Tag Archives: natural-gas

Atmos Energy Outlook Gains Strength As Natural Gas Prices Remain Low

Southern natural gas utility Atmos Energy (NYSE: ATO ) reported FQ1 earnings for the period ending December 31 earlier this month that missed on diluted EPS as warm weather weighed on its revenue result. The lower-than-expected result didn’t faze investors, however, and the company’s share price set a new 10-year high last week as bearish market sentiment and declining interest rate increase expectations drove investors into utilities. Back in October, I highlighted the company’s attractive geographic footprint, concluding that [I]ts outlook contains a number of potential drivers to additional earnings growth, including the strong likelihood of a colder than normal winter across much of its service area resulting from this year’s El Nino event, increased demand for natural gas across the country in response to falling prices, and the implementation of a federal regulation that will spur additional demand for natural gas by electric utilities. While potential investors are unlikely to be interested in the company’s relatively low dividend yield, existing investors should remain in their positions despite the high valuation due to the number of potential positive catalysts on offer. While the expected cold weather has yet to materialize, natural gas prices have continued to decline in the interim, prompting continued consumption growth. The company’s share price has gained by 21% in the meantime (see figure). This article re-considers Atmos Energy as a potential long investment opportunity, given the turmoil that has hit the energy markets since October. ATO data by YCharts FQ1 earnings report Atmos Energy reported FQ1 revenue of $906.2 million, down 4% from the same quarter of the previous year as warmer-than-normal temperatures prevailed across its service areas. While the regulated segment reported higher revenue following a rate increase, this was offset by reduced demand resulting from the presence of 29% fewer heating degree days in the company’s operating area. Natural gas distribution throughput declined by 18% YoY as a result, although falling natural gas prices (the average price in the quarter was 26% lower YoY) and higher storage demand (up 37% YoY) caused pipeline transportation volumes to increase by 7% over the same period. Finally, the company ended the most recent quarter with 1.2% more customers than it had at the end of the same quarter of the previous year. The company’s cost of revenue declined by 20.7% YoY on low natural gas prices. This caused its gross profit to increase from $423.3 million to $443.8 million over the same period despite the revenue decline. The regulated distribution segment again reported the largest gross profit at $333.5 million, up from $323.8 million in the same quarter of the previous year. The regulated pipeline segment reported the largest overall gain, however, with gross income of $94.7 million versus $83.6 million YoY. The company attributed most of this gain to the recovery of continued reliability investments, reflecting the positive regulatory environments that it has the advantage of operating within. The non-regulated natural gas delivery segment reported gross income of $15.8 million, down slightly from $16 million YoY, although its average unit margin rose to $0.12 from $0.10 over the same period. O&M expenses increased to $124.8 million from $118.6 million YoY as the company took advantage of unseasonably warm weather to get a head start on some of its maintenance and preparation work. Operating income came in at $196.2 million, up from $187.7 million YoY. Net income came in at $102.9 million versus $97.6 million in the same period of the previous year, resulting in non-adjusted EPS of $1.00 versus $0.96 over the same period. The regulated segments’ contributions to net income increased by $5.5 million on higher rates and increased pipeline demand, although this was partially offset by a $2.6 million YoY timing-related reduction to the non-regulated segment’s contribution. While the non-adjusted EPS result was in-line with the consensus analyst estimate, Atmos Energy included unrealized margins in this result that, if excluded, brought its adjusted net income down to $95.6 million, or a diluted EPS of $0.93. This compared to results of $92.8 million and $0.91, respectively, for the same quarter of the previous year. While the adjusted result came in below expectations, the fact that much of the miss was attributed to income timing at the non-regulated segment prompted the company to move ahead with a quarterly dividend payment of $0.42/share (2.4% forward yield) that marked a 7.7% annual increase. Furthermore, since weather-normalization mechanisms cover 97% of the company’s utility margins, the negative impacts of a continued warm winter on its cash flows should be muted. Outlook Atmos Energy’s management was upbeat about the company’s outlook despite the FQ1 earnings miss, announcing during the subsequent earnings call that it is maintaining its adjusted EPS guidance range of $3.20-$3.40. The midpoint of this range would only represent a 5% increase over the FY 2015 result, below the company’s