our timeline out slightly (by a quarter or two), but we remain confident that CNQ will hit this target. Overall, it was a strong quarter for Canadian Natural and it continues to impress.
Bull List Earnings
Open Text (TSE:OTEX)
Open Text delivered yet another beat on the top and bottom lines. Of note, it is a little confusing with this company as it is already in Q4 of Fiscal 2023, ahead of most companies due to the timing of their Fiscal results. As a reminder, the numbers are in USD unless otherwise stated.
Earnings of $0.91 per share beat estimates by $0.05, and revenue of $1.491B beat by $50M. As a reminder, this is the second quarter that includes the MicroFocus acquisition, so year-over-year numbers are skewed. If we strip out MF, organic revenue growth came in at 1.2%, lower than last quarter’s 2.5% jump.
The company’s leverage ratio jumped to 3.5x (from 3.3x last quarter), and it once again reiterated that it plans to be below 3.0x within the next 8 quarters (by end of Fiscal 2025). That said, only 47% of the company’s debt load is fixed, so it is subject to interest rate volatility.
The integration of MF continues to be on track and, in fact, is ahead of schedule. The company expects to return to positive organic revenue growth in Fiscal 2024 (+2-4%), a year ahead of their previous target. Management is proving yet again that it is more than capable of delivering on expected synergies.
By the end of Fiscal 2026, the company expects to generate more than $1.5B in free cash flow, more than double the amount it generated this past year ($655M).
While it was a decent quarter, there were some drawbacks. First, management guided to a Q1 that was a tad light compared to estimates. OTEX is guiding to $1.36-$1.41B revenue and $438-$468M adjusted EBITDA (-2.5%-3.5% year over year) vs estimates for $1.45B and $509MM. This is mainly due to the seasonal fluctuations, and as mentioned, FY ’24 guidance remained pretty much unchanged.
You can read our fully updated report of OpenText here
Pembina Pipeline (TSE:PPL)
It was another mixed quarter for Pembina Pipeline as it navigates a challenging macro environment. Earnings of $0.54 missed by $0.04, and revenue of $2.07B missed by $140M. Adjusted EBITDA also missed, coming in at $823M versus the $865M expected. Adjusted funds from operations (AFFO) came 11% lower year-over-year (YoY) as the Northern Pipeline outage and wildfires impacted the company.
However, despite major headwinds, it still expects 4% volume growth on the conventional pipelines in Fiscal 2023. In fact, the company said June volumes were substantial, and it expects “significantly stronger volumes” in the second half of the year.
The company also narrowed Fiscal 2023 adjusted EBITDA guidance. New guidance calls for $3.55-$3.75B vs the $3.5-$3.8B it announced previously. Not a big change, but a reiteration is a sign that management is confident in a solid second half. This includes previously disclosed impacts from the Northern Pipeline leak in mid-January and Alberta Wildfires.
When we last reported, comments were made that the Western Canada wildfires had a negative impact on operations, but no actual details were given. We now have clarity in that Q2 EBITDA was negatively impacted by approximately $24M due to the wildfires. Once again, we continue to be impressed by EBITDA guidance remaining relatively unchanged despite some significant one-time impacts.
In the quarter, Pembina repurchased 1.2M shares for ~$50M, and it expects 2023 operating cash flow to exceed dividends, share repurchases and capex. Anything over and above will be evaluated, and a decision will likely be made between further debt repayments and/or share repurchases.
Speaking of debt, it exited the quarter with a leverage ratio (debt/adjusted EBITDA) of 3.5. As a reminder, it previously announced that it expects to exit Fiscal 2023 with a ratio between 3.3 and 3.6. It remains on track to achieve its stated target.
