Energy, Energy Service, Natural Gas &amp; Oil Sectors

Top 490. Jun 21, 2001 11:25 AM

» lcha - If you missed 'em before...

Taking the Contrarian View on Energy
By Christopher Edmonds
Special to TheStreet.com
6/21/01 9:55 AM ET

WASHINGTON -- Be careful. The energy tape may shock
you.

As crude oil, gasoline and natural
gas inventories grow, exploration
and production stocks are on the
skids. Now, threats of price caps
and additional re-regulation have
power companies on the blink. The
energy-service stocks -- the drillers
and equipment providers -- never
really got out of the starting blocks
in January.

Jim Cramer best summed it up
Wednesday evening: Momentum has left the sector.

In a matter of just weeks, energy has gone from managers'
must-have list to the must-halve list, with investors quickly
whittling positions across the board. "The squeal factor is
increasing quickly among energy investors," says Dan
Pickering, director of research at Simmons & Co., a
Houston energy investment firm, and a member of the TSC
Energy Roundtable.

Pickering thinks new money may avoid the sector, at least in
the short run. "Nobody wants to catch a falling knife right
now," he says. "A lot of investors are willing to miss an
opportunity that the sector might make a small move to the
upside on the chance there is another 5% to 10% on the
downside."

Politics and Prices: The Worries Continue

Among the stocks hardest hit in the recent selloff are the
independent power producers, the companies that supply
electricity to California and other states to keep the lights on.
With the Federal Energy Regulatory Commission
recently restricting prices for power sold to Western
markets and congressional rhetoric threatening re-regulation
of all power markets, investors are squeamish about the
future growth of companies like Calpine (CPN:NYSE -
news - commentary), AES (AES:NYSE - news -
commentary) and Dynegy (DYN:NYSE - news -
commentary). The smaller-cap names with less liquidity,
such as Orion Power (ORN:NYSE - news - commentary)
and Aquila (ILA:NYSE - news - commentary), have felt
even greater trading pressures.

With both oil and natural gas storage levels increasing at an
unexpectedly quick pace, commodity prices have felt
pressure, which in turn has dampened enthusiasm for the
exploration-and-production and energy-service stocks.
Want to see ugly? Just look at the charts of such companies
as Apache (APA:NYSE - news - commentary), Anadarko
(APC:NYSE - news - commentary) or Burlington
Resources (BR:NYSE - news - commentary) in the E&P
space or Halliburton (HAL:NYSE - news - commentary),
Smith International (SII:NYSE - news - commentary) or
Rowan (RDS:NYSE - news - commentary) among the
energy-service carnage.

The recent action is a clear pattern. As Doug Kass pointed
out a few weeks ago, energy has been a crowded trade.
When perceptions began to change, the momentum shifted
and negativity spread. "Energy stocks are seeing multiple
compression, not earnings reductions," opined Pickering.
"Stocks are going down, and they look cheaper. That makes
investors ask themselves what are they missing and are
earnings really going to be what they appear to be. That just
feeds on itself."

Fundamentals to the Rescue?

Can a return to a fundamental focus help pull energy stocks
out of the doldrums? In the near term, that will be tough.
However, in the coming weeks and months, keep your eyes
on the following data for some evidence of life in the sector:

Second-quarter earnings. Unlike the first quarter,
when no surprise was good enough to propel the
stocks higher, second-quarter results could fuel a relief
rally. The sentiment shift has been remarkable. Most
companies should modestly beat consensus estimates.
Listen carefully to the conference calls: The outlook
will be important. Especially focus on what E&P and
energy-service companies cite as their benchmark price
for crude and natural gas. I'm betting estimates are still
based on below-market prices, even with the recent
commodity selloff. That would provide good earnings
visibility ahead.

Storage and inventory data. Both crude and natural
gas storage growth have been much greater than
expected. That has pressured commodity prices and
hence stock prices, especially of E&P companies. I
still believe that natural gas prices will rise noticeably as
power consumption increases this summer.
Remember, this is only June. Just like investors and
commodities traders quickly forgot about the gas
shortage in March, they too will quickly forget about
the excess supply once withdrawals begin.

Rig utilization. Drilling rigs in use continue to push
capacity. As summer drilling activity picks up, watch
the rig-count number. If it heads higher, that means
demand will push supply, prices will rise and new and
refurbished rigs will come to market. That is a
fundamental positive for energy-services stocks.