long-term annual target of 6-8% earnings growth. The primary driver for FY 2015 growth is still expected to be driven by capex, with the company maintaining its previous target of up to $1.1 billion for FY 2016. These are in turn expected to result in an increase to operating income of up to $125 million for the fiscal year via new rate outcomes. Atmos Energy’s capex growth beyond FY 2016 will be heavily influenced by natural gas prices. The company benefits from low prices in two ways. First, its regulated distribution segment should experience steady demand growth from customers encountering reduced heating costs. This will provide Atmos with capex growth opportunities in the forms of increased infrastructure needs and reliability spending. This capex will ultimately justify higher rates for Atmos, supporting its future revenue and gross income. So long as natural gas prices remain low, however, the higher rates will not necessarily result in reduced demand by customers since the rate increases will be offset by the low prices, preventing customers’ bills from increasing on a net basis. Higher natural gas prices, on the other hand, could likewise hurt the company’s revenues by resulting in weak demand, much as weather did in FQ1, but the U.S. Energy Information Agency [EIA] doesn’t expect this to happen before 2018 at the earliest. Henry Hub Natural Gas Spot Price data by YCharts Atmos Energy also benefits from low natural gas prices because of its regulated pipeline segment, which connects both the regulated distribution segment and other large customers to multiple Texan shale gas plays. While shale gas producers are experiencing challenging operating conditions due to the current low price of natural gas, pipeline operators and other distributors are expected to benefit in the form of higher volumes as weak prices spur consumption growth. A trade-off exists in that producers may cease production if prices fall low enough, in which case lower pipeline transmission volumes can be expected to result due to a lack of supply. Atmos Energy’s management stated that it isn’t seeing the type of economic weakness that is associated with declining production, however. This is supported by EIA projections calling for natural gas production to decline in 2016, but only because of lower imported and offshore production volumes; inland production is expected to rise, albeit at a much slower pace than in the past. One potential hurdle to the company’s longer-term capex growth plans was created by the recent decision by the U.S. Supreme Court to prevent the implementation of the U.S. Environmental Protection Agency’s [EPA] Clean Power Plan, which requires the country’s electric utilities to reduce the carbon intensities of their operations, until after a final ruling on the merits of a major legal challenge. The decision, which was split along ideological lines, postponed the Plan’s implementation until 2017 at the earliest. The recent death of Justice Antonin Scalia, who sided with the block, has created additional uncertainty around the Plan. As I discussed in my previous article, Atmos Energy’s pipeline segment could be a big beneficiary of the Plan since the least expensive method of reducing the greenhouse gas emissions of power plants is by replacing coal with natural gas. The Plan’s full implementation wasn’t expected to occur until the end of this decade at the earliest, however, yet the return of cheap natural gas has already prompted the fuel to overtake coal as electricity feedstock. Given the long-term nature of this type of conversion from one fuel source to another, the electric sector’s demand for natural gas can be expected to remain strong in the coming years regardless of the Clean Power Plan’s fate. At this point, its implementation would only cause an already positive demand outlook for natural gas to improve still further. In the short-term the demand outlook for the company’s regulated distribution segment is still positive, although I would note that weather conditions have not been as forecast this winter to date. The number of heating degree days in the company’s service areas have remained below the long-term averages in 2016 to date (down roughly 20% in January and 40% in February to date), although temperatures have been colder on a YoY basis. Previous El Nino events have been associated with colder-than-normal temperatures across the South U.S., including the company’s service areas, through April. This year’s major event has been characterized by its relatively late arrival in terms of weather-related impacts, and some meteorologists believe that its impacts will be felt later in Q1 rather than not at all. Valuation The analyst consensus estimates for Atmos Energy’s diluted EPS results in FY 2016 and FY 2017 have been revised higher over the last several months despite the FQ1 earnings miss and continued warm weather in its service area. The FY 2016 consensus has increased from $3.23 back in July to $3.27 today (investors should note that this is below the midpoint of the company’s guidance range). The FY 2017 has risen by a similar amount over the last 90 days, from $3.45 to $3.49. These estimates are supported by two