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Market Price (11/4/2016): $11.03/share; ST-Target: $17/share; NIV: $52/share
If market’s valuing NRG at such ridiculous levels, it should go private
Moving ST-Target to $17 and NIV goes to $52 from $19 and $58, respectively. Retail margins weren’t as robust as expected for 3Q16 causing us to re-evaluate future margins. We feel that there is upside coming for commodity fundamentals. We are less than thrilled about the potential for headline risk surrounding the potential financial distress of GenOn, but we look for a positive outcome. We like that NRG is paying down debt and refinanced some $5.8B of debt due in 2018 to later maturities. Given strong potential for upside, we’re opposed to high level of hedging, especially in 2018 & 2019, so we were pleasantly surprised at the liquidation of some GenOn hedges. And, NRG has yet to disavow share buybacks, and we’d still like NRG to officially and separately reestablish a customer-based marketing and trading business through a bankruptcy-remote sub with strong, consistent and vigorously enforced risk-management policies. NRG needs to roll-up NYLD, in our minds, before NRG runs out of drop-down options. SunEdison renewable portfolio acquisition looks reasonable. 2016E AEBITDA guidance increased, but 2017E AEBITDA guidance lower due to hedge liquidation.