Corporate combinations. This is a real wild card, but
after the Barrett-Williams combination, there is still
talk of more mergers, especially in the natural gas
space. A deal between a major integrated oil company
such as ExxonMobil (XOM:NYSE - news -
commentary) or Shell (RD:NYSE - news -
commentary) and a large E&P company could help
reassure investors that the large players think the
natural gas price story is sustainable. Such a move
should provide at least short-term support for the
stocks. As E&P prices have come off their highs,
murmurs about possible deals are beginning to surface
once again.

Moderation in political rhetoric. This is both a wild
card and the hardest of the indicators to measure.
However, congressional hearings typically give way to
congressional inaction. Eventually, California Gov.
Gray Davis' rhetoric will become stale and receive only
back-page coverage. As they say, out of sight, out of
mind. (I don't look for this to happen anytime soon.)

Economic wild card. The other wild card is the
economy. The energy recovery scenario assumes a
stable economy. The economy doesn't have to grow at
breakneck speed, but signs of a prolonged or deeper
slowdown are bad for energy. Says Pickering: "If the
economy really slows from here, energy demand will
follow. That wouldn't be good for the stocks."

Middle East wild card. I don't think you have real
worries here. OPEC is committed to the $28 target
and the $25-$31 price band, and that looks like it will
hold. That provides good support for current earnings
estimates. Iraq continues to be an annoyance, but
that's about it. While the West Bank and Gaza violence
is troubling, other Arab nations are yet to show any
interest at all in Palestinian affairs this time around.

Cramer is right: This kind of pain is no fun for anyone. It
may very well get worse before it gets better. However, if
you key on these indicators, you'll have a good chance to
spot the turn.

Pickering says if you can stand the pain, now might be the
time to start nibbling. "We are locked into a trading range --
we have been for a year," he says. "We are at the bottom of
the range. Unless you think we are headed for an economic
meltdown, you have to buy the stocks when nobody else
wants to. That is the only way to make absolute returns in
this kind of market."

He may be contrarian, but like Kass' suggestion that energy
was a crowded trade, many times that's a good way to make
money. "We could see another 5% to the downside, but I
refuse to get too negative because that is what everyone is
doing now," Pickering says. "And, you generally make
money in energy by being contrarian on a trading basis."

Why should this time be any different?

End of Article

Most of my NG stocks have been hammered the last couple of weeks. P/Es that had SOARED into the low teens are now back down to single digits. I'm doing some buying again for the first time in months. Bottom line is the companies I own are very profitable, even at $3.50 gas and $22 oil and have even better cash flows. My view is longer term and this latest downturn is a great buying opportunity for me.

-- posted by lcha

Top 491. Jun 21, 2001 12:46 PM

» Rande - Re: If you missed 'em before...

In response to message posted by lcha:

Yeah, buildup in crude/gasoline/NG inventories coupled with the FERC getting real about price bands and potential $9 billion in consumer refunds has put a damper on the sector in general. XLE is down over 9% since the beginning of May. Another great example of what can happen with performance chasing and sector betting.

-- posted by Rande

Top 492. Jun 21, 2001 2:34 PM

» lcha - Re: Re: If you missed 'em before...

In response to message posted by Rande:

There is nothing wrong with sector betting if

1) You really understand the sector you are betting on.

2) You keep your total sector investment to no more than 10-15% of your portfolio.

Most people should not be making sector bets on energy.

I still believe the long term environment(next 5 years) for energy stocks is favorable and view these pullbacks as a gift.

-- posted by lcha

http://www.sfgate.com/cgi-bin/article.cg...

Top 493. Jun 22, 2001 6:01 AM

» Rande - Saw that Enron's CEO got a pie in the face yesterday as he was

Saw that Enron's CEO got a pie in the face yesterday as he was set to speak at the Commonwealth Club. The only question is, was it an angry protestor....or an angry shareholder?

Texas power firm's shares falling

Power baron Enron finds fortunes fading

There's trouble in Texas.

Enron Corp., the Houston power firm that's profited mightily during California's energy crisis, is suffering a surprising lack of popularity on Wall Street.

While all eyes have been on Enron's enormous profits here and its enormous pull in Washington, D.C., the reputed titan of the newly incarnated, free-wheeling power industry has lost half its market capitalization -- more than $30 billion -- since its peak in August.

