Regulated utilities are trading at all time high price-to-earnings multiples thanks to the Fed's low interest rate policy, giving investors who want to take advantage of their sweet distributions some pause. Where should they put their money?
Tudor, Pickering, Holt & Co. has a few ideas. The Houston energy-focused investment bank said in a report Wednesday that Chicago power giant Exelon (EXC - Get Report) is moderately cheap -- it trades at a P/E ratio of around 13.50 versus 16.20 for the industry (19 for the large caps). Midstream hybrids - those combination utility and infrastructure companies -- also seem to be "gaining some traction," the firm says, and calls Sempra (SRE - Get Report) and Dominion (D - Get Report) its top picks. It also sees value in power producers Calpine (CPN) and Dynegy (DYN) but needs a catalyst "for those names to start working."
Exelon is in the midst of becoming more of a traditional regulated utility than a power producer, a notion being welcomed by rating agencies and investors alike. Last week at its analyst day in Philadelphia, management reiterated its 5% to 7% earnings growth targets driven by rate increases at newly acquired Pepco Holdings. And in an interview with Columbia University's Center of Global Energy Policy a few days before, CEO Chris Crane said that in five years 70% of Exelon's earnings could from the regulated side and only 30% from the merchant generation side.
Meanwhile, Sempra's stock sank the first week of August given delays for the expansion of its Cameron liquefied natural gas terminal. It revealed in a recent regulatory filing that the expansion requires consent from all four of its partners, one of whom seems shy about committing capital to the project -- likely due to the oversupply in the marketplace, CreditSights analysts Andy DeVries and Greg Jones wrote in a report Wednesday. A go-ahead on that project might put some zing in Sempra's stock, which is down 7% from its 52-week high of around $114 per share last month.
Dominion is building a liquefaction project as well in Cove Point, Md., with energy-thirsty Asian counterparties already lined up. It's expected to be completed by the end of next year, when Dominion might sell it to its MLP, Dominion Midstream Partners (DM) . That kind of cash-generating event could bring some more life to its stock, which is off 2% from its 52-week high of $78.97 achieved in July.
As for Calpine and Dynegy, money flowed into their shares from energy investors as a play on bullish views for natural gas for next year, but now that the commodity call has played out because of anemic power demand, among other things, stockholders have sold their stock, TPH said. But looking forward, the firm expects 2018 gas prices to suffer as drilling activity picks up, which should put Calpine "on top of the pack" (it's the firm's favorite independent power producer) and Dynegy as a close second because of its $3.3 billion acquisition of Engie SA's U.S. power plants, which "Calpin-ifies" its portfolio, the firm said.