We maintain our Neutral recommendation on OGE Energy Corporation (OGE - Analyst Report), the largest electric utility in Oklahoma, with well-positioned regulated utility and unregulated midstream gas businesses.
Going forward, the company offers stable regulated utility businesses, operates in a strong Oklahoma economy, has a bias towards fixed fee in its unregulated natural gas business, offers a high dividend yield and employs ongoing infrastructure improvement programs.
All of the above positives have already been priced in the current valuation, leaving little room for further upside in the near term. Also, we remain concerned about the volatility in its commodity business and pending regulatory cases, along with the unfavorable macro backdrop.
OGE Energy Corporation distributes natural gas and electricity through its subsidiaries (Oklahoma Gas and Electric Company or OG&E, and Enogex) primarily in the south central United States. It competes with the likes of National Grid plc (NGG - Snapshot Report) and TransAlta Corporation (TAC - Snapshot Report).
OGE Energy is pursuing an aggressive energy efficiency program, investing in renewable energy technologies and upgrading its infrastructure. The company plans to invest $4.6 billion over the period 2011–2016 to this end. Recent investments (Redbud, wind development) have positioned the company on a strong platform in terms of compliance with environmental regulations and to meet its 5%–7% long-term EPS growth target.
OGE Energy operates in Oklahoma, where unemployment is significantly lower than the national average. The unemployment rate for Oklahoma in November 2011 was 6.1%, compared to the national average hovering around 8.6%. The resilience in the economy of its service area bodes well for the company.
Also, OGE Energy is smart in leveraging the topography of Oklahoma to develop wind based energy assets. Looking forward, lower-than-average electricity rates provide the company with significant scope for growth.
Enogex’s natural gas processing volumes are shifting steadily toward a more fixed fee-based business. The company is focusing on fixed-fee business through conversion of existing contracts and by entering into new fixed fee projects. Volume of fixed fee has increased from 8% in 2006 to 28% in 2010. Through hedging, the company has also significantly reduced its exposure to commodity spread volatility.
OGE Energy has a strong balance sheet among its peers with a low long-term debt-to-capitalization of 49.4% at the end of the third quarter of 2011. Management has also rewarded shareholders by returning a substantial portion of its free cash flow through incremental dividend over the years with a yield of 2.6%. In December 2011, the company increased its quarterly dividend on its common stock from $0.375 to $0.3925 per common share. Thus, the annualized dividend has increased from $1.50 to $1.57. Looking ahead, the company’s dividend appears sustainable and secure, given management’s stated goal of 2% dividend growth annually through 2012 along with investment grade credit ratings. Thus, in the near-term horizon, OGE Energy holds a Zacks #2 Rank, which translates into a short-term 'Buy' rating.