It took some time, even during a recent heat wave that saw multiple days of high demand and price volatility, but the forward curve is finally starting to rip. The mild spring and bearish CDR report (at least the market thought so), left a lot of ground to make up to get back to highs from earlier this year – but 2020/2021 forwards have almost fully recovered (2022 less so). Month-to-date on-peak forwards are now up ~18% in 2020 and ~8%/3% in 2021/2022. This is what ultimately matters for the stocks, as it allows incremental hedging at more attractive prices. For reference, both NRG and VST are 70% hedged in ERCOT for 2020 – leaving ample open capacity.
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Post close 8/16, BK Court Judge Montali maintained PCG’s exclusivity, allowing it to lead the bankruptcy exit process for the time being and allaying investor fears of other more dilutive proposals. This is a relief to PCG. But Judge Montali also ruled that Tubbs victims could pursue a trial, raising the risk that a jury awards plaintiffs many billions of dollars. PCG’s last disclosed offer for all 2017-18 fires (not just Tubbs) was $18B. Resolution of claims is key to PCG’s value. And the Tubbs ruling now puts PCG in a weaker bargaining position. But a jury trial that may last into spring could also impact timing of PCG’s exit – targeted for May 2020 – ahead of the 6/30/20 deadline to benefit fully from wildfire law (AB 1054). Given all the variables on PCG stock, we remain on the sidelines.
Wolfe Research's Senior Utilities Analyst Steve Fleishman and Midstream Analysts Alex Kania & Keith Stanley hosted a webcast to discuss post-earnings takeaways and top ideas, themes, and catalysts.
Momentum has no valuation ceiling while risks and uncertainties have no valuation floor. This is the story within utilities and among the market overall. A choppy Q2 due to unfavorable weather and weaker core sales growth seemed to only exacerbate this trend. A few companies appear to be re-rating on lower risk perceptions – ETR, FE, EVRG, SO, EIX, SRE – but otherwise we continue to see more divergence between the pure play safe regulateds vs those with diversified businesses or project/regulatory risk. Given our value focus, we are resigned to keep focusing on the messy ones.
More recently we’ve received questions on the difference between Vistra and NRG. To be clear, we like both given similar investment propositions – integrated low cost operations, backed by robust free cash flow generation and strong balance sheets. Both companies are anchored by premier Texas retail operations, with ~50% of total generation capacity also in ERCOT. That said, the companies also have differences in strategy and make-up, which may draw different investors.
We recently hosted meetings with Vistra Energy CEO Curt Morgan and new CFO David Campbell. The company was fresh off its Q2 earnings update, where the financial outlook was reiterated despite a challenging commodities environment. There was some level of frustration with recent stock price performance, but mgmt. is committed to continue highlighting its integrated power model, supported by low-cost operations and low leverage. We agree with mgmt’s view that public markets can ultimately appreciate a story like this, and see a “go private” decision as more of a last resort. While the cash flow generation over the next few years is robust, VST is very focused on proving out the resiliency of its terminal value, namely the modest financial contribution from its coal plants. We expect a detailed update on the company’s long-term prospects with Q3 – a potential positive catalyst. We remain buyers of high-teens Free Cash Flow yields. Outperform.
On 8/9, PCG disclosed a $17.9B liability related to claims from past wildfires, those include the latest settlement offers to subrogation holders ($8.5B offer), individual victims ($7.5B), a previously announced settlement with public entities ($1B) and suppression costs ($900M). The disclosure is important because resolution of claims is key to PCG’s equity value. With a ruling on exclusivity this week, the focus will soon be on the PCG’s plan of reorganization (POR) and possibly competing ones, all of which will address claims and financing. PCG has fallen over 20% since June on concerns over who will drive the BK exit, size of claims and risk from 2019 fires when only 40% of damages can be recovered by PCG. On our new 2021E, which incorporates $20B of claims, we see the stock worth $22.
We are downgrading Cheniere Energy Partners to Peer Perform from Outperform. The partnership has been one of the best performing MLPs YTD and it trades expensive vs. its parent and 49% owner Cheniere Inc. Once Sabine 6 is completed in 2023 CQP's growth and distribution potential will have largely topped out and we don't see a big motivation for LNG to roll CQP up at current relative levels. Bottom line, we see LNG as the much more attractive vehicle at this point and it's hard to argue for CQP further rerating higher from current levels or our $45 target price (up from $42).
EVRG made it two solid quarters in a row – edging Q2 consensus estimates, while reaffirming 2019 guidance and the long-term outlook. The big buyback program continues to chug along. The regulatory calendar also remains quiet, with an attractive 4+ year rate case stay-out while interest rates are low. EVRG is also looking at reallocating and/or increasing capex in Missouri, given PISA in MO and noise in KS. The Sibley complaint should also be resolved favorably in October. There’s still some work to be do, but this was another positive step.
OGE reported 2Q19 EPS of $0.50, in-line with us/consensus at $0.51. Results were down $0.05 from the year prior primarily due to unfavorable weather. OGE’s slow start in the 1H was expected given drag associated with the Sooner/Muskogee projects. Both projects are now being recovered as of July 1st via interim rates. OGE affirmed its FY19 consolidated guidance of $2.05-2.20 but now expects ENBL’s contribution to be near the lower end of its $0.52-0.58 range.
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