OGE Energy's Q3 Results Disappoint, Investments Impress

On Nov 27, 2015, we have updated a research report on OGE Energy Corp. OGE.

Oklahoma City, OK-based OGE Energy Corp. provides energy and offers physical delivery and related services for both electricity and natural gas primarily in the south central U.S. It is the parent company of Oklahoma Gas and Electric Company ("OG&E"). OG&E is the largest electric utility in Oklahoma and its franchised service territory includes the Fort Smith, AR area. OGE Energy operates its business through the electric utility, OG&E, and its Natural Gas Midstream Operations divisions.

OGE Energy's third-quarter earnings and revenues missed the respective Zacks Consensus Estimate. Moreover, both the top and the bottom line declined year over year. Earnings declined due to lower revenues and higher operating expenses. The company lowered its guidance for full-year earnings, taking into consideration the mid-point of the guidance range. Earnings per share are now expected on the lower end of the $1.41–$1.49 range for 2015 ($1.45 at the mid-point) compared with $1.46 in 2014. Overall, the company projected consolidated earnings between $1.76 and $1.89 per share ($1.83 at the mid-point), which compared unfavorably with $1.98 earned in 2014.

We note that the oil and gas sector is subject to inevitable commodity cycles. Depressing oil and gas prices are leading to layoffs which will likely increase the state's unemployment rate. In such a scenario, profitability at OGE Energy will be severely undermined.

On the positive side, OGE Energy's steady investments in infrastructure projects are in sync with its strategy of providing reliable services to its customers and meeting increasing demand. The company continues to witness customer additions. In third-quarter 2015, the company's customer count increased by 9,050 from the prior-year quarter.

Apart from expanding traditional fuel-fired operations, OGE Energy is currently investing substantially to execute several initiatives. The company plans to invest more than $1 billion between 2014 and 2019 for environmental compliance and plant modernization projects, all scheduled to be completed by Jan 2019. Moreover, the company is leveraging the topography of Oklahoma to develop wind-based energy assets. OGE Energy's focus on installing modern equipment at its utility facilities and expanding the renewable generation portfolio will enable it to maintain both federal and state regulated standards.

The company is also pursuing an aggressive energy efficiency program. Between 2015 and 2019, OGE Energy plans to spend a total of around $2.9 billion. For 2015, the company has allocated $595 million, which includes $305 million for base transmission, distribution and generation activities. In addition, the company plans to start several integrated transmission projects. Scheduled completion of these ventures will allow OGE Energy to boost its scale of operations.

Zacks Rank

OGE Energy carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the power sector are Korean Electric Power KEP, Ameren Corporation AEE and Calpine Corp. CPN. While Korean Electric sports a Zacks Rank #1 (Strong Buy), both Ameren Corporation and Calpine Corp. carry a Zacks Rank #2 (Buy).

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