Fuel costs are one of the biggest factors utilities have to consider when generating electricity. That's exactly why NextEra Energy (NEE 1.36%) is looking to drill for natural gas—a fuel that accounts for roughly half of the power it produces. Based on the winter natural gas price spikes in the northeastern portion of the United States, that looks like a good call right now.
Gas can be expensive
The big natural gas story in this country is low prices. That's a combination of increasing supply and limits on exporting the fuel. And while natural gas prices are well off of the historic lows reached in 2012, the fuel is still relatively cheap. At least most of the time. A steep price spike took place in early 2014 when the "polar vortex" swept across the country.
Prices were painfully elevated in regions like the northeast where natural gas demand is high but supply is limited by pipeline constraints. So there's no guarantee that utilities will benefit from low gas prices indefinitely. And efforts to build liquified natural gas export facilities and increasing gas use in other industries suggests that higher prices are more likely than lower ones over the long term.
Henry Hub Natural Gas Spot Price data by YCharts
So that helps explain why NextEra Energy is looking to partner with PetroQuest Energy (NYSE: PQ) on 38 wells in Oklahoma. Right now the cost and impact would be tiny. NextEra will spend just under $70 million and invest another $120 million over the next 30 years. The benefit will be locking in access to natural gas "at cost." This, the company believes, will save NextEra Energy around $100 million in fuel costs over that span—a tiny fraction of its fuel costs.
PetroQuest Energy, meanwhile, gets a well-heeled financial backer to help it pay for its expansion efforts. But, more importantly, this could be just the beginning. Eric Silagy, the CEO of NextEra Energy's FPL subsidiary noted that, "This investment in natural gas production is an important component for delivering lower, more stable natural gas prices for our customers, and we anticipate identifying additional investment opportunities, thereby benefiting our customers even more over the long term."
If NextEra Energy and PetroQuest expanded this relationship it could go a long way to help PetroQuest build out its 35,000 acres of gas land. That's doubly true since it's picking up the pace of drilling, with 2014 marking its most active drilling year ever in the region in which the pair have partnered.
(Source: U.S. Government)
We've seen this before
Vertical integration, however, has been going on for years in the utility space, only historically it meant owning coal mines. That relatively dirty fuel is out of favor right now, though, which explains why Vectren (VVC) is planning to sell its coal mines. That will raise roughly $300 million, but, more importantly, get the company out of the coal business.
That's in keeping with Vectren's broader move away from commodity businesses. However, it's worth highlighting that while its coal production was at all-time highs, the company was pleased to report in the first quarter that the coal business nearly broke even. No wonder Vectren wanted out.
The point of the Vectren example, however, isn't to suggest that NextEra Energy is going to lose money on its PetroQuest partnership. In fact, in the early years, the deal is likely to be very beneficial for both NextEra and its customers. However, 30 years is a long time and things change. Coal is on the outs because of its carbon footprint. Cleaner burning natural gas has been the primary beneficiary—at least until something better comes along.
A good deal
This will be a good deal assuming NextEra Energy gets the regulatory approvals it needs to proceed with PetroQuest. But don't expect the benefit to last 30 years, and watch that NextEra doesn't go overboard on the drilling front. In fact, the company happens to be one of the largest renewable power players showing just how quickly the power market is shifting today.
