The Spark Energy Bull Case Is Extinguished By A Lack Of Catalysts, Analyst Says

Spark Energy Inc SPKE reported weak third-quarter earnings Thursday, Nov. 2 and lowered guidance due to expectations of a mild winter.

The Analyst

B.Riley FBR's Carter Driscoll. 

The Rating

Driscoll lowered his rating on Spark Energy from Buy to Neutral and decreased his price target for the stock from $23.50 to $17. (See Driscoll's track record here.) 

The Thesis

Spark Energy reported EBITDA of $19.6 million, well below Driscoll's $32.7 million estimate and the Wall Street's consensus of $31.9 million. A cooler-than-expected summer, low commodity prices, flattening margins and the impact of Hurricane Harvey were the main reasons for the 3Q miss, the analyst said. Mild Q3 weather could turn into a mild winter in the East, where 76 percent of Spark Energy's electricity and 59 percent of its natural gas RCEs are situated, limiting pricing power and switching incentives, the analyst said. 

During the conference call, Spark executives said the multiples for potential M&A targets are unrealistic, so they do not anticipate meaningful deals soon Instead, Spark is focusing on integration of previous acquisitions, the company said. International expansion is promising for the company, but it is not going to have a financial impact until late 2018, Driscoll said. With a lack of M&A activity, limited ability to cut costs, regulatory uncertainty in New York state and persistently low commodity prices, Driscoll said he decided to step to the sidelines. 

Price Action

Spark Energy is trading around 8 percent lower Tuesday, and this is the third consecutive trading session with sharp losses. The stock has lost 17.44 percent since the beginning of the year, adjusted for dividends.

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