Tuesday, August 27, 2013

Entergy Nuclear is On and Off

Entergy Nuclear is a member of a nuclear power consortium formed over nine years ago called NuStart Energy.  The consortium had its sights on getting a nuclear power plant construction and operating license from the Nuclear Regulatory Commission (NRC).  As the nuclear development arm of Entergy Corporation (ETR:  NYSE), Entergy Nuclear has been is charged with bringing on-line as much nuclear power as the utility can afford.  The company owns and/or operates a dozen reactors in the northeastern and southern mid-section of the country.  In 2013, the company expects to generate 5.0 million megawatts from its wholesale nuclear portfolio compared to 1.1 million megawatts from its non-nuclear portfolio.

Lately though, Entergy has spent more time taking nuclear power facilities off-line than putting new ones on.    Just this week Entergy announced the closure and decommissioning of the Vermont Yankee facility, with shutdown expected by the end of 2014.  Entergy cited the both the high cost structure of Vermont Yankee and inadequate compensate due to design flaws in the wholesale market structure.  The company also cited the obvious  -  competition from lower-cost natural gas.

Nuclear power generation is capital intensive undertaking, with most of the cost in the initial construction and commissioning of the reactors.  Cost of operation is relatively economical.  By comparison, natural gas fired power plants are less expensive to build, but the bill for operation is driven higher by natural gas prices.  Because of the surge in domestic natural gas production supplies are presently cheap, making it possible for natural gas fired power plants to drive nuclear facilities out of business.  The question is how long will natural gas prices remain at current low levels.

Entergy Corporation is fully integrated power generation and distribution.  In addition to electric power generation revenue, the company realizes nominal sales from natural gas.  Both its wholesale and utility generation portfolios include gas sources.   Accordingly, the parent is at least partially hedged against ‘nat gas fallout.’

In the most recently reported twelve months Entergy reported $10.8 billion in total revenue on which it earned $1.0 billion in net income or $5.37 per share.  The stock trades at a multiple of 1.1 times sales and 11.8 times earnings.  At both levels ETR is priced below its utility industry peers, which trade at multiples of 1.33 and 28.35 times sale and earnings, respectively.  Indeed, while the utility industry on average is trading near five-year high multiples, Entergy is trading near is five-year low multiples.  The stock recently dropped below its 200-day moving average and broke below a key support level at the $66 price level.  A review of historic trading patterns suggests there is little support against further price weakness until about the $53 to $55 price range.  Investors and trades alike can use options to play the Entergy situation for any time horizon.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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