The combination of low natural gas prices and the fallout from recent accidents turned many utilities off from building new nuclear power plants. But analysts say investors may still want more exposure to nuclear energy.
Despite the lack of new nuclear facilities, existing plants continue to produce cheap, clean power. Right now, low natural gas prices are diminishing profit margins for many utilities, says Travis Miller, the director of utilities research at Morningstar. But nuclear power is still far cheaper to produce — and gas prices are only likely to go up, he says. “We think gas prices have to rise from here to rationalize the market.” And as soon as those prices rise, nuclear power producers can boost prices, and profit margins.
The utility best-positioned to benefit from that trend would be Exelon (EXC), the largest operator of nuclear power plants in the U.S., Miller says. “As the cost for other sources of power, specifically coal and natural gas, rise, Exelon’s earnings should rise,” he says. Plus, Exelon’s nuclear plants aren’t affected by new environmental regulations that may force some coal plants to close, he says. Morningstar analysts also see NRG Energy (NRG) as a good value now. Two-thirds of this company’s power generation comes from coal and nuclear plants. Its coal plants are already more efficient than competitors’, Miller says. “We think its entire fleet, including nuclear and its very low-cost and efficient coal and gas plants, all can benefit in an environment where power demand and gas prices rise,” he says.
Exelon’s stock price fell this year in part because a district court put a stay on the new EPA emissions rule that would close some coal plants, says Justin McCann, a senior industry analyst at S&P Capital IQ. But the market likely overreacted, McCann says. “We expect the courts to ultimately uphold the rule or at least the bulk of the rule,” he says. Even if the shares take a while to recover, the drop in the stock’s price means its yield is now 5.4%, higher than the industry average, McCann adds.
Broader exposure to nuclear power production probably doesn’t make sense for individual investors right now, however, says Jack Reutemann, the founder and CEO of Research Financial Services. “I would not drill down and specifically invest in anything that is just nuclear,” he says. Supplies of natural gas are so abundant and the fuel is so cheap that a pure-nuclear play doesn’t make sense, he says. Neither does a natural gas price play like United States Natural Gas (UNG), while prices remain so low, he says. However, a broader utilities ETF like the Utilities Select SPDR (XLU), up about 11.6% in the past year, may offer some value to some individual investors, Reutemann says.