When you think of big energy companies, you typically hear people mention staples like ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS-A), BP (NYSE: BP), PetroChina (NYSE: PTR) and Chevron (NYSE: CVX). However, solely focusing on market cap could be a mistake these days, especially if one is looking to build a next generation investment portfolio. This has me excited to discuss NRG Energy (NYSE: NRG), a name I believe epitomizes what a modern energy company is all about.
For those not familiar with NRG, the company is the largest independent power producer in theU.S.with capacity of 47,000 megawatts (enough to support ~40 million homes). Rather than simply rebuild the wheel and offers its customers the traditional fossil fuel power access, NRG is carving out a new path in the utility space by building a renewable energy asset basket which includes wind, biomass, solar, smart metering as well as access to electric vehicle (EV) charging infrastructure. On top of that, the company will soon bring to market carbon capture technology which may turn carbon waste from coal plants into a revenue stream and also stimulate oil production through enhanced oil recovery (EOR) technology by injecting CO2 into existing wells. I’m a big fan of EOR technology and believe this will become a big theme in years to come as a means to stimulate older wells.
NRG is aiming to make a big splash in the energy world through clean power solutions. By its actions the company is showing it really means business when it comes to advancing new energy technologies (i.e. closing NRG closed the GenOn acquisition transaction earlier than expected). NRG’s progressive nature toward clean energy compares to Big Oil, a group I feel largely invests in cleaner energies because the government mandates them to allocate money to the space.
NRG positioned strongly for rebound in natural gas
Like most power producers, the slump in natural gas prices has hurt profitably in recent years. However, natural gas has been priced for nirvana. Therefore I’d expect any supply disruption to cause a massive short squeeze. I also believe the exporting of liquefied natural gas (LNG) will relieve the glut of natural gas seen in the U.S.as a result of fracking sooner than later. Therefore, as older coal plants are retired due to age and the demand grows for the use of natural gas (i.e. increased use as a heating source in both residential and commercial buildings; greater implementation as a transportation fuel for fleets), natural gas prices will rebound. Keep in mind the Energy Information Administration (EIA) said in its January 8, 2013, report, “Despite projected declines in electric power consumption from 2012 levels, consumption of natural gas for electric power generation remains high by historical standards and reflects a structural shift toward using more natural gas for power generation.”
According to ExxonMobil’s (NYSE: XOM) “Energy and the World in 2040”, natural gas will be the fastest-growing major fuel worldwide (overtaking coal for the No. 2 fuel behind oil). Also the report says, “natural gas demand will rise by 65% through 2040, supported by growing unconventional supplies such as from sale”. Increased use of natural gas will bode very well for NRG since while many rivals have contracted their businesses in recent years due to weak natural gas prices, NRG has actually expanded its retail presence. Therefore NRG seems strongly positioned for a rebound in natural gas when prices recover (Note: NRG has grown through acquisition. In recent years the company purchased Reliant Energy’s retail business for $287.5 million in 2009; the 1,279 megawatt Cottonwood Generation Station in 2010; Green Mountain Energy for $350 million in cash in 2010; EnergyPlus Holdings in 2011; GenOn Energy for $1.7 billion in 2012). So if you think natural gas prices will recover, NRG may be a name to keep on your radar.
Changing of the Guard
Suffice to say, NRG is a forward thinking utility company that I feel will increasingly turn more heads both near and longer-term, especially as it becomes the standard by which to measure all utility progress. Why? The answer lies in the fact the energy landscape is changing like never before in human history. The need for clean energy is no longer a myth since climate change is real and at the forefront of political debate globally. This means the transition of energy resources into a more sustainable society, a lower carbon society, will make NRG’s power product suite more attractive than larger cap players/competitors who are fearful of change and focused primarily on fossil fuels. Therefore I’m seeing a quiet changing of the guard in the energy sector which ultimately makes NRG a leader in a new energy paradigm that investors simply shouldn’t ignore, especially since the company sports one of the lowest price to sales ratios in the utility space (0.64 vs 1.37 industry average).
