Given the jittery state of the market in recent months and the projection that cheap energy will be with us at least into 2017, it’s a good idea to find some stability here.
One place to look is big utilities. There are two key reasons for this.
First, these aren’t companies that people look to for short-term growth. These are long, buy and hold plays, so the market doesn’t judge them too harshly quarter to quarter. It’s more concerned with the regulatory environment and the customer base.
As volatility heats up in the stock market, these stocks will ports in the storm. That’s why it’s a good idea to get in the best of them now, before the herd piles in.
Second, consolidation in the energy sector is working in utilities’ favor. There is a lot of talk about oil prices but few really discuss natural gas prices. They remain low, though they recently broke through the $3 per million BTU (MM/BTU) ceiling.
Part of the move is the fact that natural gas has been growing in demand for industry and energy production. Low prices have gone hand in hand with low oil prices since most natural gas production is an offshoot of oil exploration and production (E&P).
The difference is, Saudi Arabia doesn’t have the natural gas resources the U.S. has. It can’t manipulate the natural gas market like it does the oil market.
This transition from cheap coal to cheap natural gas has been a boon for the utility industry because it also helps utilities meet tighter environmental standards for power generation.
You see, the domestic E&P players are stuck in a difficult spot because both oil and natural gas has been so cheap. But as more utilities demand more natural gas, that demand will start to move prices up. And it’s already happening.
Another sign that the utilities are taking advantage of this new dynamic is the fact that the big utilities are entering into big mergers with natural gas pipelines and producers.
This is another sign of energy companies with deep pockets buying up strategic assets of companies that have been hurt during this energy patch downturn. The big companies are coming in and buying what they need to stay competitive for the long haul.
Southern Company just bought a 50 percent stake in Kinder Morgan’s Southern Natural Gas System.
Duke Energy bought Piedmont Natural Gas for $5 billion. Dominion is planning on buy Questar to help build out its natural gas pipeline assets.
And if you notice, all three of these utilities are on the East Coast. They are making a big move away from coal here. Coal was the dominant energy source for power generation in the East for decades. Now it is certain there is a shift away from coal to natural gas, and these recent moves confirm it.
Also bear in mind that some of these companies are also gearing up to enter the natural gas export business. While natural gas is cheap in the U.S., in Asia it’s five times more expensive and in Europe it’s at least twice as expensive. That creates an enormous opportunity for big utilities to develop export facilities to sell the gas abroad.
Just remember, global growth is a key component to rising energy prices and if doesn’t pick up, these price differences will remain where they are. If global growth revives, natural gas prices will go even higher.
Either way it’s a boon for utilities that are building out their natural gas production and distribution now.
Right now, the Big 3 — Southern, Duke and Dominion — seem to have a very good strategy at play right now and should benefit as gas prices rise in winter and exports begin in coming months.
— GS Early