Thursday, May 2, 2013

Excelon Buying Production in Haynesville?

In business school, we were taught that most business strategies come from a few basic models.  One is vertical integration, where the company diversifies up and down along its supply and production chain (think:  Henry Ford buying rubber plantations in Brazil).  I couldn't help but think of this when I read on Bloomberg that the nation's biggest utility Excelon "has a 'small but growing portfolio' of gas holdings in the Haynesville and Barnett shale regions of Louisiana and Texas."  Apparently the company is considering investing $3 billion in non-core but related energy businesses, including natural gas exploration and distributed solar generation.

This is not really vertical integration, more tangential investment I guess, but being conservative by nature I always get concerned when companies like this stray from their white-hot focus areas.

While it seems logical that one of the nation's largest consumers of natural gas would like to own some production itself, if only for the market intelligence, I can't help but be concerned when utilities invest in businesses outside of their proverbial wheelhouse.  Excelon had to lower its dividend rate earlier this year - heresy for a utility - to maintain its credit rating.  Clearly the company is looking for more profit and cash flow.  But buying into a cyclical energy business?  I don't know...

Utilities aren't regular companies.  They are mostly regulated entities that have to deliver at an incredibly high performance level.  But when utilities start to venture into unregulated businesses, things can get hairy.  In fairness to Excelon, the company has not made a lot of specifics on this program public, so I am a little quick to judge.

Still it is worth keeping an eye on them.  There aren't many big transactions in the Haynesville these days, so any new blood is certainly welcome.

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