Gdf Suez Is Going On A Diet


On December 6, GDF Suez (GDFZY.PK) held an Investor Day and announced it expected to lose around €185 million ($241 million) in EBITDA this year due to the regulated energy tariffs set by the French government. Partial price increases agreed by the government on July 1st and October 1st have not offset the rise in supply costs. For the fourth quarter alone, the EBITDA shortfall is estimated at €165 million ($215 million). Besides, the French group disclosed its new strategic plan and its "Perform 2015" action plan to cope with "deep and accelerated changes within energy markets".

New strategy: focus on fast-growing markets and optimization in mature markets

GDF Suez gave details about its new strategy initiated by the acquisition of International Power:

  • Decrease of its exposure to European merchant markets and optimization of its electricity and gas assets through asset disposals.
  • Transformation of its business model in mature markets by focusing on LNG, Energy Efficiency and Renewables activities.
  • Acceleration of its development in fast growing markets (LNG and independent power production). According to the group, it will benefit from its positions in high growth markets by 2015.
  • Reinforcement of its presence in promising segments: bio energy, electricity storage, smart energy and non-conventional gas.

In Europe, growth will be driven by the development of Energy Efficiency activities and the group aims a 40% increase in sales by 2017 thanks to a strong demand, a favorable regulatory framework and an acceleration in development of renewable energy.

Demand for LNG is set to skyrocket over the next 20 years and its growth will mainly stem from a strong demand in the Asia Pacific region as illustrated by the figure below. GDF Suez plans to double its sales of LNG by 2020 and will accelerate the development of its liquefaction and production projects in order to increase its presence along the LNG value chain. Besides, the French company can rely on LNG sales agreements with major Asian players such as Kogas, CNOOC (NYSE:CEO) or Petronet.

End of the Investor Pact with Suez Environnement (OTCPK:SZEVF)

GDF Suez is going to give up its control on Suez Environnement by not renewing a shareholder pact giving an effective control of the waste and water management company. The pact, which brings together GDF Suez (35.7%) Albert Frères (7.2%), CDC (2%), Areva OTCPK:ARVCF (1.4%), CNP Assurances (1.3%) and Sofina (0.8%) will expire on July 22, 2013. However, the group reaffirmed its willingness to remain the reference shareholder and a long-term strategic partner.

Through the operation, GDF Suez would reduce the full debt load of Suez Environnement in its consolidated accounts by around €5 billion ($6.5 billion). Indeed, the group would no longer be required to incorporate all of the debt of its subsidiary in its own consolidated accounts ($10.4 billion in mid-2012), but only a proportion corresponding to its shareholding (35.7%), or a around $3.9 billion. This operation should help the French utility to achieve a Net Debt to EBITDA ratio of 2.5 at the end of this fiscal year. At the end of September, the ratio stood at 2.67 for a Net Debt of €45.9 billion ($59.6 billion).

Perform 2015 action plan: Cost cutting, Capex and Debt reductions

GDF Suez will step up efforts to reduce operating costs and improve revenues in its core energy operations. Through the Perform 2015 action plan, GDF Suez wants to generate annual savings of €3.5 billion ($4.6 billion) as of 2015 by:

  • Reducing General and Administration expenses by €1.1 billion ($1.4 billion), Other Operational Expenditure by €1.7 billion ($2.2 billion) and Financial Expenses by €200 million ($260 million).
  • Increasing additional revenues by €600 million ($780 million).

For 2013 and 2014, the group plans to generate annual savings of €2.3 billion ($3 billion) and €3.5 billion ($4.6 billion). Besides, the P&L should benefit from a further gross contribution of €1 billion ($1.3 billion) thanks to Capex and working capital optimization. The management stated that there would be no redundancy scheme.

Moreover, GDF Suez will reduce its Capex by 20% in 2013 and 2014 to €7-€8 billion ($9.1-$10.4 billion) a year vs €9-€11 billion ($11.7-$14.3 billion) initially planned. Capex will be focused on fast-growing markets, especially in power generation and natural gas in Latin America, Middle East and Asia. Indeed,40-50% of its medium-term investment will take place in fast-growing markets.

At the same time, asset disposals should amount to €11 billion ($14.3 billion) over the period 2013-2014, and will be focused on mature markets. On December 6, GDF Suez also announced the sale of 80% of IP Maestrale, its Italian subsidiary specializing in wind power, to the Italian group ERG. Nonetheless, the French company keeps the remaining 20%. Through the operation, GDF Suez will reduce its debt by €800 million ($1 billion).

Furthermore, the utility company aims to enhance its financial flexibility thanks to a decrease of its net debt to around €30 billion ($39 billion) by the end of 2014 . The lower debt will come partly from the end of the investor pact regarding Suez Environnement as explained above. By increasing its financial flexibility, GDF Suez could also consider new acquisitions such as LNG assets of the Spanish oil and gas company Repsol (OTCQX:REPYY).

Significant downgrade of financial targets for 2013 and 2014

Above all, GDF Suez issued a profit warning for 2013 and 2014. Net income should fall due to harsh conditions in its traditional European markets and would recover only in 2015. In addition to a slowdown in demand in mature markets, the company is subjected to regulatory and fiscal pressures. As a result, the management targets for 2013 are the following:

  • EBITDA between €13 to €14 billion ($16.9-$18.2 billion).
  • Recurring net income between €3.1-€3.5 billion ($4-$4.6 billion).
  • Gross Capex between €7-€8 billion ($9.1-$10.4 billion).
  • Net Debt to EBITDA below or equal to 2.5x.

In Paris, after the profit warning the stock lost as much €2.69 ($3.50) or -15.6% and plunged to €14.55 ($18.9) at its lowest point. Statements from the group on the European crisis and its savings plan were expected but the significant decrease in EBITDA and Net Income forecasts were worse than expected.

Threat on the dividend policy ?

Till now, the stock could rest on its high payout ratio with a current payout ratio above 100%. Nonetheless the sharp decline in future net income raised questions about dividend policy sustainability. The decrease in Capex level and the cost reduction could enable the firm to maintain a constant dividend policy. But in my opinion, the dividend policy should be given up to strengthen the financial flexibility of GDF Suez. Moreover, the fact that the French State is a main shareholder prevents or at least restricts the possibility of a workforce reduction in France. And yet, cutting labor in France could be an effective way to reduce costs and to offset the energy prices decline.

I still believe in the group's strategy, especially its capacity to capture growth in fast growing markets, and I think changes are necessary for GDF Suez to enhance its operational performance in each business line. The stock should be a growth play but the presence of the French State as a main shareholder is an obstacle.

For the moment, it is better to hold GDFZY.PK instead of selling it. The profit warning should not occult the growth potential of the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Water Utilities, France
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