A Utility and Natural Gas Play (OGE)
Seasonal trading is nothing new. Commodity traders frequently review charts looking for the best opportunity based on seasonal trends, often based on the weather. Speculators might purchase corn futures, or the Teucrium Corn Fund (CORN), during a dry season expecting prices to rise on a thin harvest. Energy traders do the same thing with unleaded futures based on inflated expectations of summer driving.
Weather is also a factor for stocks. For instance, utility companies tend to trend upward in especially hot summers. It makes sense. Investors expect energy output to be higher as consumers cool their homes and businesses cool their offices. That’s important to consider given this summer’s weather pattern. Whatever is happening outside your window, the summer of 2010 has been especially hot in many areas of the U.S.
A recent analysis from Ned Davis Research reported, “Cooling degree days (CDD), measured as monthly deviation from trend, rose to 56 in June, the most since August 2007. CDD has been at least as high on only three other occasions since 1983, all of which were mid-summer months that registered strong growth in utilities output.” Higher utility output means more revenue for utility companies.
This may be good news for revenues, but what about expenses? How do these utilities generate electricity, and are their expenses reasonable compared to revenues? Each utility generates electricity in different ways. Companies may use coal, wind, natural gas, or even nuclear power to create electricity. Right now, those using natural gas are in a particularly attractive situation. Why? Because natural gas prices are low and will probably stay that way for some time.
Natural gas has been trending down since mid-2008 when it reached almost $14 per million BTU (MMBtu). Since then prices have settled down near $4.60 MMBtu – a virtual crash in the natural gas market. This is horrible news for anyone who went long in 2008 but great news for companies dependent on natural gas.
OGE Energy Corporation (OGE) stands to benefit from the seasonal rise in the utility sector. OGE is the Oklahoma City-based parent company of OG&E Electric Services, Enogex LLC, and OGE Energy Resources. The firm services utility customers in Oklahoma and western Arkansas. They generate electricity from coal and wind, but their largest source is natural gas. Low prices for natural gas are keeping their expenses low during this hot summer.
The numbers look good for OGE as well. Their profit margins are healthy at 8.5% with $3.14 billion in revenue. Year-over-year earnings growth is an astounding 44%. The charts tend to agree with these positive numbers. OGE stock prices rose with the broader market since March 2009 and peaked in early May. Later that month, the shares lost steam, trading as low as $34. Since then, it has been trending higher, and last week prices broke above their June peak and are once again trading above $38.
We like OGE’s chances to move above $42 and resume a longer-term trend. To own a seasonal utility with low expenses in a long-term uptrend, buy OGE.
Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.