|Shares Out. (in M):||335||P/E||NM||NM|
|Market Cap (in $M):||9,631||P/FCF||8.7x||8.5x|
|Net Debt (in $M):||13,828||EBIT||1,700||1,800|
Sign up for free guest access to view investment idea with a 45 days delay.
NRG Energy (ticker NRG) is a somewhat mis-loved, mis-understood and under-valued long opportunity that is largely mis-perceived for what it was 2 – 3 years ago (i.e. over-leveraged and allocating significant capital to solar “pipe-dream”) and still is largely ignored by the investment community given complicated end-markets and confusing structure … and the market does not properly value the changes that have taken place in the interim including: (a) changes in commodity markets, (b) early signs of regional S/D becoming more balanced driving power prices, (c) best-in-class capital allocators with a proven track-record / 4+ highly accretive transactions and (d) Yield vehicle better isolating the NRG merchant assets under-valuation (NRG “merchant” owns the largest fleet in US w/ >50 GW of power generation). On a consolidated basis, NRG trades at a cheap multiple (sub-7x EBITDA-capex on 2016E / unhedged basis factoring in $5 natural gas and ~8x EBITDA-capex using $4.50 nat gas. Stripping out the value of NRG Yield (NYLD is the ticker), NRG’s merchant assets trade at sub-4.5x EBITDA and ~5x EBITDA –capex using my 2016E estimates (factoring in $5 natural gas). NRG presents a compelling risk-reward proposition with a total return potential of >60% using conservative base case assumptions ($4.50 natural gas) over the next 3 – 12 months and >120% applying $5 natural gas assumptions (more detailed discussion below).
As discussed below, three material and new dynamics have transpired that the market is largely ignoring:
Valuation snapshot: Given the dynamics above, NRG’s merchant assets are significantly under-valued based on 2014E and more importantly on 2016E / “open” (un-hedged) #s. As highlighted below, NRG’s merchant assets trade at sub-4.5x EBITDA and ~5x EBITDA-capex using $5 natural gas prices (equity trades at >30% FCF yield). If we assume $4.50 natural gas (instead of $5 bucks), implies ~4.9x EBITDA, ~6x EBITDA-capex and ~24% FCF yield.
|NRG Consolidated||Less: NYLD (1)||PF NRG "merchant"|
|$ amt||multiple||$ amt||multiple||$ amt||multiple|
|to nrg (2)|
|b||PF Net Debt||13,828||5,058||5,058||8,770|
|d||Less: 2-yrs FCF||2,200||534||534||1,666|
|f||16E EBITDA (2)||3,810||5.6x||824||11.7x||2,986||4.2x|
|h||2014E FCF - % yield||11%||5%||15%|
|i||2016E FCF - % yield||23%||9%||32%|
|(1) Includes ROFO + Edison Mission drop-downs|
|(2) Pro forma for NRG's equity stake|
|(3) Assumes $5 nat gas|
What’s NRG’s merchant assets worth: Applying relatively conservative multiples to NRG’s fleet (~8x EBITDA and sub-10x EBITDA-capex) and factoring in 2-years of FCF generation gets to a $55 - $60 / share of value (relative to current $28.50 / share or >100% upside). In the scenario where management takes a more aggressive stance to capital allocation via share repurchases, acquisitions or other shareholder-friendly approaches, my upside valuation is well north of >$60 / share.
|FV - merchant assets||Lev||PF||Shares||Px /|
|FCF||% yield||Mkt Cap||Out||Share||Current||% upside|
|Base - $4.50 gas||1,279||8.0%||15,987||335||$47.72||$28.75||66%|
|Upside - $5.00 gas||1,716||8.0%||21,455||335||$64.05||$28.75||123%|
|Downside - $4.00 gas||841||10.0%||8,414||335||$25.12||$28.75||-13%|
Downside protection: Given NRG’s merchant assets generate >$850MM of FCF over the next few years at $4 natural gas prices (i.e. mid-teens FCF yield on 2016E basis), “creating” NRG for a sub-6x EBITDA multiple in the scenario where nat gas futures do nothing (every $1 move in nat gas above $4 equates to >$850 - $900MM of additional FCF); upside optionality also from Texas markets and regional S/D dynamics (given the upward volatility in power prices this past winter, this has surprised market observers as it suggests markets are a bit more sensitive and in some cases “balanced” in regions that most believed to be far out of balance – witness New England)
Another creative trade is to consider hedging out NYLD and thereby “creating” the NRG merchant biz for sub-4.5x EBITDA and ~5x EBITDA-capex (NYLD MLP structure may limit ability to do for some folks)
|show sort by|
Are you sure you want to close this position NRG ENERGY INC?
By closing position, I’m notifying VIC Members that at today’s market price, I no longer am recommending this position.
Are you sure you want to Flag this idea NRG ENERGY INC for removal?
Flagging an idea indicates that the idea does not meet the standards of the club and you believe it should be removed from the site. Once a threshold has been reached the idea will be removed.
You currently do not have message posting privilages, there are 1 way you can get the privilage.
Apply for or reactivate your full membership
You can apply for full membership by submitting an investment idea of your own. Or if you are in reactivation status, you need to reactivate your full membership.
What is wrong with message, "".