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Quick Pitch: FirstEnergy Corporation (FE)

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February 24, 2012 – Comments (7) | RELATED TICKERS: FE

Here's a quick pitch for a stock that I just added to my CAPS portfolio.

 

FirstEnergy Corporation (FE) is a relatively safe stock that pays a 5% dividend and has a catalyst that should help its results in the coming quarters.  The company recently announced that it is going to close six coal-burning power plants in Ohio rather than spend big money to upgrade them to comply with new Federal emissions standards.

How is closing plants a good thing for a company? FirstEnergy is the dominant electricity provider in large chunks of Ohio. Consumers have no choice but to buy power from them. A lower supply of power plants with a steady or perhaps slightly increasing demand for power if the economy continues to improve means higher power prices. Higher power prices are obviously a big plus for a utility, particularly at a time when low natural gas and coal prices are driving the price of electricity down.

An analyst from UBS projects that if power prices in the state were to rise from their current $126/megawatt to $200/megawatt it would result in an additional $216 million in annual revenue for FE.

While two hundred million dollars isn't a game changer for a company that has $15 billion in revenue, every little bit helps...particularly in a sector that has been faced with weak pricing for its product. Plus, one analyst is projecting that power prices in Ohio may reach as high as $500/megawatt. Such an increase would obviously have even more impact.

Also, keep in mind that First Energy is actually closing old, inefficient plants to get this increase in revenue not spending big bucks to build new ones.

While I'm not convinced that an increase in the price of natural gas is coming any time soon, many smart analysts believe that at least some strngthening in nat gas is inevitable as a result of a decrease in drilling activity and an eventual shift towards more use of this cheap power source.  Any strengthening in nat gas prices should lead to a boost in power prices and in turn higher profits for power companies.

Have a great weekend everyone! 

Deej

7 Comments – Post Your Own

#1) On February 24, 2012 at 1:25 PM, zCreator (94.68) wrote:

Hey Deej, what do you think of UPL?

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#2) On February 24, 2012 at 2:22 PM, TMFDeej (99.40) wrote:

Hey Creator.  A lot of really smart people are bullish on UPL.  I personally am a little hesitant to bet directly on the price of natural gas, which to me is essentially what going long UPL would be, so I won't be buying any. 

While increasing the use of nat gas makes so much sense in a world where oil is over $100 and gas is sitting at a record low level, I think that the transition will be slower than many believe.

Much like many people are bullish on UPL, many very smart people are bullish on natural gas as well. 

Many E&P companies are shifting their investments towards oil and away from gas, but given the abundant supply of nat gas that has resulted from new drilling and fracing technology I think that any slight increase in price would be met by an immediate surge in production, keeping a lid on how high nat gas can go any time soon.

It all boils down to, if nat gas does well UPL will do well.  If gas prices continue to sit down here then the company will continue to flounder.

Deej

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#3) On February 24, 2012 at 2:38 PM, zCreator (94.68) wrote:

Thanks for the input. I appreciate it.

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#4) On February 24, 2012 at 7:44 PM, rfaramir (29.30) wrote:

I don't see how one company closing six plants helps that company pricewise. Similar to how cartels fall apart (when not enforced by the State), other companies nearby will just produce more, negating most of the price rise. Meanwhile this company sells less at the negligibly higher price, so total revenue goes down.

The only advantage is if these plants in themselves are truly money-losers. That's the correct and only reason to shut them down. If they were profitable, even slightly, then they will pay the price for being politically correct. Fine with me if they do, but like race-discriminators, they pay the price for it. With their own money, I must add, because I wouldn't buy a slice of such a company.

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#5) On February 26, 2012 at 12:37 AM, Mega (99.95) wrote:

As I understand it, UPL is one of the lowest cost producers and thus less leveraged to the price of natural gas than slightly higher cost producers like SWN, EOG, CHK and STR.

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#6) On February 26, 2012 at 12:43 AM, Mega (99.95) wrote:

Although on the other hand, that theory is not reflected at all in their stock price performance.  Maybe it's wrong.

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#7) On February 28, 2012 at 5:55 PM, XMFConnor (98.01) wrote:

Check out my latest blog post on Sandstorm Energy if you want exposure to increasing natural gas/ commodities. I think it's the cheapest way to play it

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