10 Year Lows
The Stock price is at a 10 year low, a myriad of factors have come together over the past 6 months to push the stock down from $25 a share on June 22nd to as low as $8.81 on December 4th 2015. The previous 10 year low in the stock was $15.32 on April 30, 2012 on similarly low natural gas prices for the spot market where natural gas dipped below $2 per MMBtu. Thus a low natural gas environment is nothing new for NRG, and Natural Gas prices recovered on declining rig counts and colder weather as did NRG`s stock moving from the 2012 low of $15.32 towards $37.20 a share as recently as May 31, 2014.
Negative Catalysts
The catalysts for the recent plunge in the stock are many fold. First the utilities sector is weaker as investors anticipate a 25 basis point rate hike by the Federal Reserve. Second the Power Generation Firms like Calpine (CPN), Dynegy (DYN) and NRG (NRG) are all getting hit on lower priced electricity at the wholesale level due to a mild winter so far, and a downward trek in Natural Gas prices moving from $3.30 MMBtu on August 13, 2015 to $2.12 MMBtu on December 7, 2015. NRG has company specific headwinds in a failed and costly excursion into Green Businesses with the likes of Home Solar, Renew: Solar/Wind, and EVgo. And the sudden resignation of David Crane who has been the face of the company for over a decade. Add to this over $20 Billion in debt, a dismal 2015 for earnings, around an 8% short interest in the float and technical algo selling on new lows and you end up with an $8 stock.
Are these catalysts reversible?
The utilities sector and bond prices could continue to take a hit in 2016 if inflation takes off and the Fed is forced into playing catchup with several rate hikes in the span of the next 6 months. However, given the tepid global growth environment and other central banks` dovishness this scenario seems less likely. It is looking like a “One and Done” rate hike for the next 6 months by the Federal Reserve. Money should not retreat from the utilities sector in 2016 due to extensive rate hikes. At any rate, this catalyst shouldn`t be the defining reason for investing in NRG one way or the other.
Low Natural Gas Prices
In regard to the Power Generation Firms trading down on low natural gas prices, if this correlation continues, this actually serves as a positive catalyst with natural gas prices close to where they bottomed in 2012. We are heading into the heart of the winter heating season in February where natural gas prices tend to rise, this bodes well for Electricity pricing at the wholesale level. At any rate, natural gas prices trend, and given enough natural gas rigs going offline, natural gas prices will recover to the $5 MMBtu level. Sure there is a lot of natural gas in storage, but there was a lot in storage in 2012 as well, rigs were idled, weather patterns changed and natural gas prices moved well above $7 MMBtu on cold weather two years ago. It is just a matter of time but natural gas prices will make a long sustained trend higher towards the $5 MMBtu level sometime over the next two years. It is just how the market trades, but even if it is different this time, I anticipate a rebound in natural gas prices this winter to around the $3 MMBtu area which should serve as a positive catalyst for a rebound in NRG and the rest of the Power Generation Firms.