A backdoor way to play a rise in gasoline prices
Hess (NYSE: HES) announced last week it was closing its Port Reading refinery and exiting the refinery business. This move makes NRG more relevant in my view since the company is building the country’s first privately-funded network of home and public charging stations through its subsidiary eVgo which has a presence in Houston, Dallas/Fort Worth and has announced networks in the San Francisco, Los Angeles, San Diego and San Joaquin Valley areas. I believe the Northeast seems like a logical geographic expansion for eVgo especially since consumer interest in electric vehicles, which is already on the uptrend thanks to increased models, cheaper prices and better range, could further rise in the wake of the likes of Sunoco (NYSE: SUN) and Hess leaving the refinery business (Sunoco was a large producer of distillate products in the Northeast but also a provider of RBOB gasoline. However, Hess historically had a strong gasoline presence in the region and its latest refinery closure and sector exit takes another 50,000 barrels a day of gasoline off the market). This lack of Northeast refining capacity will likely be a catalyst for higher gasoline prices in the region in my view since the increased transport of gasoline from other regions of theU.S. (including higher imports) into the Northeast will likely lift both wholesale and retail prices. That could spell opportunity for NRG.
I believe the recent Hess news (expected but still quite important) may be a backdoor way for investors to play a rise in gasoline prices which I fully expect again this summer especially as the EPA goes against the federal appeals court and raises biofuels production estimates for 2013 and gets more strict on emissions standards (something many refiners, one of the top producers of sulfur dioxide into the atmosphere, are just not able to conform to without heavy capex spending they are just not willing to commit to thanks to a stronger evolution of clean fuels, including using natural gas in fleets and as a power catalyst for fast charging electric vehicles).
As a result, any sort of “Prius Effect” amongst consumers this year may stimulate more interest in NRG’s eVgo subscription based charging network. In fact, the preparations for this bias may already be underway since Nissan (NASDAQ: NSANY) just announced on Friday that it was working with its partners, including NRG’ eVgo network, to boost the current number of public fast chargers, including the first network of fast chargers in Northeast. So in essence, NRG could not only be seen as a play on natural gas but it could also give investors exposure to electric vehicles without the high risk that comes along with a high-profile company such as Tesla (NASDAQ: TSLA). Of course Tesla itself is paving a way for increased electric car visibility in the U.S. (the Tesla S sedan was the 2012 Motor Trend Car of the Year). However, some investors may feel too skittish to buy Tesla at present valuation and could consider looking at a name like NRG since it offers a less volatile alternative, but one which still gives strong exposure to the growth in electric vehicles as well as natural gas (think compressed natural gas filling stations for vehicles).
Bottom Line: It is clear NRG is interested in making a real change when it comes to utilizing cutting edge energy technologies and their diversity into clean fuels is a testament to that. Also, the commitment by management to expand an already deeper presence in natural gas than its rivals makes me confident this company firmly believes natural gas prices are undervalued. With more focus on automakers to develop more efficient fuels and advance more electric vehicle charging infrastructure throughout the U.S., NRG gives investors a complete investment into the clean energy world.
If the U.S. is as committed to a cleaner future as it says it is, then new energy technologies and electric power delivery will be needed by utility companies as coal becomes less important as an energy source (again refer to XOM’s own 2040 outlook mentioned above). So while rising natural gas prices could be construed by some to be a negative for utility players, the truth of the matter is costs do need to be passed to consumers (yes I know that is not a popular comment). Why? New capital expenditures by utility companies will need to rise in order to upgrade older infrastructure and deliver/transport power (delivery typically comprises ~40% of an average consumer bill). Keep in mind that regulators usually set electricity prices and if the utilities themselves must pay more to produce power, you can bet electric bills will go up as result and that means all the acquisition moves NRG has been making in recent years could be seen as a coup longer-term. With a growing presence in clean fuels, rising exposure to natural gas and less-risky exposure to electric vehicles through infrastructure, I already see that coup beginning to unfold.
Note: NRG, which increased both adjusted EBITDA and Free Cash Flow before Growth investment guidance recently, will release Q412 earnings results in late February.
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