The annual EEI conference will be held November 10-12. Management from most of our covered companies will be there. This report is a helpful guide for investors attending and includes questions to ask each company and summary model information.
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OGE reported 3Q19 EPS of $1.25, handily beating consensus $1.11 (WRe $1.13). Driving the beat was favorable weather and continued sales growth. OGE raised its FY19 consolidated guidance to $2.24-2.30 from $2.05-2.20 largely due to rider true ups (+$0.07) and favorable weather (+$0.04). For LTM ending 9/30, weather normal sales growth was just north of 2%. Management is now expecting OG&E’s LT sales growth forecast to be higher than the previously anticipated level of ~1%; every 1% of growth translates to ~$0.05 of EPS
After a long headline-filled year, the S&P 500 broke out to new highs last month and caught up to utilities, both up a little over 21% through October. The market has climbed a wall of doubters, while our recent poll shows utilities continuing to gain investor support. From a contrarian standpoint, we take the market. Investors have been leaning defensive most of the year such that a typical year-end defensive trade seems unlikely. In fact, the defensive trade over the past few weeks has been to buy depressed value stocks and cyclicals. Utilities still trade at a 17% premium to the market and we would like to see them closer to the average to be more constructive.
It may have went under the radar, but last week FES reached a settlement with labor unions in its pending bankruptcy proceeding – resolving all issues and filing for approval at a hearing tomorrow (10/15). FES assumes all collective bargaining agreements in the settlement. We now expect the plan of reorganization to be confirmed by the judge. Once complete, the only remaining step before FES can emerge is the NRC licenses transfer for its nukes. FES filed for approval in late-April, with this typically taking 6-9 months. All appears to be on track to emerge by year-end – about one year after the last power generator came out of bankruptcy (GenOn).
The audience told the story at our conference this year. In the past, you used to hear crickets at our Yieldco and Regulated Utilities panels. This year, the Yieldcos were packed and even the smaller utilities were nearly full. Our Keynote lunch with NEE CEO Jim Robo was the most crowded meeting ever at the conference – SRO and we ran out of lunch. Power and diversified utilities used to garner the crowds – not as much this time. Many seem to be on the wrong end of the 80/20 rule – spending over 80% of their time talking on 20% of their business that is non-utility.
We look forward to seeing you at our Wolfe Utilities & Energy conference next week. Participating utilities/power companies are on the right and there is still time this week to register. The conference provides a unique mix of company presentations via panel discussions and guest speakers that provide industry insights. This report is focused on the utilities and power companies with a list of questions to ask, model summaries and industry themes below.
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.
Utilities have rallied over 20% in the past 9 months and are near all-time highs. The huge decline in interest rates and investor concern over tariffs, geopolitical risks and recession fears are key drivers. In general, we sense that many buyers of utilities are worried about an impending market collapse. To that end, we decided to look back at history to see how the market and utilities perform after huge utility stock rallies. The answer may surprise you - it’s a bullish sign for the market, not bearish.
As midstream investors shift their focus to 2020, there have been a lot of questions regarding production growth and what volumes will look like into next year. In this week’s report, we break down the Wolfe Energy team’s recently updated production model, which expects incremental production to decelerate some over the next year and a half. At the basin-level, the Permian is expected to provide the bulk of the growth, though volumes may underwhelm the slew of takeaway projects near completion and recently announced. In response to lower production growth, we expect midstream capital spend to decrease materially into 2020, which should help midstream screen much more favorably in terms of positive FCF yields next year. We show our projections for capex and FCF outlooks for 2020 vs. 2019 for our coverage in the report.
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.
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