Tag Archives: energy

Pattern Energy – An Attractive Value

“}); $$(‘#article_top_info .info_content div’)[0].insert({bottom: $(‘mover’)}); } $(‘article_top_info’).addClassName(test_version); } SeekingAlpha.Initializer.onDOMLoad(function(){ setEvents();}); Management Agreement with Pattern Development gives good upside. Q1 2015 was a fluke. Their narrow focus on wind energy allows them to operate with lower costs. Before I start with the article, I would like to acknowledge that yes, I am the guy who wrote the most recent Seeking Alpha article about Pattern Energy (NASDAQ: PEGI ), in which I presented my bear case. I started working on this as a short, but then after some astute comments on the article and further research, I have come around to seeing that there is significant upside optionality here with little downside. Unlike the other yieldco’s, Pattern has a management agreement in place such that once the market cap hits $2.5B, the management of their parent company (Pattern Development) will drop down into Pattern Energy for free. When this happens, instead of earning a fixed Return on Capital like the other yieldco’s, Pattern can use their development expertise and relationships to earn potentially much higher returns on capital, and at worst they will continue earning the fixed 9-10% ROC. I would expect them to develop localized wind solutions like their Fowler Ridge development for large data-centers and other tech-focused facilities that need a reliable source of clean energy. Secondly, their first quarter was ridiculously unlucky due to El Nino winds illustrated below, particularly on the panhandle of Texas and Southern California. Anyone like myself selling the stock due to this performance was and is sadly mistaken. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Lastly, since they focus almost exclusively on wind energy projects, they can maintain a low overhead due to specialization. From an industrial organization perspective, there are likely costs of operating developments with different technologies, which benefits competitors like Pattern who stick to their bread and butter. Alternative energy companies delving into new and unknown technologies has been risky, as shown in the WSJ recently: www.wsj.com/articles/high-tech-solar-pro… . In conclusion, the management agreement coupled with El Nino winds provide good upside and a good buying opportunity, and not a good selling opportunity as I originally thought. Their fixed purchase agreements with their customers gives them good downside protection. Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in PEGI over the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article. Share this article with a colleague

My Favorite Utility Stock: 41 Consecutive Years Of Increased Dividends

Summary Utility stocks are getting beaten down, mostly due to fears of rising interest rates. However, I continue to favor well-run regulated utilities, which should be fine even if interest rates rise. This is because they can achieve favorable rate outcomes to ensure steady growth. Consolidated Edison offers the best mix of growth, an attractive valuation, and high yield. If I could only buy one utility stock, it would be ConEd. Utility stocks are getting sold indiscriminately right now, mostly because of the prospect of higher interest rates. Investors are fearing that once the Federal Reserve starts hiking interest rates, utility stocks will suffer from rising costs of capital. I believe this fear is overblown, especially as it pertains to the regulated utilities. Regulated utilities should be fine, even with higher rates, because they are able to pass through regular rate increases to cover their higher costs. Rather than getting overly panicked about interest rates, it’s more important to assess the health of an underlying business, which I believe is a truer indicator of whether a stock will perform well long term. Utilities are selling off now, but the downside risk is limited, because their underlying businesses are vitally important to society. People always need to keep the lights on. Electricity is basically a matter of national security, which makes it hard for me to believe the best utility stocks will suffer greatly, even if interest rates rise from here. As a result, I believe income investors can use the recent dip in utility stock prices as a buying opportunity. Valuations look attractive, and dividend yields are elevated, thanks to the falling stock prices. My favorite in the entire utility sector is a regulated utility with a strong business, attractive valuation, high dividend, and a long history of dividend growth: Consolidated Edison (NYSE: ED ). The Best Mix Of Growth And Yield Consolidated Edison has increased its dividend for 41 years in a row, which is very impressive. At its recent closing price, the stock yields 4.5%, which is also impressive. This is a higher yield than many other popular utility stocks, including American Electric Power (NYSE: AEP ), which yields 3.9%, or Exelon Corporation (NYSE: EXC ), which yields 3.6%. This gives ConEd an edge for income investors. Admittedly, ConEd doesn’t match Southern Company (NYSE: SO ), which yields 5%, but I believe investors should avoid Southern Company for fundamental reasons. Southern Company is struggling, because of problems at its massive Kemper project. Kemper is a massive lignite coal facility, which is amounting to a money pit for the company. Last year, Southern took $536 million in after-tax charges related to increased costs at Kemper. The year before that, the extra costs totaled $729 million. The total price tag for Kemper is projected to reach $5 billion, which is significantly higher than the $2 billion initially anticipated. Continued cost overruns are weighing on Southern, which posted a 15% decline in earnings per share last quarter . Meanwhile, ConEd is displaying the slow-and-steady growth that is more typically associated with utilities. ConEd’s earnings per share grew 2% last quarter , thanks to higher rates, as well as lower operating and maintenance expenses. Looking back further, ConEd grew EPS by 3% last year . These aren’t huge growth rates of course, but utilities aren’t relied upon for growth. ConEd’s growth is more than enough to continue paying its dividend, as well as providing modest dividend increases each year. Plus, ConEd expects 2015 to be another successful year. The company raised full-year guidance after its first-quarter earnings report. ConEd expects to earn $3.97 per share at the midpoint of its forecast, which would represent 6.5% growth from 2014. This is a very strong growth rate for a utility. Moreover, even when interest rates do begin to rise, ConEd will be able to navigate the rising-rate environment because it has a manageable level of debt. According to ConEd’s 10-K , ConEd’s interest payments total $662 million this year, $1 billion over the following two years, and then just $878 million the two years after that. ConEd’s interest payments over the next four years are manageable, given the company’s steady profitability. Last year, alone, ConEd earned $1.1 billion in net income. Its profits are more than enough to meet its debt obligations as well as continue to reward shareholders with earnings and dividends. Lastly, ConEd is my favorite utility because I believe it is attractively valued in relation to its peer group, especially considering its growth is higher than many of its competitors. ConEd trades for 15 times earnings. That is on par with AEP, and is a lower valuation than both Southern Company and Duke Energy (NYSE: DUK ), which each trade for 18 times EPS. The “Goldilocks” Utility Stock It seems that not all utility stocks are created equal. While some like Southern Company and Duke Energy appear slightly overvalued, ConEd trades for a discounted P/E. Meanwhile, ConEd’s dividend yield is higher than certain utility stocks, such as AEP and Exelon. For these reasons, I believe ConEd is the Goldilocks utility stock. Its valuation, underlying growth, and dividend yield are just right. That’s why if I were could only buy one utility stock right now, it would be ConEd. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Equal Weight Energy ETF: A Better Way To Tap Oil Rebound?

