Genie Energy: profitable despite unfavorable market conditions

mgstudio

Investment thesis

I think Genie Energy Ltd. (NYSE: GNE) is a profitable business as it has established record profitability and strong returns over the past few months, and its valuation implies that it is currently trading below the fair value, which leads me to price the stock as a buy. The company is doing reasonably well even when energy prices are volatile. I also think management is excellent at managing risk through hedging strategies (reducing commodity volatility risk) and improving its position by reducing its forward obligations in the market.

Record quarterly results

GNE set record second quarter results, which were the company’s strongest second quarter results in company history. The company’s revenue decreased by 1.8% ($1.35 million) from $75 million to a profit of $76 million in the second quarter of 2021. However, gross margin increased in its results Q2 218.2% to $67.5 million (affected by market-to-market gain on international coverages), increasing gross margin 89.9% from 27.7% gross in Q2′ 21 margin. The increases reflect the company’s risk management portfolio of “Hedging Strategies to Reduce Commodity Volatility Risk” in the first quarter of 2022 to be effective ahead of a recent increase in energy prices.

Genie Energy Segments

GNE operates in three different segments:

Genie Retail Energy (“GRE”) – provides electricity and natural gas to residential and small business customers in parts of deregulated markets in the United States.

Genie Retail Energy International (GRE International) supplies electricity to Scandinavian residential and small business customers.

Genie Renewables – Four Businesses:

  • Solar Engineering Energy (Solar Engineering) – Designs and builds a local solar installation for commercial-sized customers.

  • CityCom Solar – Recruit customers to buy the electricity produced by the community solar fields.

  • Prism solar technologies – Designs and manufactures niche solar panels for wholesale distribution.

  • Diversegy (Diversegy) – An energy broker for commercial customers.

Author - Data from Sec.Gov - Mega Chart Chart

Author – Data from Sec.Gov – Mega Chart Chart

In Q2’22 results, GRE accounted for the majority of the company’s revenue and had revenue of $63.2 million, while GRE International had revenue of $8.1 million. dollars in the second quarter, followed by Genie Renewables of $3.8 million.

Author - GNE Second Quarter Earnings Data

Author – GNE Second Quarter Earnings Data

Gross profit by segment (three months ended June 2022 and 2021):

GRE: Second quarter 2022 results gross profit of $29 million versus $18.3 million in Q2’21.

GRI: Second quarter 2022 results gross margin of $37.8m vs. $1.9m in Q2’21 (appreciation in the value of forward hedges).

Renewable Engineering: Second quarter 2022 results gross profit of $818,000 versus $922,000 in Q2’21.

Operating income increased from $4.5 million to $48.5 million due to an increase in consolidated SG&A expenses (including overhead) from $16.7 million in Q2 21 to $19 million in Q2 22, reflecting an increase in customer acquisition spending and general GRE spending. air.

Operating profit by segment (three months ended June 2022 and 2021):

GRE: Q2 2022 operating income of $14.4m vs. $5.4m in Q2’21.

GRI: Q2 2022 operating income of $36.4 million versus $144,000 in Q2’21.

Renewable Engineering: Loss of second quarter 2022 operating profit of $519,000 compared to $334,000 in Q2’21.

GNE also announced that it will pay a quarterly dividend of $0.075 to Class A and Class B shareholders and repurchased 639,000 Class B common shares for $4.4 million, an average of approximately $6.90 per share.

I believe GNE’s hedging strategies have proven effective in the volatility of energy prices and increased the company’s profitability during the second quarter of 2022. GNE’s share price was around $6.30 in May and is currently trading at $10.69 or a 69% increase over the last quarter, and surprisingly enough the company is still below fair value.

The company’s balance sheet appears strong. The company has strengthened its balance sheet by having a low level of debt and increasing its cash flow growth. According to Michael Stein, CEO of GNE:

“Our solar strategy includes creating value with strong returns by leveraging our strong balance sheet.”

– GNE Q2 2022 results – Results call transcript

The company has total cash and cash equivalents of $67 million or $2.58 per diluted share. Although the company’s cash was up 32% from last year’s second quarter results, GNE’s cash balance was down $28.1 million, down 29% from the previous quarter. Avi Goldin, the company’s chief financial officer, has this to say about the shrinking cash position:

“The cash balance is down from last quarter as we transfer money to the administrator of our former UK business as the insolvency process progresses.”

– GNE Q2 2022 results – Results call transcript

Overall, management suggests that profitability growth will continue in the coming quarters. Much of the success in the second quarter results was due to mark-to-market gains on the company’s power futures hedges. Due to volatile energy prices, geopolitical risks and the overall global economic situation, the company further improves its position by reducing its term bonds in the market, starting by selling the Swedish pound (meaning sort of reducing its geographic position diversity, but I think it’s a step in the right direction given the volatility and risk of operating in those regions). Michael Stein, CEO of GNE, also said:

“In summary, we delivered record results in the first half of the year and expect to continue to deliver strong year-over-year consolidated Adjusted EBITDA growth in the second half. We have also taken several steps to lay the foundation for long-term growth in our emerging renewables business. And finally, we continue to fulfill our commitment to return capital to shareholders. »

– GNE Q2 2022 results – Results call transcript

This can be seen through the company’s share buyback and a dividend of $0.075 per share to be paid during the quarter. Overall, I think GNE is doing well when it comes to risk management. I believe the business will be profitable in the months to come and hope that it will continue to be profitable in the years to come when it can expand its geographical diversity once the economic situation stabilizes.

Evaluation

Author - Sec.Gov Data

Author – Sec.Gov Data

I think GNE is currently trading below fair value. Using a DCF model, the fair value of the stock is $14.47, which represents a 35% upside from the current price of $10.69. As shown in the image above, I used a discount rate of 10% and a growth rate to infinity of 1.50%. With my revenue assumptions of 2% and an average unleveraged FCF of 8.3% (with a slightly higher pro forma tax rate compared to the tax rate of the last quarters), I have the fair value for the scenarios following:

Bear: Fair value of $13.36, add 30% MOS and we get a target price of $9.35, which is 14% below the current stock price.

Base: Fair value of $14.47, add 30% MOS and we get a target price of $10.13, which is -6% below the current stock price.

Bull: Fair value of $15.87, add 30% MOS and we get a target price of $11.11, which is 4% above the current stock price.

Overall, the stock price is trading below its fair value, which leads me to rate the stock as a buy. Management is doing quite well with risk management by reducing its forward obligations in some of its volatile markets and its hedging strategies.

Risks

A volatile global economic situation and geopolitical risks are the current risks for GNE. Energy markets are volatile and we can reasonably expect that natural gas and energy prices will be subject to fluctuations in the future. Until the global economic situation stabilizes, GNE will still be subject to these risks. Energy price volatility can expose GNE to massive gains or massive losses, and investors should consider this before committing to the stock.

Conclusion

Overall, I believe GNE is a profitable business that is doing well in adverse market conditions while establishing record operating income. Management also does quite well in terms of risk management. The stock is currently trading below fair value, which leads me to a buy rating. If GNE can achieve excellent results in unfavorable markets, it can certainly achieve better results in more stabilized markets.

Thank you very much for your time, have a nice day.

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