Wolfe Research Senior Analysts Steve Fleishman (Utilities & Midstream), Scott Group (Transports), Nigel Coe (Industrials), and Josh Silverstein (Oil & Gas Exploration & Production) hosted a webcast to go over their regional power outlook, gas additions vs. coal retirements, the renewables explosion and latest on nukes, implications for the rails, the impact on natural gas demand, the impact on industrials, and stock implications.
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On Wednesday (09/18/19), McDermott confirmed that it had hired a restructuring firm to improve the EPC’s financial picture. The stock fell 63% on concerns it may lead to bankruptcy. MDR is one of the contractors for the Cameron LNG project, where two trains are under construction (full project 93% complete as of August) with completion scheduled for next year. There are several layers of protection for SRE, but the biggest risk at this point could be the prospect of more delays on the last 2 trains. MDR risk notwithstanding, we continue to see SRE as attractive; remain Outperform.
Our Wolfe annual bottom-up power supply study shows a big increase in the five-year supply growth outlook relative to last year – over 50 GW in aggregate. This is primarily being driven by a record level of renewables additions, with the most notable uptick in solar. Coal retirements continue at a solid pace, while nuclear shutdowns have slowed. However, baseload capacity is shrinking even despite renewed financing interest in natural gas plants. Renewables are benefitting from improved economics and a ticking clock on favorable tax credits. While the influx of renewables is likely a tailwind for key players in the industry, it should also lead to increased power market volatility. We saw this play out over the summer in ERCOT, to the benefit of the generators. Storage will be the key driver longer-term.
Our annual bottom-up study of power generation shows increased supply growth across the major markets – totaling over 50 GW in aggregate. This five-year outlook is a record since we started this study at Wolfe. The growth is primarily driven by continued acceleration in renewables, which given intermittency is very different from baseload capacity. In the key competitive market of ERCOT – it’s all about renewables, with another big uptick in wind and now solar too. In PJM, gas plant new build is rearing its ugly head again. Coal retirements continue at a steady pace overall, while nuclear retirements have slowed as state legislative support has kept several running.
Wolfe Chief Investment Strategist Chris Senyek published a report this morning (9/16/19) with some early thoughts on 2020 election implications. The Presidential election will likely be the key story of 2020 so we don’t think it’s too early to start pondering it and positioning on it. We know what Trump has done the last 3 years, so the more interesting discussion is what might happen if the Democrats win. We discuss some high level thoughts below.
Before the market opened 9/13, PCG announced a settlement in principle with insurance subrogation claimholders to resolve all such claims arising from the 2017 NorCal and 2018 Camp Fires for $11B. Since 8/10, PCG has been hinting it was close with subros. PCG offered $8.5B, whereas subros proposed $15.8B. Although the amount was higher than offered, the deal shows PCG has made progress ahead of a status conference involving exclusivity on 9/24 (two days before it ends). PCG will argue for an extension. Still, PCG has not settled with fire victims, represented by the Torts Committee. PCG offered $7.5B, but Torts have alleged tens of billions. Upcoming Tubbs rulings will be a meaningful swing factor. Given this and fire season, we remain on the sidelines after an 11% gain in PCG.
CWEN conservatively cut its dividend 40% early this year as PCG project cash flow was trapped due to the BK. The prior dividend level should return once PCG exits BK, plus the cash trapped during the BK will free up and be available to fund growth. Every key party in the BK supports retaining PPAs and exiting BK by the June 2020 deadline for wildfire fund. This sets up a very positive 2020 for CWEN…as long as PCG can avoid a catastrophic fire this season.
We hosted NRG senior management team for investor meetings last week. NRG is very committed to a customer-focused business model with a more agnostic view to generation. Their goal is to perfect and optimize the matching between customer load and generation supply. They see this as a more consistent business model over time with less commodity volatility that investors will ultimately revalue as they see the performance. Management is still working on the right disclosures and metrics to highlight the change in the company so stay tuned.
We hosted AES CEO Andrés Gluski in Boston this week. Much of the conversation focused on two overhangs – Argentina & DPL’s DMR – as well as management's confidence in achieving its 7-9% EPS and parent FCF growth targets. AES reiterated that no one issue would be enough to knock the company off track, highlighting the resiliency of its portfolio and upsides (LNG, cost cuts) that aren’t included in the outlook. We came away from our meetings with more confidence in AES being able to execute on its plan. But we remain Peer Perform as valuation looks fair given some of the overhangs.
Upgrade to Outperform following unwarranted sell-off. AEE stock reached 52-week lows relative to regulated peers this week, and now trades around an average regulated group multiple. We view AEE as a low-risk, high-quality fully regulated utility, given its 6-8% LT EPS growth target and constructive regulatory frameworks. AEE’s recent performance mirrors that of premium regulated names, such as CMS, ES, LNT, WEC and XEL, which have pulled back from nose-bleed valuations. AEE is catching all the downside from this but it never fully participated in the upside. We believe this is a disconnect and now is a good entry point, given risks are modest and management has shown discipline in achieving its targets.
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