The energy sector has been gaining ground in recent months after the U.S. oil price rebounded strongly, gaining over 33% from a six-year low of around $45 per barrel hit in January. This is primarily thanks to the billions of dollars in spending cuts, shrinking U.S. oil rigs counts, higher crude oil processing by the U.S. refiners, and consolidation. Will the bullish trend continue in the coming months too? If we look at the demand/supply trends, demand is definitely on the rise but not enough to meet the growing global supply gut, suggesting range-bound trading for the oil and energy stocks. Additionally, strong dollar has been a major headwind for the oil prices. Mixed Trends The peak summer season will drive up the demand for the oil products, in particular gasoline, pushing the energy prices higher. As a result, the International Energy Agency (IEA) raised the global demand growth outlook by 280,000 barrels a day to 1.40 million barrels, bringing total daily demand to almost 94 million barrels for this year. While the agency projects a rise in global demand, oil supplies continue to exceed demand this year. This is because the Organization of Petroleum Exporting Countries (OPEC) is pumping up maximum oil in more than two-and-a-half years buoyed up by higher output from Iraq and Iran. It is currently producing about a million barrels a day against its target of 30 million barrels a day to protect market share and meet growing demand. Notably, the top oil exporter – Saudi Arabia – has boosted its production to at least a three-decade high. Further, oil production in the U.S. has been on the rise and reached another record high of 9.6 million barrels per day last week, in more than 40 years. However, it is expected to show some signs of slowdown in June through early 2016. This is especially true as oil production from the seven major U.S. shale plays will likely fall by 1.3% in June and further by 1.6% in July. The latest positive inventory data report from the U.S. Energy Information Administration (EIA) also showed that crude supplies fell for the sixth straight week (ending June 5). Given mixed fundamentals, investors are definitely looking for a safe and quality choice in this rebounding sector. While there are several energy ETFs available in the market, the Guggenheim S&P 500 Equal Weight Energy ETF (NYSEARCA: RYE ) could be an excellent play. RYE in Focus The fund offers equal weight exposure to 41 stocks in the basket by tracking the S&P 500 Equal Weight Index Energy. None of the firm holds more than 3.03% of the total assets. In terms of industries, oil, gas and consumable fuels takes the top spot at 70.5% while energy equipment and services account for the remaining portion. The product gained nearly 6.6% over the past three months, easily outpacing the broad sector fund – the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) – by over 200 bps. Further, RYE is also leading the way higher from the year-to-date look, with gains of 0.06% against the loss of 1.03% for XLE. Why RYE is Beating XLE The outperformance was mainly driven by its equal allocation across various securities, which prevents heavy concentration and provides a nice balance across various securities. With quarterly rebalancing, the product tends to cash in on the overvalued stocks and reinvest in the underperforming ones, potentially allowing outperformance on solid fundamentals. RYE is also nicely spread out across the two spectrums of market capitalization levels with 52% in large caps and 40% in mid caps. Further, about three-fifths of the portfolio is tilted toward value stocks that appear safe and appealing for investors in a volatile market. Value investing strategy includes stocks with strong fundamentals – earnings, dividends, book value and cash flow – that trade below their intrinsic value and are undervalued by the market. As a result, value stocks often overreact to both positive and negative news, resulting in movement in the share prices that do not reflect the company’s true long-term fundamentals. This creates buying opportunities in such stocks at depressed prices and offers the potential for capital appreciation when the stock finally reflects its true market price. As a result, the combination of large or mid-caps and value stocks help to provide stability in the portfolio in an uncertain environment while also offer a significant upside potential when the trend reverses. While the fund goes a long way in reducing overall risk, investors should note that it is a relatively high cost choice in the space. It charges a bit higher fee of 40 bps compared with the expense ratio of 0.15% for XLE. Further, RYE is illiquid, exchanging just 43,000 shares a day in hand on average suggesting additional cost in the form of bid/ask spread, though it has a decent level of $173.8 million in AUM. Bottom Line Given its equal weighted strategy and diversification benefits, this energy ETF could prove more beneficial to investors compared to the other products in the space. The solid run in the product is expected to continue in coming months even amid volatile oil trading. Link to the original post on Zack.com