UBS Downgrades NRG Energy From Buy To Sell

UBS’ Julien Dumoulin-Smith believes NRG Energy Inc NRG's risk/reward is negatively skewed, given that the share price has nearly doubled from its January lows.

Dumoulin-Smith downgraded the rating on the company from Buy to Sell, with a price target of $16.

PJM Capacity Concerns

“NRG and peers have rallied as part of a bullish gas thesis but we think the market is overlooking the $285 million decrease in PJM capacity revenue and the potential for continued weakness in PJM which represents 33 percent of capacity,” the analyst mentioned.

Although a commodity recovery could offer upside, Dumoulin-Smith believes this thesis would be less relevant for NRG Energy.

Related Link: NRG Gives Back During 2016 Global Giving Week

Despite the company’s robust year to date performance, the 2019 ATC power prices are more or less flat in NRG Energy’s core markets, while the recent 2019/2020 PJM capacity auction was significantly below expectations.

How PJM Impacts NRG

Dumoulin-Smith pointed out that the deterioration in PJM was especially negative for the company during a time when it is looking to negotiate with creditors of its GenOn subsidiary.

More than 60 percent of NRG Energy’s PJM capacity is in GenOn, and the analyst expects the subsidiary’s capacity revenue to decline by $240 million in 2019/2020 from the 2018/2019 levels, representing an 85 percent decline in the company’s capacity revenue.

“We attribute a portion of the resiliency of NRG and other merchant power producers to continued investor bullishness around 2017 natural gas; however, we see NRG as less relevant for this thesis than peers,” Dumoulin-Smith said.

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Posted In: Analyst ColorShort IdeasDowngradesCommoditiesMarketsAnalyst RatingsTrading IdeasJulien Dumoulin-SmithUBS
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