3 Reasons Dominion Resources' Stock Could Fall

Dominion Resources' (NYSE: D  ) is a diversified energy giant operating in the Northeast. Its fingers reach into regulated utilities, electricity transmission, natural gas infrastructure, and merchant power generation. That's a lot of moving parts and there are positives to watch in each of its businesses that should drive long-term shareholder returns.

However, if the company encounters troubles anywhere along the way, investors could take a less positive view of the shares. And since the stock price is up over 100% over the past five years, any trouble could lead investors to jump ship. So it's important that you keep a watchful eye on Dominion.

D Chart

Data by YCharts

Carbon
One of the first areas to keep an eye on is carbon. Like most utilities, Dominion has been switching to green alternatives like renewables and natural gas. For example, on the merchant power side of the business it recently sold coal power plants so it could focus on its Millstone nuclear plant and an expanding renewable portfolio.

While nuclear and renewable power (wind and solar, for example) don't have to deal with the increasing scrutiny placed on carbon dioxide emissions, switching to natural gas-powered plants will only delay the day of reckoning. That's because, like coal, natural gas is a carbon based fuel. Cleaner, sure. But clean? Not quite.

How big an issue could this be? In 2013, coal, which is currently under heavy fire from environmentalists, accounted for roughly 26% of Dominion's power generation. Natural gas was around 30%. Oil, another carbon fuel, came in at 9%. In other words, roughly two-thirds of the company's power is from carbon based fuels. This is a long-term issue, but one where sentiment could change quickly with regulatory shifts. Watch this issue and how quickly Dominion "cleans up" its power act.

Are MLPs good or bad?
One of Dominion's big growth plans is to set up a master limited partnership (MLP) to house its partially and fully owned natural gas assets, including a planned liquefied natural gas (LNG) export terminal. 

However, there are potential tax issue with the MLP structure, and the U.S. government has made frequent grumblings about trying to limit its use. With more and more companies looking to set up MLPs, look for the government to increasingly focus on the space. It could lead to a moratorium on the MLP structure or at least efforts to make setting up an MLP more difficult.

Dominion Resources' assets shouldn't have any trouble passing muster, but investors tend to go to extremes. Since Dominion is aggressively talking up its MLP plans, any troubles (regulatory or otherwise) could lead to the shares taking a hit.

(Source: ReubenGBrewer, via Wikimedia Commons)

A merchant of power
A more pressing problem to watch right now is Dominion's merchant power business. Although the Millstone nuclear plant is a big part of this business and is likely a diamond in the rough, historically low natural gas prices have depressed energy prices. Thus, this segment of the company has been struggling.

That's not to say that other parts of the business haven't more than made up for merchant power's difficulties, but that this sore spot needs to be watched. That's particularly true since low natural gas prices look like they will be with us for a while. And, thus, Dominion's merchant power business is likely to remain a drag.

Alone that shouldn't be too much of an issue, but if another part of the business starts to weaken there could be a compounding effect -- at least in investors' minds. Watch the performance of Dominion's merchant arm, since it could remain a thorn in the lion's foot until results improve.

More good than bad
At the end of the day, there's more good news than bad at Dominion Resources. However, for a utility stock that's doubled in five years, any bad news could compound with a still weak merchant business to knock a little near-term wind out of Dominion's share price. Don't avoid the company, but at least be prepared in case everything doesn't go as planned.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3081210, ~/Articles/ArticleHandler.aspx, 10/22/2014 7:14:23 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement