Report
Travis Miller
EUR 850.00 For Business Accounts Only

Morningstar | Initiating Coverage of Vistra Energy, Overvalued on Bearish Texas Outlook. See Updated Analyst Note from 28 Jan 2019

We are initiating coverage of Vistra Energy with a $19 per share fair value estimate, no moat, and negative moat trend rating.

Once part of the sprawling Energy Future Holdings complex, Vistra Energy broke off when EFH exited bankruptcy in 2016.  The EFH assets make it one of the largest power producers and retail energy providers in Texas. It owns and operates 40 gigawatts of nuclear, coal, and natural gas generation after acquiring Dynegy in 2018. Its Retail Electricity segment includes TXU Energy, which serves almost one quarter of all Texas electricity consumers.

Vistra's first two postbankruptcy years have been a success, but we think investors should be cautious. As an independent power producer and retail energy provider, Vistra has a much different risk profile than a typical regulated utility. Vistra is subject to the whims of the U.S. energy markets, particularly electricity and natural gas markets.

Our no-moat and negative moat trend ratings are primarily due to our view that returns on capital will be low, volatile, and shrinking during the next decade. We think there will be substantial wholesale and retail margin pressure in Texas, in particular. Exceptional planned growth in renewable energy and a more efficient distribution grid will hurt margins for Vistra's legacy coal, gas, and nuclear generation. Energy demand remains strong in Texas, but wind generation is suppressing prices.

We forecast 2019 will be a peak earnings year after power prices rallied during 2018. We expect this has allowed Vistra to hedge its wholesale generation at attractive margins for 2019 and part of 2020. We forecast $3.2 billion EBITDA in 2019, in line with management’s guidance based on energy market conditions in early 2019. However, we think falling power and capacity prices will weigh on earnings beyond 2019.
Underlying
Vistra Corp.

Vistra Energy operates an integrated retail and generation business in markets throughout the U.S. Through its subsidiaries, the company is engaged in electricity market activities, including electricity generation, wholesale energy sales and purchases, commodity risk management and retail sales of electricity. The company has six segments: Retail, ERCOT, PJM, NY/NE (comprising NYISO and ISO-NE), MISO and Asset Closure. The Retail segment is engaged in retail sales of electricity and related services. The ERCOT, PJM, NY/NE and MISO segments are engaged in electricity generation, among others. The Asset Closure segment is engaged in the decommissioning and reclamation of retired plants and mines.

Provider
Morningstar
Morningstar

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.

We have operations in 27 countries.

Analysts
Travis Miller

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