Heating bills: Households to see ‘the worst of it this winter,’ strategist says
Reaves Asset Management President John Bartlett joins Yahoo Finance Live to discuss the outlook for natural gas and heating oil prices and what that means for households' utility bills this winter.
Video Transcript
AKIKO FUJITA: Well, if your summer utility bill sends a shock through your wallet, you might want to brace yourself for more high prices come winter. Some estimate households could be paying up to 25% more to heat their homes this year. Joining us now is John Bartlett. He's President of Reaves Asset Management. John, it's good to talk to you today. We just said 25%. I've seen some estimates that put it at about 35%. How painful are things about to get?
JOHN BARTLETT: Well, I think we're going to see the worst of it this winter. That's-- that's the good news. It is-- it really depends on where you live and how you heat your house and how your utility generates its electricity or buys it on your behalf.
AKIKO FUJITA: And John, talk to us a little bit about the impact of natural gas on utility companies today.
JOHN BARTLETT: Sure. Well, natural gas is the fuel that sets the price of electricity. The last-- the last generator that comes on is usually a natural gas facility, and that's the one that sets the price. Generally speaking, your utility is buying natural gas either to fire its own generating stations, or it's buying natural gas for you to heat your house. They're buying it all year long.
And when we get to the winter months, roughly half of the gas that you're burning in your house is coming out of storage. And that gas obviously was bought much earlier on in the injection season.
AKIKO FUJITA: So what's actually driving these prices to these levels? Is it a simple supply-demand dynamic?
JOHN BARTLETT: Yeah, well, in this winter, it's just simply that. And it is something that is-- as you can imagine, the best thing for high prices is really high prices. And we're seeing that at work right now. That is the confluence of supply and demand really adjusting to a little bit better sense of equilibrium.
INES FERRÉ: So how should investors play the utility space, because I'm taking a look at our YFi Interactive Board, our charts for the sectors. XLU is down more than 1%, outperforming, though, the broader markets, as you're looking at the S&P, down year to date 22%. XLE, of course, is the major one that's gaining this year. But-- so how should investors play this? Do they continue with utility stocks if they're in these, or do they sell and take some profits off the table?
JOHN BARTLETT: Well, I think as far as utilities go and their relationship to the rest of the market, what you see is what you get. And what we've experienced this year is significant outperformance really on the backs of the fear trade and also a fundamental improvement in the industry. And that that's not insignificant.
Generally speaking, if you kind of look at long periods of history, utilities tend to be fairly correlated with interest rates. But they also generally tend to do a little bit better than you might expect during periods of inflation. And that, coupled with, really, the backdrop of what's been very constructive regulation not only at the state but also at the federal level, it's-- utilities have had a good run.
And I think what you can expect is your dividend yield plus your earnings growth on an ongoing basis. There are some P/Es that are probably a little too high. And there certainly aren't any places to go bottom fishing in utilities. But again, I would go back to my earlier comment. What you see is what you get-- earnings plus dividend and a very strong outlook.
AKIKO FUJITA: I mean, is this sort of similar to what we've been seeing when oil and gas companies-- I mean, oil companies-- we're talking about natural gas here. But we've seen the profits go up on the back of consumers who are the ones that are having to pick up the load. And yet, it's been incredibly profitable and good for investors, too. I mean, is that sort of how investors should be looking at these utility names as we go into the winter months and look at these major price hikes?
JOHN BARTLETT: No, I don't think so at all. All of those companies profit on higher commodity prices. Utilities really only have their fortunes based on solid regulation and the investments that they have in their companies. So if the price of natural gas goes up, it really is a passthrough from the utility to the customer.
So it's an unfortunate situation for the customers. It also-- no utility likes to see bills go up, A, because they don't have any benefit from it, but B, it really-- it's just not good for their relationship with their customer and their regulator. So again, I don't I don't think you have to worry about whether or not the commodity is going to affect the profits of these companies. And you certainly shouldn't be investing in utilities to, say, go long, natural gas, or something like that.
So it is-- again, these are conservative investments. Plenty of stocks that yield well over 3% have their earnings growth in excess of 5%. So they-- really, the opportunity for a kind of high single digits total return is, plus or minus a little something from the stock market, is very visible at this point.
AKIKO FUJITA: Yeah. Well, a lot of Americans bracing for some sticker shock come winter. John Bartlett, President of Reaves Asset Management, appreciate your time today.
