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Duke Energy to Sell Bulk of International Assets for $2.4B


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Duke Energy Corporation (DUK - Analyst Report) has recently signed twin sell out deals, worth a total value of $2.4 billion; to finally reduce its international exposure. This leaves the company with the 25% equity stake it has in National Methanol Company (NMC) overseas, which its management plans to retain. The after-tax gains from the transactions are expected to contribute to the company’s debt reduction.

The Twin Deals

Per the terms of one of the contracts, I Squared Capital – an independent global infrastructure investment manager – will purchase Duke Energy’s international assets situated in Peru, Chile, Ecuador, Guatemala, El Salvador and Argentina, for a total enterprise value of $1.2 billion. This will mark the company’s final exit from its Latin American business.

These Latin American assets of Duke Energy include hydroelectric and natural gas generation plants, transmission infrastructure and natural gas processing facilities, totaling 2,300 megawatt (MW) of installed capacity. This deal requires Argentina’s antitrust approval, although the approval is not a condition of closing.

Under the terms of the second agreement, clean energy company – China Three Gorges Corporation – has agreed to acquire Duke Energy’s entire Brazilian business, consisting of eight hydroelectric plants and two small hydro power plants, for a total of $1.2 billion. These assets represent an accumulative installed capacity of 2,090 MW.


Reason Behind the Sell Out

Duke Energy’s International Energy segment has been underperforming for past few quarters, owing to ongoing draught conditions in Brazil, decreased demand in both Brazil and Latin America, as well as unfavorable foreign exchange rates hampering the company’s results overseas. Consequently, in Feb, 2016, Duke Energy announced its near term plan of divesting its International Energy business segment, excluding the equity investment in NMC and give more emphasis on growing its operations in the domestic front.

Management expected this sale to improve the company’s risk profile and enhance its ability to generate more consistent earnings and cash flows over time.

Our View

In the business world, there lies no value in retaining non-profitable assets. Considering the widespread volatility prevailing across Latin America, as well as persistent fluctuations observable in oil price amid skepticism of an OPEC production cut, it has become quite difficult for energy stocks to survive, especially in low-demand regions like Latin America.

Inevitably, Duke Energy’s future prospects in its international business segment are bleak, at least in the near term. Hence, a divestment strategy is a wise option to adopt. We believe, with this sell out, the company will now be able to focus on nurturing its core domestic business, wherein it has recently completed the $1.8 billion worth Piedmont Natural Gas takeover.

Notably this latest buyout will increase the company’s total regulated business mix to over 90%, thereby supporting its earnings and dividend growth objectives. Moreover, the acquisition will be accretive to its earnings in 2017.

Zacks Rank & Stocks to Consider

Duke Energy currently carries a Zacks Rank # 3 (Hold). A few better-ranked stocks in the utility sector include DTE Energy Company (DTE - Analyst Report) , Edison International (EIX - Analyst Report) and Xcel Energy Inc. (XEL - Analyst Report) . All the three stocks carry a Zacks Rank #2 (Buy). You can seethe complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

DTE Energy has witnessed a 0.6% rise in its last 5 days’ stock price. This company’s current year consensus estimate improved 0.8% in last 7 days.

Edison International has witnessed a 1.08% rise in its last 5 days’ stock price. On average, the company witnessed an earnings surprise of 8.00% in trailing 4 quarters.

Xcel Energy has witnessed a 0.5% rise in its last 5 days’ stock price. On average, the company witnessed an earnings surprise of 8.00% in trailing 4 quarters.

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