Forgive Californians for savoring a bit of schadenfreude over the Houston boys' reversal of fortunes. But what gives? Isn't this the company that was fattening up on the backs of the state's beleaguered utilities, residents and state budget? Isn't this the company with such close ties to the Bush administration that Kenneth Lay, Enron's chairman, was reported to have interviewed a candidate for a job on the commission that regulates his company?

Yup. That Enron.

On Monday, Enron shares hit a 52-week low of $43.07, after the Federal Energy Regulatory Commission decided to apply the same price controls to power marketers such as Enron that had applied to power-generating companies for months. That's a far cry from August, when the company's shares peaked at $90.

"There's a whole kaleidoscope of issues that Enron is being challenged with in the marketplace right now, none of which on the surface is a major deal," said Donato J. Eassey, an analyst with Merrill Lynch Global Securities in Houston. "But when you combine them all . . . I think what's happening here is you have a crescendo with this FERC announcement. You have people saying, 'OK, the growth rate is now in question.' "

That growth rate was an eye-popping 88.82 percent in revenues for the United States on a two-year average, and nearly 98 percent in the rest of the world. Enron officials did not respond to a request for interviews, but as the stock continued to drop Tuesday morning, chief executive Jeff Skilling issued a statement to the markets in which he reiterated "strong confidence" in its earnings guidance. The stock rebounded slightly throughout the week, closing at $44.05 yesterday.

In a speech at the Commonwealth Club last night, Skilling blamed regulatory interference with the "free market" for investor flight from his company.

"Our stock prices have gotten hammered," he said. "They're half what they were a year ago."

Tumbling stock prices weren't the only bad news for Skilling last night. A protester pelted the executive with a berry pie just before he began speaking. As Skilling used paper towels to wipe the pie from his face, a woman was arrested on battery and malicious mischief charges.

Enron isn't the only company with stock prices that soared in tandem with California's power crisis and are now suddenly headed south. Shares of Reliant Energy Inc., AES Inc. and Williams Companies Inc., which generate and sell electricity in California, and El Paso Energy Corp., which sells natural gas here, are all trading near 52-week lows.

The main culprit appears to be the suddenly serious talk in Washington about power price controls, re-regulation and now, the possibility of big refunds being ordered for California. Even Calpine Corp. of San Jose, which has developed a reputation as an industry good guy because it has not played the spot market and has not been accused of manipulative tactics, dropped nearly 7 percent yesterday, to $37.10. But none of the companies has been hit as hard as Enron.

Such a drastic drop in market capitalization poses serious problems for any company. It leaves it less money to invest in its own growth, and because executive compensation is so closely tied to stock price, a sharp decline makes it more difficult to retain talented leaders.

While Enron's power wholesaling division seems to be doing fine, the firm has been buffeted by disappointments in other lines of business and other regions in recent months. In the financial press, the continuing knock on Enron is that its business lines are so new and complex, and the company is so secretive about its operations, that analysts and fund managers don't feel confident in their understanding of what it does.

A look at the firm's recent troubles exemplifies its diversity.

For instance, Enron has engaged in repeated battles with the state government of Maharashtra in India over a 2,184-megawatt power plant there. The Dahbol Power Co., which is 65 percent controlled by Enron, stopped construction on a second phase of the project on Sunday, claiming it is owed $48 million by the Maharashtra State Electricity Board. The state has accused Enron of charging too much and not generating enough, and stopped buying power from the plant last month.

Closer to home, Enron has struggled with its investments in fiber-optic bandwidth. The company buys and sells unused, high-speed bandwidth space, treating it like a commodity as it does electricity, coal or natural gas. But the fiber-optic sector has imploded in recent weeks as it has become clear that for all the long-distance cable laid in the ground, there have not been enough "last mile" connections set up for users to actually take advantage of it. Earlier this year, Enron scuttled plans for a joint venture with Blockbuster to offer what it called "video on demand," in which customers at home would be able to select a video of their choice for a fee and have it transmitted via fiber-optic cables.

Then there was the FERC ruling. For months, the agency had resisted aggressive price controls in the West, preferring to let the market run its course. But as control of the U.S. Senate was handed to Democrats this month and President Bush appointed a tough Texan regulator named Patrick Wood III to the commission, the agency changed its tune. It expanded price controls to all hours of the day, spread the controls throughout the Western region and brought previously excluded power marketers under the tent.

So under current calculations, that means Enron could sell power for no more than $108 per megawatt in a shortage and about $90 during normal hours -- far short of the hundreds of dollars that companies were regularly charging during the past year.

