Just a few weeks ago I commented about how Barron’s had not picked a single utility in all of 2016. (See here) This past weekend they wrote a full page article about Vistra Energy (see here). (You can also see a short video from Barron’s discussing the stock here) Vistra Energy came out of the Energy Future Holdings (EFH) bankruptcy. It wasn’t discussed in the article, but the LBO that formed EFH was one of the largest leveraged buyouts of all time, and on an inflation adjusted basis ranks second all-time. (See rankings here.)
The article mentions that the growth of renewable generation has played a part in the difficulties encountered by independent power producers. I would say renewables have played a role in this, but the much bigger factor is the drop in natural gas prices. Look at what happened to natural gas prices in early 2008, right after the EFH deal was completed.
Source: February Utility Stats Monthly
Since natural gas fired power plants tend to be the last electricity generators to dispatch, the price of natural gas plays a very large role in determining the price of electricity. The shale revolution was completely missed by the EFH investors, and the drop in gas prices eliminated the profits that justified the high takeout. Today gas prices are nowhere near a the prices a decade ago, and no one has any hope of prices reaching that level again. Vistra has a good mix of operating assets and is generating good cash flow today, even with today’s lower gas prices. While gas could go lower, any drop would be nothing compared to what the industry has just gone through, so there would seem to be a good chance they could maintain a large amount of this cash flow going forward.