PulseCheck: Price Uncertainty Sapping Energy Companies

by: Research Recap

Due to slower demand for utilities, and uncertainty over natural gas and power prices, analysts remain cautious on independent power companies.

Continued competition with coal-fired plants is also slower-than-forecast growth in demand for more environmentally friendly energy: Goldman Sachs lowered its outlook on independent power players and utilities companies to “neutral” from “attractive” on Wednesday (AP).

Analyst Michael Lapides downgraded NRG Energy (NYSE:NRG) to “buy” from “conviction buy.” Citigroup analyst Brian Chin today downgraded NRG to “hold” from “buy” and lowered his target price from to $25 from $27 (Barron’s). In February, Deutsche Bank had initiated coverage on NRG with a “buy” and target price of $32 (StreetInsider). Earlier this month NRG was selected to receive up to $154 million in government funds for the building of a post-combustion carbon plant. (Zacks)

On Mar 12, Bank of America analyst Ameet I. Thakkar moved NRG to “neutral” from “buy” and lowered the price target to $24. BofA still thinks NRG is the premier company in the sector but that growth opportunities will likely take time to materialize.

Goldman also has a “buy” rating on Entergy (NYSE:ETR)and Edison International (NYSE:EIX) but with lowered price targets.Jefferies & Co upgraded Edison from Hold to Buy on Mar 12 and raised the Price target to $37.50 from $35. (StreetInsider).

Among large-cap regulated companies Goldman’s Lapides favors American Electric Power (NYSE:AEP), and kept a “sell” rating on Ameren (NYSE:AEE), Duke Energy (NYSE:DUK), Consolidated Edison (ED) and Cleco Power. He added that his previous call to upgrade the group was premature. Deutsche Bank also remain buyers of AEP, CMS Energy (NYSE:CMS) and ITC Holdings(ITC).

Citi analysts are recommending “buy”-rated Calpine (NYSE:CPN) though “we continue to believe electric utilities will underperform the S&P500 over the next 12 months” (StreetInsider). Jefferies & Co had also upgraded Calpine to “buy” from “hold” earlier this month, and raised the price target of the company to $14.50 from $11.50 (Benzinga).

Meanwhile Fitch Ratings says North American refiners continue to struggle with poor fundamentals in the form of still-falling end-user demand in the U.S., global overcapacity, low industry utilization rates, a high U.S. unemployment rate, and possible new environmental regulations.

However, Mark Sadeghian, senior director at Fitch, said refiners have carried out positive steps to fight a possibly bad year. “Refiners as a group have responded vigorously and early to the downturn by paring back capital expenditures and operating costs, cutting shareholder distributions and employed a range of liquidity-enhancing measures.”

In its latest North American Refining Sector Outlook (Premium) Fitch has a “negative” outlook rating to all domestic refiners, so it looks like the sector won’t recover as quickly as some analysts had hoped.

Sheena Lee