In part, the company's gyrating stock price reflects the volatile nature of the businesses Enron has decided to pursue. And the hard-charging company has a reputation for going aggressively into entirely new markets. But sometimes that approach gets it in trouble, as was the case last year, when Enron had to take a $400 million charge for its failed investment in Azurix, a global water company that set out to make a commodity out of water supply the same way it had done for electricity service, as governments privatized their water systems. The opportunities never materialized.

Add it all together and Enron has a tough time supporting a price-earnings ratio of nearly 39, considerably above the liberal standard of health, which is 25. The company had less than $1 billion in profits on more than $100 billion in revenues last year. Still, a survey by Thomson Financial/First Call found that analysts expect Enron to deliver earnings of 42 cents per share in the second quarter (up from 34 cents last year), and $1.79 per share on the year. Most maintain a strong "buy" rating on the stock.

But investors with big positions in Enron have taken a hit. Hardest-put of them will be the Janus funds, which, as Enron's largest mutual fund investor, held nearly $3.33 billion of its stock as of the end of April.

In a semiannual report to investors, John Schreiber, a portfolio manager, said the stock price of the "new-age energy merchant" was a victim of negative psychology resulting from the California energy crisis. Janus declined to make fund managers available for interviews.

"There are tremendous rewards for being first into new markets," said Raymond Niles, an energy analyst with Salomon Smith Barney in New York. "When you're an aggressive first-mover, from time to time you're going to make mistakes. But I don't think any of the mistakes Enron has made hit the core of the company."

-- posted by Rande

Top 494. Jun 22, 2001 10:57 PM

» JenL_2 - Re: If you missed 'em before...

In response to message posted by lcha:

Thanks for the article Icha and for your opinions on the sector for the longterm. Let's take a look at some of the stocks mentioned in the article...

<img src="http://pvcharts.quicken.com/bin/icenter...." width=470 height=250>
Oil & NG Stocks

.....Jen

-- posted by JenL_2

http://interactive.wsj.com/articles/SB99...

Top 495. Jun 23, 2001 6:16 AM

» lcha - Beaten Down Energy

Power Plays
Beaten-down energy stocks look attractive

By Cheryl Strauss Einhorn

The Federal Energy Regulatory Commission last week voted to extend controls on California power prices to 10 other Western states and to keep them in force every day, rather than just during shortages. The news sent share prices tumbling, not only for energy trading and marketing companies, such as Enron, but also for alternative energy providers, such as Plug Power, and outfits that build and operate power plants, such as Calpine and NS Group. The decision dampened expectations for the profitability of these industries, in part because capped prices will reduce incentives to build power plants and to find new energy sources.

While regulators' decision to "mitigate" prices is popular with consumers, it does nothing to fix the underlying energy problem. For the companies being vilified are exactly those that need the most investment to expand energy supplies. Their shares' selloff may make them ripe for picking. With their services a necessity, these companies should find politicians willing to come up with tax breaks and other incentives to offset the price caps and boost the supply of electricity.

Donato Eassey, a Merrill Lynch analyst who follows electric, natural-gas and other energy companies, thinks the stocks are "now well oversold." For "while there still remains a long road ahead to navigate through the California chaos, we believe the crushing political pressures, which have helped decimate over $45 billion in energy merchant market cap since the beginning of the year [for an average decline of 27%], may be in an ebbing mode."

Which companies look best? Perhaps Sempra Energy, which signed a preliminary agreement last week with the State of California to settle its $750 million in undercollected power costs. The settlement should not have any earnings impact, in part because the company is well reserved. This company is one of the very few energy trading and marketing shops that hasn't suffered a big stock setback in the past month. Eassey describes it as "holding in there like a rock." Sempra's share price is unchanged during the past month and is actually up 18% this year.

Eassey says the stock has held up well, in part because it has been undervalued as investors have failed to recognize that the company does much more than generate energy: "It has a sizable trading and marketing arm." Now, though, he thinks it will benefit from being the largest combination U.S. gas and electric utility; its assets, he says, mean the company "has a lot of shock-absorbing capacity."

--------------------------------------------------------------------------------

The fact is price caps, reductions in price, loss of favor, etc... do not add ANY NG or power to our supply. This economic slowdown is also slowing down energy consumption. When the economy picks up, so will demand. We better be ready.

