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OGE Energy – Should Investors Buy The Dip?

Summary OGE Energy has suffered lately due to its ownership interest in Enable Midstream Partners. This weakness is likely to remain in place in the short term, but the regulated utility business will bolster earnings. Compared to partner CenterPoint Energy, OGE Energy looks to be the more attractive deal currently. OGE Energy (NYSE: OGE ) is another pseudo-utility option for investors, with both a regulated electric business and an equity ownership interest in master limited partnership Enable Midstream Partners (NYSE: ENBL ). The regulated business does substantially most of its business in Oklahoma, serving nearly one million customers throughout the state (including Oklahoma City). Power is provided through the company’s ownership of 6.8GW of mixed electric generation. By peak capacity, OGE Energy has more production available at its natural gas facilities, however in general the company has relied on its coal-fired units for baseload generation due to cost advantages. The equity ownership in Enable and how it came to be is an interesting one. Enable was founded by OGE Energy, ArcLight Capital Partners, and CenterPoint Energy (NYSE: CNP ) ( prior research by myself on CenterPoint is available here on SeekingAlpha ) in 2013. CenterPoint has a majority interest through the limited partner units, but both parties have equal management ownership rights. CenterPoint and OGE Energy elected to spin-off Enable from Centerpoint in April of 2014 to raise capital, while also swapping their common stock ownership to subordinated to appease prospective investors. As I cautioned investors in October when I wrote on CenterPoint, while exposure to midstream operations has been a trend in many utilities lately and can boost the earnings growth, such operations can also bring volatility to the stock price. In the time since that research was published under two months ago, Enable has fallen over 30%, now down 45% over the past six months. This has dragged both CenterPoint and OGE Energy down along with it, compared to a relatively boring performance for the utility sector as a whole over the same timeframe. Is it time to go bottom fishing for a deal in either of these two names? Historical Results For The Utility Business (click to enlarge) I’ve stripped out the results for OGE Energy’s utility assets above, so this is purely the results from the regulated utility segment. Revenue growth has been solid for the company, primarily due to Oklahoma’s relatively favorable economic profile compared to the rest of the country. Oklahoma City and other large cities have seen sizeable inflows of interstate migration, and charge-offs have been low due to below average unemployment and better than average median household incomes. Operating margins, however, have contracted. This is primarily due to increased depreciation and amortization expenses, stemming from additional assets being placed into service throughout the period. Capital expenditures have been quite high, even excluding the midstream pipeline infrastructure, from 2011-2013. This has moderated somewhat in 2014/2015, but further ramp-up is likely in the coming years. The reason for that is the company’s coal power plant exposure. From 2015-2019, the company estimates it has over $1B in capex costs directly related to bringing these coal power plants into emissions and regulatory compliance, while also converting two to natural gas where it deemed upgrades unfeasible. (click to enlarge) * OGE Energy Investor Presentation, EEI 2015 Like many Midwestern utilities that have traditionally used coal as a primary source of power generation, OGE Energy has been engaged in a lengthy dance with federal and state regulators. It recently won a one year extension for compliance for Mercury Air Toxic Rules (through April 2016) and lost many filings and appeals over the EPA’ Federal Implementation Plan, which it tried to push all the way to the U.S. Supreme Court. While these costs will be eventually passed along to utility customers and likely recovered, this recovery will take time and the burden of the costs over the next several years will likely dent short-term cash flow. The likely cash flow shortfalls in the coming years will be a continuation of recent trends. OGE Energy has raised $1B in net debt since 2011, but managed to minimize the impact of this by using proceeds from the spin-off of Enable as an offset. Given the current market appetite for Enable common units being weak at best, it is unlikely management will elect to sell any of its currently held units to the public to raise cash. To pay for 2016-2019 capex, investors should expect the company to turn back to the credit markets again, making good use of its solid credit ratings. While OGE Energy is already paying $150M in annual interest expense, its leverage ratios remain low (roughly 2.7x net debt/EBITDA on 2015 full year expectations). Conclusion Enable’s results are the wildcard here. In my opinion, if you’re willing to shop for or own OGE Energy, you should also be willing to buy CenterPoint Energy, and vice versa. While CenterPoint trades cheaper at 7.9x ttm EV/EBITDA compared to OGE Energy’s 9.7x, I think the risk/reward favors OGE Energy still. You’re getting a lower levered player with a higher quality regulated business. However, in the end, you might end up with both company’s assets anyway as I think OGE Energy and CenterPoint are ripe for a merger. Both management teams already work closely together due to their interests in the Enable entity, and tying the companies’ fates together makes economic sense. The joined company would enjoy further diversification and the companies operate right next door to one another geographically. Utility consolidation has been an ongoing trend, and a merger here is one of the more obvious remaining moves among smaller utility names in my opinion.

