By Steve Gelsi, MarketWatch
NEW YORK (MarketWatch) -- An expected shift to natural gas from coal for U.S. power generation will fuel mergers and acquisitions as well as capital spending in the energy sector, according to a deal-making expert.
Steve Mitnick, a partner at management consulting firm Oliver Wyman, said Wall Street may see more purchases in the vein of Consol Energy's /quotes/comstock/13*!cnx/quotes/nls/cnx (CNX 42.49, -0.01, -0.02%) bid to buy Dominion Resources' /quotes/comstock/13*!d/quotes/nls/d (D 40.68, +0.08, +0.21%) Appalachian natural gas properties for $3.5 billion in purchase announced March 15. See full story.
"2010 looks like a better year for deals and for infrastructure than last year," said Mitnick, who advises executives at S&P 500 /quotes/comstock/21z!i1:in\x (SPX 1,167, +0.86, +0.07%) companies on industry trends.
Oliver Wyman"There are a few utilities out there (like Dominion) that have had small divisions with gas recourses and now they're not small divisions any more," he said. "They're providing tangible earnings streams when regulated utilities are not. Dominion had a division and it grew to be an asset for investors."
One challenge facing natural gas verses coal is price volatility - an issue of focus now by natural gas producers and power companies.
"It's topic number one," Mitnick said. "Everybody is looking for a price point that can be somewhat sustained. Increasingly, both sides are working together in an unprecedented way. A few people see that the power sector is now transitioning to significantly more gas. The head is just starting to move."
Mitnick compared natural gas price swings to coal prices in the 1970s, when labor woes in the mining sector caused volatility. Nowadays, coal prices are stable, partly because of actions taken by both sides. He sees a similar transition happening now with natural gas.
"From the major independent gas producers, the energy majors and the big electric players, those conversations are happening for the first time and they will get worked out," he said. "That's a game-changer for using natural gas for power production."
Coal supplies about 45% of U.S. power generation, while gas supplies about 23%, according to December, 2009 figures from the Energy Information Administration. The natural gas portion is expected to grow to 30% over time, Mitnick said.
"The potential for more gas use and more gas demand from the power sector is there," Mitnick said. "It's area that will boom now."
He noted that Exelon /quotes/comstock/13*!exc/quotes/nls/exc (EXC 43.28, +0.09, +0.21%) and Progress Energy /quotes/comstock/13*!pgn/quotes/nls/pgn (PGN 39.31, +0.17, +0.43%) recently set plans to shut down coal plants and open natural gas plants after meeting with politicians and regulators.
Excel Energy /quotes/comstock/13*!xel/quotes/nls/xel (XEL 21.09, +0.05, +0.23%) is currently working with law makers in Colorado to reduce emissions. Part of that plan would be to retire or retrofit 900 megawatts of coal-fired capacity, with natural gas a likely substitute.
Mitnick said the proposed acquisition of Exxon Mobil /quotes/comstock/13*!xom/quotes/nls/xom (XOM 66.50, -0.04, -0.06%) and XTO Energy /quotes/comstock/13*!xto/quotes/nls/xto (XTO 46.87, -.00, -0.01%) signals more deals in the natural gas sector, as well as infrastructure spending.
"You'll see a tidal wave of pipeline development down the road and definitely storage infrastructure," he said. "If you talk about gas for power use, storage becomes more important. We'll also see construction of gas-fired plants."
Buck
