NRG Energy

Ticker
$NRG
Industry
Power Gen
Type
Beaten Up
Rating
Covered
Category
General
Target Price
$53.00
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Notes

  • This is a comp to Vistra ($VST) which was also impacted by winter storm Uri in Texas. Both stocks look cheap.
Investor day presentation highlighted a path to $12.50 per share in FCFbG (FCF before growth) by 2025
Capital allocation — 2021 was dominated by Direct Energy acquisition + debt paydown; 2022 is focused on share buybacks (~$1bn) — NRG plans to have $8bn in deployable cash from 2022-2025 — $1.3bn going to dividends, $2.7bn going to buybacks, and $4bn available for opportunistic activity
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2021 — how capital was allocated
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2022 — allocation forecast
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BofA comparing valuations of IPPs to HY energy stocks
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From 2Q21 earnings transcript:
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Industry information
  • PJM (east coast generation assets) had low 2021 auction prices... No auction in 2019/2020. Lowest prices in 11 years.. Link to article
  • WSJ article on California energy challenges — link
  • Power gen retirements in 2022 — Natural gas plants retiring 1.2GW of generation
  • Exelon spun-off their generation business to create a new public comp — Constellation Energy

Financials and Valuation

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FY21 Valuation — At 8x FCF = $47 price target, at 10x FCF = $59 price target — these would equate to 8.6x EBITDA and 9.8x EBITDA — I’m simply bracketing the 3yr average multiple for NRG in calculating but I think they’ll ultimately deserve a higher multiple given the actions taken on reducing risk and volatility in the business (no longer a merchant power plant). For simplicity — call it 9x $5.90 in 2022 FCF per share for a $53 price target and 40% upside within the next 12 months.

Resources

NRG Energy ($NRG) — FY21 Update
NRG Energy ($NRG) — Initiation (11/18/21)
BofA Note — IPPs
document (26).pdf1307.4KB