Best And Worst Q4’15: Small Cap Growth ETFs, Mutual Funds And Key Holdings

Summary The Small Cap Growth style ranks eleventh in Q4’15. Based on an aggregation of ratings of 11 ETFs and 427 mutual funds. SLYG is our top-rated Small Cap Growth style ETF and VSCRX is our top-rated Small Cap Growth style mutual fund. The Small Cap Growth style ranks eleventh out of the twelve fund styles as detailed in our Q4’15 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Small Cap Growth style ranked eleventh as well. It gets our Dangerous rating, which is based on an aggregation of ratings of 11 ETFs and 427 mutual funds in the Small Cap Growth style. See a recap of our Q3’15 Style Ratings here. Figure 1 ranks from best to worst the nine small-cap growth ETFs that meet our liquidity standards and Figure 2 shows the five best and worst-rated small-cap growth mutual funds. Not all Small Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 29 to 1186). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Small Cap Growth style should buy one of the Attractive-or-better rated mutual funds from Figure 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Vanguard S&P Small-Cap 600 Growth ETF (NYSEARCA: VIOG ) and the PowerShares Russell 2000 PureGrowth Portfolio ETF (NYSEARCA: PXSG ) are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 (click to enlarge) * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Managed Porftolio Smith Group Small Cap Focused Growth (SGSNX, SGSVX) and the American Beacon Bahl & Gaynor Small Cap Growth (GBSIX, GBSYX) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. The State Street SPDR S&P 600 Small Cap Growth ETF (NYSEARCA: SLYG ) is the top-rated Small Cap Growth ETF and the Virtus Small-Cap Core Fund (MUTF: VSCRX ) is the top-rated Small Cap Growth mutual fund. SLYG earns our Neutral rating and VSCRX earns our Very Attractive rating. The First Trust Small Cap Growth AlphaDEX ETF (NYSEARCA: FYC ) is the worst-rated Small Cap Growth ETF and the Dreyfus Managers Small Cap Growth Fund (MUTF: DSGAX ) is the worst-rated Small Cap Growth mutual fund. FYC earns a Dangerous rating while DSGAX earns a Very Dangerous rating. Hawaiian Holdings (NASDAQ: HA ) is one of our favorite stocks held by Small Cap Growth ETFs and mutual funds and earns our Attractive rating. Since 2010, Hawaiian Holdings has grown after-tax profits ( NOPAT ) by 11% compounded annually. The company’s current 12% return on invested capital ( ROIC ) is a great improvement over the 7% earned in 2013 and points to the business becoming more profitable. Despite the improving fundamentals, HA remains undervalued. At its current price of $36/share, Hawaiian Holdings has a price to economic book value ( PEBV ) ratio of 1.0. This ratio means that the market expects Hawaiian’s NOPAT to never meaningfully grow from current levels. If Hawaiian Holdings can grow NOPAT by just 9% compounded annually over the next decade , the stock is worth $46/share today – a 27% upside. Scholastic Corporation (NASDAQ: SCHL ) is one of our least favorite stocks held by Small Cap Growth funds and earns our Very Dangerous rating. Since 2011, Scholastic’s NOPAT has declined by 8% compounded annually. The company’s ROIC has followed suit from 5% in 2011 to its current bottom quintile 1% in 2015. Despite the deteriorating operations of the business, shares are still priced for significant growth. To justify its current price of $42/share, Scholastic must grow NOPAT by 6% compounded annually for the next 15 years . This expectation seems unlikely to be met considering Scholastic’s inability to grow NOPAT over the past five years. Figures 3 and 4 show the rating landscape of all Small Cap Growth ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds (click to enlarge) Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, style, or theme.

