We have maintained our Neutral recommendation on OGE Energy Corp. (OGE) on Jun 4, 2013 based on the company’s investment in infrastructure, a favorable Oklahoma economy and hedging activities. However, these are being offset by storm restoration costs and an unfavorable macro backdrop.
Why the Reiteration?
OGE Energy is a well-positioned regulated utility and has an unregulated midstream gas business that carries low risk. Moreover, recent investments and other wind development projects have positioned the company well to comply with environmental regulations and to meet its 5%–7% long-term EPS growth target.
The company is pursuing an aggressive energy efficiency program, investing in renewable energy technologies and upgrading its infrastructure. The company is particularly focused on developing renewable energy projects and upgrading its distribution system.
Only last month, OGE Energy Corp., CenterPoint Energy Inc. (CNP) and ArcLight Capital Partners, LLC announced that they have formed a master limited partnership (“MLP”). This partnership has created a mid-stream business. As a 50% general partner in the MLP, OGE Energy will benefit from a tax exemption.
One more important factor is that OGE Energy operates in Oklahoma, where unemployment is significantly lower than the national average. The resilience in the economy of its service area bodes well for the company.
One of the company’s subsidiaries, Enogex’ natural gas processing volumes are shifting steadily toward a more fixed fee-based business. Also, through hedging, the company has significantly reduced its exposure to commodity spread volatility.
Despite, these positives we remain on the sidelines based on the first quarter 2013 results, volatility in the company’s commodity business, pending regulatory cases, costs incurred for Oklahoma tornado restorations and the currently unfavorable market scenario.
Other Stocks to Consider
OGE Energy currently has a Zacks Rank #3 (Hold). Stocks worth considering in the energy space are ALLETE, Inc. (ALE) and DTE Energy Company (DTE), both with a Zacks Rank #2 (Buy).
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