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Will Duke Energy and Piedmont Soar on Natural Gas Pipeline Plan?

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Duke Energy (DUK - Free Report) and Piedmont Natural Gas announced Tuesday the selection of Dominion Resources Inc. to build, manage, and operate a 550-mile interstate natural gas pipeline. Initially, five companies had proposed to build the pipeline for DUK and PNY; however, DRU was selected after careful project consideration to help with the pipeline that will go through parts of West Virginia, Virginia, and eastern North Carolina.

The project has been very much needed, so as to provide the region with its rapidly increasing energy needs. The pipeline will be owned by four companies, Dominion will own 45%, Duke Energy will own 40%, while Piedmont Natural Gas will own 10%, and AGL Resources 5%.

Importance of Pipeline

Natural gas is becoming increasingly important, and thanks to newer technology and innovations, such as hydraulic fracturing, natural gas is becoming a cheaper alternative for energy. Natural gas is being heavily relied upon for more of the US’s electricity due to enormous domestic supplies that were recently found. These newly found deposits have helped ensure that natural gas remains at a low price, although they also carry some risks.

The setbacks and perils of using natural gas include possible gas leakage, which when released into the atmosphere, heats up the planet far faster than other greenhouse gas emissions. Fracking, has also seen some stern protests, regarding how the technique is so heavily reliant on water, and how it may contaminate nearby water if not carried out properly.

It is important to note that natural gas burns far cleaner than coal, which is a key fuel for electricity in the U.S. Burning natural gas emits almost none of the harmful chemicals, and about half of carbon dioxide (arguably responsible for climate change), as compared to coal. Advanced electricity generation also has the potential to significantly lower greenhouse gas emissions, and especially so when using natural gas for electricity.

The project will provide enhanced and more convenient access to newer natural gas deposits, which will in turn, lower extraction costs, as well as consumers’ costs. Another tangible advantage of using natural gas for electricity is how it can be cost-stable during brutal winters or extremely hot summers.

Duke Energy CEO Lynn Good has already stated that the company has retired and stopped using half of its coal fleet in the last five years, and the energy firm has plans to continue down that path, especially considering how there are more and more regulations on coal-fired power plants.

The pipeline has been named “Atlantic Coast Pipeline,” and it is estimated to jumpstart economic development and job creation in the region. The pipeline’s completion is highly anticipated by many counties in the region which want to attract more energy business, especially counties located along Interstate 95 in eastern North Carolina.

The pipeline is mainly designed to tap into two of the growing supplies of natural gas formation known as the Marcellus and Utica shales, which comprise over 25% of the nation’s gas deposits. The pipeline will also enable the region to be more energy sufficient and efficient, considering how Louisiana, Texas, and Oklahoma have always traditionally been the states to export gas to the East Coast.

The project is estimated to cost between $4.5 billion and $5 billion, which will allow for an initial capacity of 1.5 billion cubic feet/day of natural gas. The assignment will require Federal Energy Regulatory Commission approval, which Dominion will be actively seeking in the summer of 2016.

The pipeline is most likely to be used by six utilities companies and those that will purchase a large stake of the pipeline’s capacity to transport natural gas. The purchasing will be carried out through 20 year contracts, subject to state regulatory approval. These companies include Duke Energy Carolinas (DUK - Free Report) , Duke Energy Progress, Virginia Power Services Energy, Piedmont Natural Gas , Virginia Natural Gas, and PSNC Energy.

Round Up/Conclusion

DUK and PNY will have to weigh in on the costs and benefits of construction, and also the completion date, to see whether the pipeline will really boost both companies or not. The pipeline has triggered protests in nearby counties and regions, which feel threatened by the grand project, despite the fact that it will be creating jobs. Many of these demonstrations are due to landowners’ fears that the pipeline could cause contamination, and noise, which would lower their property values, threaten water supply, and shun tourists.

