Opinion & Analysis
OPINION: Everything has a price - there is always a price point where something is a bargain and another point which represents expensive. The shares of Genesis Energy are no exception - sometimes the price is right, sometimes it is not.
I think the Government has been forced to price the Genesis IPO for investors. Genesis was never going to be an easy sell because of the difficulties with the previous IPOs of the state-owned energy companies and investor apathy. Both pointed to a potential for limited demand. There was only one thing for Government as vendor to do and that was to lower the price. At $1.55 with a prospective gross dividend of 14.3 per cent, apathy has turned to a scramble for shares: finally, investors know that this time around they are getting a good deal. Taxpayers not so much.
Regular readers may remember I am no great fan of investment in electricity companies. While I strongly support government moves to a partial selldown of the energy companies, I have not wanted to be on the other side of the deal. I did not buy Mighty River (too expensive) and although I did buy some Meridian, I held them for a short while only and sold when the Genesis float looked sure to proceed.
From Government's point of view, the Genesis float had some headwinds. The investor experience of the previous offers meant that some were hostile while others with investor fatigue were stifling yawns. Some investors who had already bought government energy companies had losses and even those who had small profits probably thought that they had quite enough exposure to the vagaries and politics of the electricity market.
Like all the energy companies, Genesis has some risks and it was these, along with opaque pricing of shares through the "book build" process, that made me wary of the previous offers. Flat electricity prices, the closure of Tiwai Point, the Greens/Labour threat of a single electricity buyer, uncertain water rights and the possible rise of solar energy are risks common to all the energy companies.
Genesis has some risks of its own: it is exposed to the oil and gas price and because most of its electricity comes through thermal and gas generation, it is not the cheapest generator around. Also, 31 per cent-owned oil and gas field Kupe could run out in 10-15 years (making the long-term dividend less certain) and the "take or pay" contracts for gas and coal work against Genesis at times.
Genesis has been called the "ugly duckling" of the energy companies, probably because of its Huntly power station (which looks like something out of Stalin's Russia) and because to some people the company appears to be a mish-mash of various businesses.
But I think the range of different revenue streams is in favour of Genesis: it is diversified across different energy sources and its business is little dependent on rain and snow melt.
Genesis also comes with a great retail customer base and when you put these elements together you get the power of diversification.
Nevertheless, with investors getting a bit tired and plenty of other options available to invest elsewhere in the electricity market, the Government considered these cynical and jaded investors and sharpened its pencil. The $1.55 issue price along with a bonus of one share for every 15 owned for those who hold shares for 12 months, is a better deal for investors than the other IPOs.
I may not be madly enthusiastic about investing in the New Zealand electricity market, but everything has a price (even "ugly ducklings"). With all the research houses calling Genesis a "buy" and reports of unfulfilled demand, the Government's sharp pencil has done the trick and brightened up what might otherwise have been some dull investors. There is always a price that people will pay to take on a particular degree of risk - and I think that the Government has found it.
Martin Hawes is an authorised financial adviser. A disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com. This article is of a general nature and is not personalised financial advice.
- Sunday Star Times