Spark Energy Is A 'Pure Play Competitive Retailer'

Ladenburg Thalmann has started coverage of Spark Energy Inc (NASDAQ: SPKE) with a Neutral rating and $27 price target, saying that "the company's unique ownership structure supports M&A activity as compared to traditionally-structured competitors."

The Rating And Price Target

"While SPKE has engaged in some third-party acquisitions in the past, its relationship with Natural Gas & Electric (NG&E), fully owned by SPKE's founder and sponsor W. Keith Maxwell III, allows the company to partake in drop-down style acquisitions that allow for significantly reduced risks, higher realized synergies, and the maintenance of a conservative capital structure," analyst Tanner James wrote in a note.

However, the company's "complex corporate structure concentrates a significant amount of control in the company's sponsor," and there is risk to margins from commodity price volatility or extreme weather phenomena.

James noted the company's organic customer growth of between 0 percent and 3 percent on an annual basis, considerable geographic diversity, low fixed costs and attractive common dividend yield of 5.6 percent.

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The analyst is also encouraged by the company's current leverage ratio of approximately 0.3x as of June 2016 and a working capital line that removes the need for a costly credit sleeve.

Looking Ahead

On the other hand, James also pointed out Spark Energy's exposure to possible regulatory reform may impact the fundamentals of the retail energy market.

"Our PF2016/PF2017 adjusted EBITDA estimates are $80.3/$75.3 million," James added.

Shares of Spark Energy closed Thursday's regular trading at $26.02.

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