Morningstar | NRG on Track With Business Simplification and Restructuring; Raising FVE. See Updated Analyst Note from 09 Nov 2018
We are raising our NRG Energy fair value estimate to $27 per share from $25 after incorporating year-to-date results, the company's latest reported hedges, and the sale of NRG Yield and NRG's renewable energy investments. We are reaffirming our no-moat and stable moat trend ratings. We continue to believe the stock is overvalued as of early November.NRG reported $677 million of adjusted EBITDA in the third quarter and remains on track to meet our 2018 estimate adjusted for divestments. Management initiated 2019 EBITDA guidance of $1.85 billion-$2.05 billion, in line with our $2.0 billion estimate.
A jump in forward prices during the summer gave NRG an opportunity to lock in what we consider attractive 2019-21 hedges. Incorporating NRG's hedges as of Sept. 30 and current forward prices contributed $1 per share to our fair value estimate increase. Time value appreciation since our last update contributed $1 per share.
NRG raised its 2019 Texas coal and nuclear average hedge price to $51/megawatt-hour, up from $43/MWh in March. This is a key support for 2019 earnings with its expected generation nearly fully hedged. NRG faces more challenges in 2020-21 with hedge prices that are well below 2019 prices. NRG's decision to match its retail and wholesale generation hedges offset some of that generation earnings pressure.
We continue to have a long-term negative outlook for Texas power prices primarily based on wind capacity growth and higher wind generation efficiency factors. More-consistent wind generation would ease market fears of ongoing shortage conditions in Texas.
If power prices remain at current levels, we estimate NRG's target cost cuts and retail margin enhancements still won't avoid a drop in EBITDA starting in 2020. Management appears set to return nearly all free cash flow to shareholders through stock buybacks, given limited new investment opportunities. We think this is suboptimal, given that the stock trades well above our fair value estimate.
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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