factors. The first is the strong natural gas demand outlook that I described above. The second is the fact that the recent extension of bonus depreciation by Congress, which has caused some utilities to revise their guidance ranges lower, is not expected by Atmos Energy’s management to have a significant impact on the company’s earnings growth through 2020. The company’s P/E ratios have moved strongly higher in 2016 to date despite the increased earnings expectations due to its share price gains (see figure). The FY 2016 forward ratio has increased from 17.5x in October to 21.1x today. The FY 2017 forward ratio of 20.3x is well above the top of the respective long-term range, let alone its average. The company’s shares are clearly overvalued at this time as a result, despite its positive earnings growth outlook. ATO PE Ratio (NYSE: TTM ) data by YCharts Conclusion Atmos Energy reported FQ1 earnings that came in below analyst expectations as warm weather negatively impacted natural gas distribution throughput and timing issues hurt its non-regulated earnings. Investors have largely ignored the report’s release, however, sending the company’s share price to a new decade high last week in response to an improving long-term operating outlook. Low natural gas prices are continuing to drive demand growth even as production remains steady in the Texan shale gas plays. Meanwhile, prices are also expected to keep customer demand high for the regulated distribution segment by keeping utility bills flat even as higher rates are implemented to finance the company’s planned capex growth. The company’s shares are quite overvalued at this time compared to their long-term valuation levels and I do not recommend initiating a long-term investment in the company at this time. At the same time, however, I do not see any near-term downside to the shares because of the company’s positive outlook, and existing investors should consider holding their shares, as a result. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Clean Energy Fuels Remains A Buy Despite Stock Price Stagnation

Summary Clean Energy Fuels reported good growth in both volumes and margins. Being cleaner and cheaper than gasoline, natural gas usage is increasing in the transportation industry. Capex cycle is coming to a close and the company expects to turn EBITDA positive by the end of the year. Clean Energy Fuels (NASDAQ: CLNE ) has been a buy for me despite the stock price stagnating over the last couple of years at the ~$8-$12 levels. The stock took a big hit when crude oil prices crashed last year, leading to a carnage in energy stocks. However, CLNE has bounced back by more than 100% since it reached its 52-week lows, as the long-term fundamental growth story remains intact. CLNE is not for the impatient investor looking to make a quick buck. The company’s investment thesis is based on developing a market for natural gas vehicles in the USA. This will take a lot of capital investment and change in customer behavior. The US government is also not aggressively pushing its transportation industry to convert to natural gas from gasoline. This is surprising, given the abundance of natural gas in North America. Many countries with much higher natural gas prices (almost 4-5 times more) have mandated that vehicles use gas as it is a much cleaner source of fuel (e.g. India). CLNE has been performing well despite not being profitable and burning cash to roll out natural gas infrastructure in the US. The company is continuously getting traction as more and more big customers like United Parcel (NYSE: UPS ) and others covert their massive fleets to natural gas. The inflection point for CLNE’s stock will be when the business starts to generate operating cash flow. I think that CLNE is well positioned to take advantage of natural gas usage growth and would advise investors to keep holding on to their positions despite the 2 years of stagnation. Natural Gas is both cheaper and cleaner than gasoline Natural gas has an advantage over gasoline both in economic and environmental terms. Natural gas is ~40% cheaper than gasoline and is considerably cleaner than crude oil and its derivatives. Many countries have mandated public vehicles to use CNG (Compressed Natural Gas) in order to curb pollution. As climate change concerns become more pressing, natural gas usage should increase. The rollout of natural gas infrastructure makes the transformation easier for large customers. Some companies such as UPS are already converting to natural gas in order to being seen as environment friendly. Some companies such as Apple (NASDAQ: AAPL ), Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), etc., are sourcing all their power from renewable energy. The pressure is increasing on both the government and large corporates to increase their usage of green products and services. Converting to a cheaper option which is greener is a no-brainer in my view. Clean Energy Fuels is getting more and more traction Clean Energy Fuels reported another quarter of strong growth, with volumes increasing by 27% and good growth seen in all major segments such as trucking and refuse. Though revenues did not increase at the same pace, the reason was a fall in natural gas prices. The main metric of profit per gallon showed an increase both on a yearly and quarterly basis to 28 cents/gallon. More large fleet owners are converting to LNG Large fleet owners are converting more of their trucks to use CNG and LNG. Raven Transport, UPS, Dilon Transport, etc., are all increasing their usage of natural gas. Vehicle and engine manufacturers such as Ford (NYSE: F ) and Cummins (NYSE: CMI ) are also coming out with newer products which use natural gas. Westport (NASDAQ: WPRT ) is developing a spark ignited natural gas engine which should enable more natural gas conversions. A new area that has opened up for CLNE is the railways industry, where locomotive makers are looking to churn out LNG powered locomotives. The rationale for doing the conversion is the same as with the vehicle industry. There are savings in using natural gas as well as environmental benefits. Natural gas is still cheaper than crude oil despite the oil price crash Natural gas prices in North America have become extremely cheap due to the shale gas revolution and the prices should remain subdued for the medium term as well. This gives a huge advantage to natural gas users in the country. A lot of power plants have already converted from coal to natural gas. The transportation industry has taken some time to do the same because it is more fragmented and the conversion is not that convenient. However, the trend towards more gas usage is irreversible. Henry Hub Natural Gas Spot Price data by YCharts Clean Energy Fuels Risks a) Liquidity Risk – Clean Energy Fuels has been burning cash over the last 2-3 years as it continues to develop LNG stations across the length and breadth of the country. The returns on the LNG stations have not been that high as there is not enough volume generation. The number of LNG vehicles is still small, and it will need a critical mass of LNG vehicles before the LNG network can sustainably generate cash. Clean Energy Fuels is well funded for now, but if the increase in the natural gas fleets is less than predicted, then CLNE will face liquidity issues. This is a problem with all small companies in a new market. Stockholders might face huge losses if CLNE is forced to sell its assets or equity at distressed valuations. The company has plans to spend ~$59 million this year, while the cash on hand is $220 million. The capex will come down by ~35% from last year. The liquidity position is comfortable at present, but it cannot afford too many non-profitable years. The management is predicting that it will turn EBITDA positive by the end of the year. Overall, our core business is doing very well with growing volumes and expanding margins in relatively difficult environment. Although there was pressure on EBITDA this quarter, I want to reiterate that we still expect to be adjusted EBITDA positive for the full year. Source – Clean Energy Fuels transcript The immediate risk facing the company are $145 million of convertible notes that become due in August 2016. The company does not generate positive cash flow so it will have to refinance the debt either through more debt or through equity. b) Crude Oil Price Risk – Crude oil prices have rallied by almost 50% since touching new lows in 2015. The increase in crude oil price has been due to the weakening of the dollar, a rally in major commodity prices, and indications of strengthening demand in Europe and China. However, crude oil price can again fall drastically if growth slows down dramatically in China. There is also the risk of a supply spike if a deal is reached with Iran. If crude oil price falls to $20/barrel, then natural gas will not have a big advantage over gasoline. This will mean that major vehicle customers will have less of an incentive to convert their vehicles from gasoline to natural gas. Stock Performance and Valuation Clean Energy Fuels’ stock has rebounded sharply from a low of $3.99, as crude oil prices have increased and the energy sector has shown signs of recovery. The company is cheap with a P/S ratio of ~1.9x and P/B ratio of ~1.8x, with a market capitalization of $800 million. CLNE data by YCharts The company’s valuation has come down based on P/B multiple. CLNE Price to Book Value data by YCharts Summary Clean Energy Fuels’ stock price has not improved much in the last couple of years as investors keep waiting for the company to become profitable. However, the low stock price was to be expected, given that the company needed to make large investments to build natural gas infrastructure. Most of the capital investments have been made and the company is predicting that it will turn EBITDA positive by the end of the year. CLNE is riding a wave of increasing natural gas usage in the transportation industry. The trend is irreversible in my view because natural gas is both cheap and clean. More industries and companies are increasing their usage of natural gas. The recent sharp rebound in CLNE’s stock price shows that investors still believe in the CLNE story. The company performed well in the last quarter, growing both volumes and per gallon margins. I would look to keep adding CLNE on dips. 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.

