Dive Brief:
- Natural gas investments are growing in significance for Duke Energy, the company said Monday, following the announcement it would purchase Piedmont Natural Gas for $4.9 billion.
- Alongside Duke's move to develop the Atlantic Coast Pipeline with Dominion, the investments help paint a picture of growing interest in gas infrastructure across many sectors of the electric industry, the Charlotte Business Journal reports.
- But natural gas commodity prices have remained at historic lows, leading to questions about the investments' returns. At least one analyst from Citigroup has said Duke is overpaying for Piedmont "in almost any reasonable scenario."
Dive Insight:
Duke Energy's decision to buy natural gas distributor Piedmont will not be the company's last investment in the fuel space, officials said Monday.
According to Charlotte Business Journal, Duke CEO Lynn Good told analysts that “We see opportunities with the establishment of the platform to expand capital deployment. ... I think infrastructure investment around natural gas is going to become increasingly important over time.”
Duke announced this week it would purchase Piedmont for almost $5 billion, adding roughly 1 million new gas customers to Duke's service territory. The deal offers Piedmont investors $60 per share, a 40% premium on the company's closing price on Friday, which has some questioning the economics.
But the company said it intends to make even more investments in the space, and Piedmont is one of Duke's partners on the proposed 550-mile Atlantic Coast Pipeline, a major project slated to transport natural gas from West Virginia down through North Carolina.
The acquisition could return Duke to the gas business for the first time since 2007 when it spun off pipeline operator Spectra Energy.
All across the country, power companies are beginning to show an interest in gas investments driven largely by low commodity prices. Most notably, Florida Power & Light expects to save customers almost $50 million through its investments in Oklahoma shale wells, though that program has gotten off to a rocky start and, at least initially, is costing consumers money.
While gas demand around the country is rising, the U.S. Energy Information Administration estimates supply is rising at about twice that rate. Henry Hub gas, the liquid point often used as a benchmark, traded at $3.84 per thousand cubic feet (Mcf) in 2013. Next year, EIA predicts $3.14/Mcf.
So while the jury remains out on the gas investments, Duke's Piedmont investment has drawn skepticism from analysts at Citigroup. The 40% premium is too much "in almost any reasonable scenario," according to Citigroup’s Praful Mehta. "No synergy bridge gets you to $1.4B," a reference to the premium Duke is paying.