It's no news that natural gas prices are on the rise. Rates are heading higher, and this summer cost-conscious utilities will be cutting back on their natural gas guzzling. But what matters most to consumers, companies, and ultimately investors is the relative price of natural gas. A new Energy Information Administration, or EIA, report pits natural gas against a classic competitor: coal. Let's see what this report means for your gas-centric dividend stocks.
Can coal compete?
Forget high prices for 2013, a recent EIA report outlines cost comparisons between natural gas and coal over the next 30 years. With per-megawatt hour prices neck and neck in 2012, the EIA outlined its expectations, as well as four diverging cases for our energy future:
The EIA's energy outlook predicts a slow but steady price change in natural gas to coal costs over the next 30 years. After bottoming out in 2013, natural gas prices will hit 1.5 times coal by 2025, and are projected to be 75% higher than coal by 2040. But if there's one thing that's certain in energy analysis, it's that nothing's certain. The EIA released four additional scenarios to explore various pricing possibilities.
- Low coal coast – natural gas' worst nightmare, this scenario puts gas prices three times higher than coal by 2040.
- Low oil and gas resource – with a supply side squeeze on natural gas resources, prices head higher, doubling coal costs by 2040.
- High coal cost – environmental policy, higher extraction costs, or dwindling supply could keep natural gas prices just above coal for the foreseeable future.
- High oil and gas resource – gas guzzlers unite, soaring supplies keep prices on par with high coal costs.
Winners and losers
Companies have recently been scrambling to rearrange their energy portfolios, undergoing massive modernization projects keep costs competitive for the future.
Unfortunately, overzealous utilities may have bit off more natural gas than they can chew. Atlantic Power (NYSE:AT) currently relies on gas for 58% of its total generation capacity, and has plans to add more as it attempts to pull its profits out of the red. This could mean major returns if coal costs head higher or supply keeps natural gas flowing, but more eggs in one basket could spell disaster for this company and its dividend.
Dominion (NYSE:D) reported earnings last week, missing on revenue and earnings estimates. Although the utility relies on natural gas for just 17% of its regulated generation capacity, it's got heavy investments in a midstream venture that allows Dominion to sell, transport, and use natural gas all along its electrical supply chain. That could mean short-term benefit from rising natural gas prices, but consistently high costs would dry up demand for Dominion's offerings.
TECO uses coal for 61% of its generation capacity and owns or operates 11 Appalachian coal companies to cut out middleman margins. Great Plains counted on coal for a whopping 83% of its 2012 generation, while FirstEnergy's coal consumption clocked in at 64%.
While TECO relies on natural gas for the remainder of its generation, Great Plains natural gas use accounts for just 2% of its capacity, and natural gas is only 6% of FirstEnergy's energy portfolio.
Coal or natural gas?
The EIA's new energy outlook changes the game for natural gas. There's no doubt that prices are headed higher in the future, but the exact amount depends on a variety of different outcomes. The greatest lesson learned from this report isn't to cuddle up to coal or naysay natural gas: it's to diversify.
If the four scenarios above are any evidence, energy prices are fickle and no one's sure where they're headed. Keep your portfolio picks diverse and you'll be well on your way to pulling sustainable profits and dividends for years to come.