Market Evolution And The Demise Of Good-Til-Canceled And Stop-Loss Orders

Summary There have been articles in SA recently touting common stocks of some major exchange management firms. These are not stocks for your retired aunt who taught grade school. They are stocks for your cousin who runs a surfing equipment shop on Maui when she’s not on tour. Exchange management is a high tech business where a winner can become a loser in a matter of months. Decisions like NYSE, NASDAQ and BATS’ prohibition of good-‘til cancel orders, beginning in February, show that exchange management is crisis management. This is Part 1, the introduction, of a discussion of winners and losers among the corporations that manage exchange trading, including CBOE Holdings (NASDAQ: CBOE ), the CME Group (NASDAQ: CME ), the Intercontinental Exchange (NYSE: ICE ), NASDAQ Inc. (NASDAQ: NDAQ ), and London Stock Exchange Group, for example]. These articles will analyze “What’s in?”, “What’s out?”, and “Who Knows?” This first article sets the table for those that follow. What’s in? The future of processing securities and futures transactions is very bright, as the cost of entering, clearing, and communicating results of transactions goes to zero and execution approaches warp speed. The future of banking is in making big investment decisions, finding the right financing, the right companies on the investment execution side, and advising investors about participation in the enterprises they sponsor. Some exchange is going to remember that serving the needs of legions of small investors is profitable. That exchange will find a way to create an environment where these traders are not constantly swamped by high speed traders and institutions. What’s out? Places where we see men in brightly colored jackets announcing new issues and ringing a quaint bell at the market open, like the building on the corner of Broad and Wall Street. They are museums and retirement villages – glorified photo ops. Financial institutions as a storehouse for securities and other claims on real wealth. One day soon this will be done globally by a computer the size of your fingernail. Financial institutions as trading intermediaries. That business is low margin, high volume, and independent of strategic economic and financial forecasting issues. Forget foreign exchange, deposit trading, and derivatives trading by banks. Financial institutions will advise users and do the trade that originates the use of these instruments by corporations and investors, but the billions of follow-on trades are soon to be non-bank activities. Exchange corporations that make too many decisions like the one made by Intercontinental Exchange ( ICE ), the owner of the NYSE], the other day, to end GTC and SL. Unless NYSE has more changes in mind than simply those, that was a bad decision. Good exchange decisions will attract traders; bad decisions, repel them. This decision will repel many traders. Who Knows? The future of the thing that we now call an exchange, defined as a localized collection of computer servers that confirm trade execution, like the NYSE now, is in some doubt. The future of the collection of companies listed in the first paragraph above is uncertain. If they depend on markets functioning as they do today, they are zombies. If they see themselves as electronic tech companies, in a race to find the fastest, most secure, means of placing, executing, clearing and communicating transactions, they have a shot at being the king of the world of transactions. There is likely to be only one in the end. And it may be none of the firms listed above, but one of the dark pools that wait to usurp these firms’ dominant position. Or a company that does not yet exist. It will be fun to watch (from an investment-free position.) This series of articles is a warning to investors in these exchange management companies: To forecast the fortunes of the firms above, forget the charts. Forget b and a. Forget forecasts of trends in income, the size of income margins, and the like. These firms are the wildcat oil drillers of finance. They exhibit handsome returns in the past few years. (And wages are high for deep sea divers, if they survive and surface to collect.) As a combined portfolio of shares, the sort of analysis that applies to Google, now Alphabet, Inc., ( GOOGL , GOOG ) or Apple (AAPL] is relevant for these stocks. The future of electronic trading and clearing in the next several years is good. But keep a close eye on new players. Also old players, such as dealers like Goldman Sachs (NYSE: GS ) and the hedge fund, Citadel, that have an unexplained interest in trading technology. But the individual corporations are not so secure. Some of them may not be with us in as few as five years. The changing technology of trading and the jockeying of the combatants are as much fun to watch as a Star Wars battle scene. If your money is not invested in one of the losers. As an aside, here is a list of dark horses: Bank of New York Mellon (NYSE: BK ), State Street Corp. (NYSEARCA: SST ), BATS Exchange, and IEX. My guess is that the ultimate king of the hill will be someone we have not mentioned. It’s human nature. Darwin knew about it. Change in the environment always means the death of old species and the rise of new species. So to resist change is instinctive. It promotes species survival. The human animal hates change. NYSE management hates change. Individual investors hate change. Following articles will expand on the reasons for my picks of winners and losers.