On the other hand, investors who are looking to put their buck on natural gas and utility stocks ought to keep an eye for the DUK, PNY, and maybe even AGL. Make no mistake, these stocks will be impacted, though it could be over the longer term. Still, all it takes is one big announcement and either one of the stocks may soar; however, examining financial reports is crucial before any investment decision.
 
Stock Financials

DUK financials don’t look shabby at all. For the quarter ended on (6/30), DUK had a dividend yield of $0.795/share, and as of last fiscal quarter, the company has mustered $5,949 million in sales, $2,195 million in gross profit, and a positive net income of +$609 million. DUK retains a diluted net EPS of $0.86/share. DUK also has a forward P/E ratio of 16.13, slightly better than PNY’s forward P/E ratio, but slightly worse than AGL’s P/E ratio.

For the last quarter, DUK positively surprised the Zacks Consensus Estimate EPS of $1.00/share, by +11%, or 11 cents (posting $1.11/share). A lot of analysts have downgraded their estimates for the current quarter’s (9/2014) EPS estimates though, moving the consensus from $1.59/share to $1.52/share as of 90 days ago. As of now, DUK has an Earnings ESP positive surprise of +0.66%. DUK closed Tuesday at $73.45/share.



PNY financials don’t look extraordinarily bright for the upcoming quarter. For the quarter ended on (4/30), PNY had a dividend yield of $0.32/share, and as of last fiscal quarter, the company has mustered $462.25 million in sales, $141.33 million in gross profit, and a positive net income of +$62.54 million. PNY retains a diluted net EPS of $0.80/share. PNY also has a forward P/E ratio of 19.73, slightly worse than DUK and AGL’s forward P/E ratios.

For the last quarter, PNY positively surprised the Zacks Consensus Estimate EPS of $0.75/share, by +6.67%, or 5 cents (posting $0.80/share). A lot of analysts have been neutral on their estimates for the current quarter’s (7/2014) EPS estimates though, and the consensus has stayed the same at -$0.06/share. As of now, PNY has an Earnings ESP surprise of 0.00%. PNY closed Tuesday at $37.17/share.



AGL financials don’t look bad at all. For the quarter ended on (6/30), AGL had a dividend yield of $0.307/share, and as of last fiscal quarter, the company has mustered $902 million in sales, $289 million in gross profit, and a positive net income of +$64 million. AGL retains a diluted net EPS of $0.54/share. AGL also has a forward P/E ratio of 11.87, slightly better than DUK’s forward P/E ratio, but far better than PNY’s P/E ratio.

For the last quarter, AGL negatively surprised the Zacks Consensus Estimate EPS of $0.41/share, by -2.44%, or 1 cent (posting $0.40/share). One analyst has downgraded his or her estimates for the current quarter’s (9/2014) EPS estimates though, however the consensus remained pretty much the same, sitting at $0.25/share.




As of now, AGL has an Earnings ESP positive surprise of +12.00%. AGL closed Tuesday at $13.75/share.
DUK retains a Zacks Rank #3 (Hold), PNY retains a Zacks Rank #2 (Buy), and AGL has a Zacks Rank #2 (Buy). Since DUK is ranked lower than PNY and AGL, we will assume that for the next upcoming months, PNY and  AGL are better investments than DUK, and since AGL’s P/E ratio is lower than PNY’s, it seems like a safe bet, despite the fact that it negatively surprised estimates last quarter.

PNY has the smallest market capitalization of all three companies, and it may be safer to invest in a larger, more solid company. When we examine Price and EPS estimates history for all 3 stocks, we can see that PNY and DUK are far safer investments than AGL, as they have positively surprised more consistently in the past. Investors should remember how DUK is far larger than both PNY and AGL in terms of market capitalization, and therefore it is likely to be less volatile company.

Investors should be careful when investing in DUK, however, with a net income of $609 million, DUK seems to be the best investment out of all these three natural gas energy stocks, especially considering how it surprised last quarter by about +11%. It is likely to continue growing and investors should keep a keen eye on the stock in the near term.

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