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Thursday February 11, 2010
Dow Theory: Charged up over utilities
By Richard Moroney, editor Dow Theory Forecasts  Among the large industry groups with the utility sector, the natural-gas and diversified utility indexes have delivered the best returns over the last year.Utilities make up less than 4% of the total stock market’s value. While you may want to overweight the sector based on your evaluation of its risk-return potential, don’t bet your portfolio on a single sector just because it pays a high yield. Below, we review our two favorite utility stocks: Energen (NYSE: EGN) boasts a solid growth outlook, with Wall Street projecting 20% higher per-share earnings in 2010. Yet the shares trade at 11 times projected 2010 earnings, 37% below the average for utility/energy hybrids. Natural gas averaged $2.92 per thousand cubic feet in September, the lowest monthly average in more than seven years. Since then, the price has increased 88%, helped by lower inventories and frigid weather forecasts for February and March. 
Energen hedges much of its production but does benefit from high gas prices. Energen has hedged 72% of expected 2010 energy production at levels well above current spot prices. On average, Energen has hedged its 2010 natural gas at $8.03 per thousand cubic feet, up 47% from today’s $5.48. The company’s oil is hedged at $84.98 per barrel, 10% above the current spot price of $77.23. After taking the hedges into account, the company estimates that changes of $0.10 in natural-gas prices per thousand cubic feet or $1 in per-barrel oil prices will increase or decrease 2010 profits by $0.01 per share. Energen’s regulated utility, Alagasco (43% of 2009 revenue, 18% of profits), reported 6% lower revenue last year. Sales for the exploration-and-production business (57%, 82%) slid 10% in 2009. Natural gas represented 65% of production, followed by 24% for oil, and 11% for natural-gas liquids. Energen is a Long-Term Buy. Questar (NYSE: STR) has rallied 26% over the last year, outperforming the S&P 500 Utility Sector Index’s 4% gain. Weak natural-gas prices weighed on sales, down 18% in the first nine months of 2009. But during that time, Questar aggressively cut costs, widening operating margins and boosting free cash flow. Reductions in spending on capital projects resulted in positive free cash flow in each of the first three quarters of 2009, ending a seven-quarter stretch of negative flows. Despite that cutback in capital spending, Questar managed production growth of 7% in the nine months ended September. Anticipating higher natural-gas prices, Questar boosted spending in the December quarter and said it planned to raise production by at least 13% in 2010. Management believes it can increase production at a 12% to 15% annualized rate over the next five years, excluding the effects of acquisitions. Questar is a Long-Term Buy. Learn more about this financial newsletter at Richard Moroney's Dow Theory Forecasts. |
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