After the rather dramatic drop in EXC on Friday, I feel I should do a bit of explaining. Here’s an article that sums it up: http://www.bloomberg.com/news/2012-11-01/exelon-falls-after-ceo-says-he-may-cut-dividend.html?cmpid=yhoo
Basically, low natural gas prices have led to low energy prices which is squeezing Excelon’s profit margin. The CEO of Excelon said that if prices don’t come up next year, he will cut the dividend to keep EXC’s investment grade rating. Utilities and other big dividend plays lose market value quickly as their yields drop, because their core investors are looking for yield.
After a number of acquisitions including Duke Energy, EXC is the largest electric power provider in the US. It has the largest capacity of nuclear plants in the US, but has diversified to hold high capacity in natural gas and other types if energy production. These acquisitions have also left a large amount of debt, so keeping an investment grade rating is crucial.
It’s impossible to say what the best buy in point is for EXC, but I tend to think it won’t be a bad long term play. If we hit a slowdown and electricity prices are stable to lower, there will certainly be a dividend cut.
However, three things to keep in mind on EXC are:
1. Interest rates staying low are a good thing for this company and I see this as likely for quite a few years. There is simply too much debt in advanced economies right now for central banks to look at raising rates. Look at Japan’s rates following their property bubble in 1989 – they stayed low ever since.
2. Rising natural gas prices can’t be ruled out even in a slowdown.
– Natural gas wells tend to produce over much shorter time frames than oil wells, especially with fracking/horizontal drilling techniques which get gas deposits that are more spread out as opposed to being in a large underground pool like oil. This mean gas producers can slow down production quicker than oil producers when prices fall too close to cost or below cost.
– Central bank printing tends to be bullish mainly for commodities like oil, food & gas.
– natural gas remains expensive in Japan as well as Europe, allowing for more of our capacity over time to be converted into LNG and shipped to those markets. It may take time for LNG capacity to increase but it will happen.
3. As the largest US energy producer, I don’t see Excelon in a position of losing its market or in any danger of default. I believe they can come back for this and make significant gains in the future, the question is only how long that will take.
What to do on this is a tough call, but personally I’m holding. I can’t buy anything right now without selling anyway, I’m comfortable with my holdings, and I’ve learned that over-trading doesn’t necessarily help you.
That’s all for now,