NRG Energy: Texas Weather, Elliott’s Displeasure Heating Up

We are reaffirming our $37 fair value estimate for NRG Energy NRG after activist investor Elliott Management published a letter deriding the strategy NRG management detailed at the company’s investor day on June 22. At the same time, hot weather in NRG’s core Texas market should boost earnings this year, masking any near-term performance shortfalls.

We’re not surprised at Elliott’s dissatisfaction and call to replace CEO Mauricio Gutierrez given NRG rejected Elliott’s proposal to unwind its $5.2 billion Vivint acquisition. We always thought that unwinding the deal was unlikely and not in investors’ best interests given the costs involved.

Although we think the Vivint deal alone is value-neutral, NRG’s goal to achieve $300 million of synergies and $150 million of cost savings could add $3 per share of value. We remain skeptical and do not include any material benefit from synergies and cost savings. We continue to believe the retail energy, home services, and power generation businesses do not have sustainable competitive advantages.

Aside from Elliott, which held a 13% economic interest in May, the market seemed to like management’s plan, sending the stock up 6% in the last three trading days.

Elliott supports NRG’s plan to return the bulk of its cash flow—potentially more than $6.9 billion through 2027—to shareholders. This effectively eliminates growth and could increase value if the stock continues trading below our fair value estimate. A big stock rally would make that strategy less appealing.

The potential for record-breaking electricity demand and tight generation supply margins in Texas this week should help NRG’s retail and wholesale generation businesses. If hot summer weather continues, we expect NRG will hit the high end of management’s $3.0 billion-$3.25 billion EBITDA guidance for 2023 even if Vivint synergies are slow to develop. Weather doesn’t have a material impact on our fair value estimate since we assume normal weather in our long-term forecasts.