Morningstar | Early End to Texas Summer Supports Our Bearish View on NRG
We are reaffirming our $25 per share fair value estimate, no-moat rating, and bearish outlook for NRG Energy as weather forecasts and forward power prices suggest summer could end early in Texas, NRG's largest market.The Texas power market has realized large price swings this summer. Prices peaked with speculation in May, took a steep dive in June, came roaring back in July, and have fallen more than 50%Â through mid-August. NRG's stock is down 7% from its May peak. Texas temperatures are still relatively high and wind generation is weaker than other months, yet cooler weather forecasts and suppressed forward prices seem to indicate the summer upside has passed.
We expect July price spikes gave NRG an opportunity to lock in favorable 2019-20 hedges, as it did in May. We previously raised our 2018-19 outlook based on these market rallies. Prices topped $1,000 per megawatt-hour 15 times in July and the state grid set a new demand record on July 19, serving 73,259 MW.
Peak demand and price spikes have minimal short-run benefits for NRG, but they typically lift forward prices. NRG raised its 2019 Texas coal and nuclear average hedge price to $51/MWh from $43/MWh in the second quarter, and we expect it added some favorable 2020 hedges.
However, we remain bearish on long-term Texas power prices. Demand remains strong, but wind generation is suppressing prices. Wind generation is averaging 6.1 gigawatts this August, up from an August average 4.5 GW during the last five years. Apart from July, wind generation has been exceptionally strong. We think this could lead grid operators to raise their reliability-adjusted wind forecasts, easing market fears of ongoing shortage conditions in Texas.
If prices remain at current levels, we estimate NRG will need to hit its target cost cuts to avoid a drop in EBITDA starting in 2020. We still expect NRG to achieve our $1.8 billion full-year 2018 EBITDA estimate, excluding businesses it plans to divest.
For a more detailed analysis of our bearish view on Texas power markets and NRG, see our report, "When Texas Hype Cools, NRG Energy Will Power Down," published June 12.
NRG Energy is an energy company. The company produces and sells electricity and related products and services in primary power markets in the United States and Canada. The company sells energy, services, and sustainable products and services directly to retail customers under the names NRG, Reliant, Green Mountain Energy, Stream and XOOM Energy, as well as other brand names owned by the company The company's segments are: Retail, which includes retail energy, portable solar and battery products home services, and a variety of bundled products; and Generation, which includes plant operations, commercial operations, development, engineering and construction, asset management, energy services and other related functions.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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