Cold Weather Drove Up UNG – What’s Next?

Summary The price of UNG have risen by 10% since the beginning of the month. The colder-than-normal weather is pushing up the price of UNG. The storage is projected to be 7% higher than the 5-year average by the end of the extraction season. Even though the energy market – mainly oil – continues to struggle, the natural gas market showed some early signs of recovery in recent weeks; shares of the United States Natural Gas ETF (NYSEARCA: UNG ) added 10% to their value since the beginning of the month. Will the ongoing colder-than-normal weather could keep pushing up the price of UNG? Despite the contango in natural gas futures markets, this hasn’t had a strong adverse impact on the price of UNG. Since the beginning of the year, the price of UNG underperformed the price of natural gas by only 0.4%. Looking forward, if the contango continues to expand, this could widen the gap between natural gas prices and UNG prices. (Data Source: EIA and Google Finance) In the past week, the extraction from storage was close to market expectations with a 111 Bcf withdrawal, which brought the total storage levels to 2,157 Bcf. This is 2.8% higher than the 5-year average and 45.8% above the levels recorded in the same week last year. The low extraction from storage was despite the spike in demand for natural gas in the northeast in recent weeks. In the past week, the demand for natural gas spiked by 23.1%, and was nearly 21.2% higher than the demand listed in the same week in 2014. Most of the gain was in the residential and commercial sectors. (Data Source: EIA) Assuming the extraction from storage were to remain 15% lower than the 5-year average (during the past 14 weeks, on average, the withdrawal from storage was 17% lower than the 5-year average), this could bring the storage levels to around 1,800 Bcf by the beginning of April (the time of injection season). This will be roughly 7-8% higher than normal. This week, the extraction from storage is likely to be, yet again, well below the 5-year average: The average deviation from temperatures was 5.07, which implies lower demand for natural gas for heating purposes than normal. In the next two weeks, temperatures are projected much lower than normal, mainly in the Midwest and Northeast. This means, at face value, another spike in demand for natural gas in the near term. This assessment is also strengthened by the expected sharp rise in heating degree days across the U.S. From the supply side, gross production remained flat, and most of the gain in supply came from higher imports from Canada. The recent update from Baker Hughes showed a cut down of 11 gas rigs in the last week, so the total rigs reached 289 rigs. So on the one hand, the rise in demand and the on the other the stagnation in the production contributed to the rally of UNG in recent weeks. The recent recovery in UNG is driven by lower-than-normal temperatures that are increasing the demand for natural gas for heating purposes. But the extraction from storage is still low and could bring the storage levels to well above normal levels by the end the extraction season. This factor could curb the recovery of UNG down the line. In the short term, unless the weather forecasts come to fruition (i.e. the weather will be hotter than expected), the price of UNG is likely to keep pushing upward. For more see: ” Has the Weakness in the Oil Market Fueled the Decline of UNG? ” 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.