-- posted by lcha

Top 496. Jun 23, 2001 6:43 AM

» Rande - Best "Energy Play"

As of 3/31/01, the Total Stock Market Index (Wilshire 5000) had a sector weightig of 6.3% energy and 9.4% utilities. Is nearly 16% enough? You can try to outstmart the market by getting into or out of various sectors with overweighted or underweighted positions at just the right time, hoping for the rest of your life that you'll be right more often than wrong. Or, you can let the market decide for you.

-- posted by Rande

Top 497. Jun 23, 2001 9:06 AM

» lcha - Re: Best "Energy Play"

In response to message posted by Rande:

"The market" is only smart when you take a contrarian view and do the opposite. This philosophy says the market is made up of boneheads so the best coarse is do what they are not doing. In March of 2000 "the market" was telling us that tech was going to be the center of the universe for the next 10 years and the economy was going to grow like gangbusters for years. Yea, real astute forecasting.

As far as sector investing I will only speak of my personal experience. I have 10% of my assets I am committing to the STOCK portion of my portfolio in the energy sector. If prices are right I may increase that to 15% but no higher. I am "betting" on a sector in which I have made a good living for 18 years. I am investing mainly in the type of companies (E&P) that are my clients and that I talk to on a regular basis. I am investing in a sector that has been, I believe, undercapitalized for at least 15 years. A period which saw a consistent increase in its product demand. I believe I am investing in a sector that requires a large capital investment over a LONG period of time so my focus is longer term (5 years plus) and not for a quick buck. Lastly, I am investing in a sector that is, at best fairly valued, and in some areas (small-mid cap E&P) largely undervalued by most common valuation metrics.

If you understand little to nothing about what you are investing in, then a total shotgun approach (complete diversification) to investing is best. If you make an investment in an area that you feel you understand and that this knowledge might give you a little advantage over others who are not as knowledgeable then I believe the risk is justifiable.

-- posted by lcha

Top 498. Jun 23, 2001 10:06 AM

» Rande - Re: Re: Best "Energy Play"

In response to message posted by lcha:

Icha,

The market is made up of boneheads? It's possible to be smarter than the market?

All those well-backed, MBA finance types don't seem to be able to beat it on a consistent basis, even with the multi-billion dollar resources at their disposal. What makes Joe Investor so smart? You would have thought that all the people who piled into tech in the late 90s would have learned their lesson about performance chasing and sector betting. But it seems it's a never-ending matter of piling into the next "hot" sector for some. If the lesson just learned wasn't sufficient, what would be?

But, don't take my word for it...

Any individual who is not professionally occupied in the financial services industry (and even most of those who are) and who in any way attempts to actively manage an investment portfolio is probably suffering from overconfidence. That is, anyone who has confidence enough in his or her abilities and knowledge to invest in a particular stock or bond (or actively managed mutual fund or real estate investment trust or limited partnership) is most likely fooling himself. In fact, most people-probably you-have no business at all trying to pick investments, except as sport. [Gary Belsky and Thomas Gilovich in Why Smart People Make Big Money Mistakes]

"With all the analysts and all the research and all the statistics and all the computers, it is still possible to be 51 percent wrong, and you can do better than that by flipping a coin." [Adam Smith, "The Money Game"]

Potential .400 hitters in the stock market are falling short of their goal because growing numbers of today's investors are sufficiently educated, sophisticated, and informed to block their way, just as batters capable of achieving a .400 average have fallen short of that goal since the old days because defending teams have developed sufficient skill to block their way. No successor to Peter Lynch has appeared on the scene, and even Warren' Buffett's touch is not as magic as it used to be. [Peter Bernstein in Where, Oh Where Are the .400 Hitters of Yesteryear? in the Financial Analysts Journal (November/December 1998)]

For professional investors like myself, a sense of humor is essential . . . We are very aware that we are competing not only against the market averages but also against one another. It's an intense rivalry. We are each claiming, "The stocks in my fund today will perform better than what you own in your fund." That implies we think we can predict the future, which is the occupation of charlatans. If you believe you or anyone else has a system that can predict the future of the stock market, the joke is on you. [Ralph Wanger in "A Zebra in Lion Country"]

Speculation: The activity of forecasting the psychology of the market. Speculative motive: The object of securing profit from knowing better than the market what the future will bring forth. [John Maynard Keynes, "The General Theory of Employment, Interest, and Money"]

The market is never wrong and it cannot be defeated. It is selfless. It does not experience feelings of victory or defeat. The market is a cold battlefield and its participants are engaged in a life-or-death battle against themselves.
Josh Lukeman in The Market Maker's Edge

-- posted by Rande