We have maintained our Neutral recommendation on CenterPoint Energy, Inc. (CNP) on May 28, 2013. CenterPoint displayed improved year-over-year performance, ongoing infrastructure development projects and major deals & agreements. However, these positive factors will be challenged by a tepid economy and volatility in wholesale natural gas prices. The company currently has a Zacks Rank #4 (Sell).
Why the Reiteration?
The top line of CenterPoint Energy beat the Zacks Consensus Estimate in its first quarter. Indeed, both the top and the bottom line improved on an annualized basis due to the performance of the regulated gas distribution unit and the competitive natural gas sales and services unit. The company’s stable and regulated electric power operations and gas distribution utilities generate a relatively stable and growing earnings stream.
Moreover, the company’s diversified service territory spread across six states insulates the company from individual state specific risks. This is complemented by its expanding pipeline network, the expansion of its pipeline capacity, rate base growth and gas well connections.
CenterPoint Energy plans to spend approximately $6.8 billion between 2013 and 2017, focusing mainly on upgrading its electricity and natural gas distribution system and generation assets through projects such as the advanced metering system and intelligent grid. For its gas gathering business, the company tends to enter into long-term contracts with volume commitments and acreage dedication, which insulates the company’s margins from volatility in gas prices and a lower level of drilling activity.
In May this year, CenterPoint Energy inked a long-term midstream deal with an affiliate of the U.S. energy behemoth, ExxonMobil Corporation (XOM). The long-term midstream deal with ExxonMobil will unlock significant growth opportunities for CenterPoint and allow it to diversify its product gathering capabilities and geographic footprint.
Again, the master limited partnership with OGE Energy Corp. (OGE) and ArcLight Capital Partners will allow CenterPoint to realize the benefits of the partnership’s enhanced scale, broad geographic reach and expanded capabilities.
Despite these positives, pending regulatory cases, the tepid economy, lower demand for electricity, volatility in wholesale natural gas prices and a significant presence in a hurricane prone section of the U.S. compel us to remain on the sidelines.
Stocks to Consider
In the near term, we would advise investors to accumulate its short-term Zacks Rank #2 (Buy) peer CPFL Energia S.A. (CPL).
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