2 Gas Plays On New England's Energy Policy Lunacy

There was an article in the New York Times on Friday about the challenging electricity situation in New England. The reporter took aim at

Electricity prices in New England that have been four to eight times higher than normal in the last few weeks, as the region's extreme reliance on natural gas for power supplies has collided with a surge in demand for heating.

The Times being the Times, the reporter seemed to miss the delicious irony that one of the main reasons that New England is so dependent on natural gas is environmentalists (which the paper supports consistently 95% of the time) and low natural gas prices have been successful in shutting down numerous oil & coal electricity plants over the last few years. Going further the article states the situation would be worse without New York's Indian Point nuclear plant which the Governor of New York is attempting to shut down at behest of the state's environmental lobby.

Natural gas has gone from meeting 15% of New England's overall energy needs in 2000 to over 50% currently. Pipeline capacity has failed to keep up with the expansion of natural gas demand and "renewables" have failed to make a meaningful contribution to replacing the lost energy supplies from coal & oil despite billions in tax credits, government loans and grants. The article gave me a good chuckle over the consequences of a lack of a logical cohesive energy policy, and more importantly it also provided an actionable investment theme. Given the current situation in New England and the possible closure of the Indian Point nuclear plant in New York, natural gas infrastructure is going to have to expand significantly to meet the increasing needs of the region as forces preventing oil & coal energy production from expanding are unlikely to subside. In addition, existing pipelines in the region are becoming more valuable by the day. Finally, E&P plays in the Marcellus should benefit given the region's proximity to the growing natural gas demand in New England. Here are two plays on this investment thesis.

Spectra Energy Corp (SE) engages in the ownership and operation of a portfolio of natural gas-related energy assets in North America. The company's U.S. Transmission segment engages in the transportation and storage of natural gas for customers in various regions of the northeastern and southeastern United States and the Maritime provinces in Canada.

4 reasons SE is a good value play at $29 a share:

1. The stock yields 4.1% and the company has raised its dividend payout by approximately 40% over the past five years.
2. Spectra has one of the most aggressive capital expansion plans in the industry with $25B targeted toward expanding capacity over the next decade. This includes an initial $600mm pipeline expansion proposal in New England. It already is a key supplier to gas-fired power in New England through the Algonquin pipeline.
3. S&P has a "Buy" rating and a $37 price target on the stock. TheStreet has a "Buy" rating and a $34 price target on the shares.
4. The stock recently crossed its 200 day moving average.

Rex Energy Corporation (REXX) operates as an independent oil and gas company. It has interests in Pennsylvania, Ohio and Illinois. Its primary production currently comes from the Marcellus shale region.

5 reasons REXX has upside from $14 a share:

1. I have been positive on REXX since the second quarter of 2012 when it traded at less than $11 a share. The company is making good progress on using a "Super Frac" method that will make its wells more than 100% more efficient from FY2010 to FY2014.
2. The company has increased production at better than a 50% CAGR since 2009 and its production is now up to 30% liquids.
3. Approximately 90% of both natural gas and oil production is hedged in 2013.
4. The company has beat earnings estimates five of the last six quarters. Consensus earnings estimates for FY2013 have moved up 4% over the last month as well.
5. Revenue growth is expected to accelerate to over 50% gains after posting an almost 30% increase in FY2012. The stock has a five year projected PEG ratio right at 1 (1.01).

Disclosure: I am long REXX. 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.