The Utility of the Energy Renaissance

The most economically vibrant areas in the country are those involved in the North American 'energy renaissance.' These pockets of economic activity have much lower unemployment rates and higher job growth than the rest of the country.

Consider this: the two metropolitan areas with the lowest unemployment rates are Midland-Odessa, TX, followed by Bismarck, ND. Both of these sit on shale plays: The Wolfcamp and the Bakken, respectively. The metropolitan area with the highest job growth is consistently Houston, TX, the "buckle" of the Gulf Coast petrochemical belt and the headquarters of most American energy companies.

Within the utilities sector, it should be no surprise that the companies with the healthiest growth prospects will be those utilities that serve areas involved in the "energy renaissance." This includes horizontal drilling areas, but is not limited to just that.

Houston Ship Channel, America's most important energy hub. Source: Wikipedia

Due to various regulations, producers cannot easily export oil or gas to other countries. This has resulted in lower realized oil and gas prices within the U.S. Because natural gas is an important input cost in so many industrial products, low U.S. gas prices have given U.S. manufacturers a newfound, competitive edge. This has led to an industrial renaissance along the U.S. Gulf Coast, which is home to many refining, petrochemical, and plastics facilities. 

Entergy Corporation (NYSE: ETR  ) is in not one, but two energy renaissance sweet spots, one of which has only begun to deliver load growth for the company. Entergy operates in two segments. The first is nuclear power generation in New England. That is a fairly stable business which sells its power to transmission companies in that area. The second part of Entergy, and the more promising one for now, is its transmission and distribution business in Arkansas, Mississippi, eastern Texas, and Louisiana.

Strong growth prospects
Entergy operates all along the Louisiana Gulf Coast, an area that is economically flourishing thanks to low natural gas prices and the subsequent industrial resurgence. In addition to the competitive advantage afforded to the Gulf Coast industrial complex, Entergy's utility business has focused on nuclear energy and natural gas, both of which are low-cost sources of power. Unlike coal, nuclear energy and natural gas remain relatively unharassed by federal regulators at this time.

Thanks to friendly state-level regulations, the burden placed on Entergy to build high-cost, inefficient "green energy" generation has been relatively light. This has allowed the utility to keep its prices low and provide yet another competitive advantage to industry in the region. Gulf Coast industry will drive 5%-7% net income growth in the utility segment through at least 2016. This puts Entergy ahead of even top-tier growth utilities such as American Electric Power (NYSE: AEP  ) and Wisconsin Energy (NYSE: WEC  ) . 

I think 5%-7% growth is very understated. This is because eastern Louisiana and southwestern Mississippi are also home to the nascent Tuscaloosa Marine Shale, a play that has only begun to develop. I believe that any continued development in the Tuscaloosa Marine Shale will build upon the 5%-7% net income growth rate. Entergy has a lot of growth upside.

Bottom line: Help yourself
Unlike many of the other top-tier growth utilities, Entergy still trades at a very reasonable valuation of around just 13 times trailing earnings. It also yields a generous 4.5%. I believe that part of this is because Wall Street has not yet fully woken up to the fact that Entergy has upside from not only the Gulf Coast industrial complex but also the Tuscaloosa Marine Shale. In addition, Entergy benefits from business-friendly regulations which allow the utility segment to transmit and distribute low-cost energy. 



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