Internet Outshines Energy Stocks
Commodity prices are up, and the financial performance of a
number of energy companies is on the rise. The question being asked
last week in Houston was why are Wall Streeters treating energy
company stocks like ugly stepchildren?
"We're scratching our heads because although our companies look
a lot different than they used to, our stocks stubbornly behave
like utilities," said Reliant Energy CEO Steve Letbetter, who spoke
at the 19th annual Cambridge Energy Research Associates (CERA)
Executive Conference. Joining him on the same panel was Sempra
Energy President Stephen L. Baum.
"We performed very well this past year. We've exceeded analysts'
estimates. We've met all our internal targets. In fact, we were, on
earnings, three cents above the Street's consensus, and a year
ahead of time all of our unregulated businesses have met
profitability. None of this made any difference as far as Wall
Street was concerned," Baum lamented. "Our multiple didn't
increase, and our stock price went down. And we were not rewarded.
We had strong cash flows and good earnings growth, as many of the
participants in our industry do. And it doesn't make any
Also feeling unloved is the exploration and production sector.
"If you look at the big stock market indexes, you'll see hardly any
representation anymore of exploration and production. Technology is
about 30% of the S&P 500 stock market index, which is one of
the universal indexes on Wall Street. I think E&P stocks out
there are maybe a quarter of one percent," John Olson, senior vice
president of the Sanders Morris Mundy natural gas group, told a
Wednesday producers' luncheon.
According to all three, one big reason for the energy sector's
lackadaisical stock performance is the Internet and the flurry of
activity surrounding dot com stocks. "People are falling all over
themselves to get into Internet IPOs," Olson said. "I don't see any
E&P IPOs... Hopefully this will change, but it's going to take
you all to continue to engineer the change."
Olson told producers to focus on profitability. "This is what
sells on Wall Street, ladies and gentlemen. Cash flow, I think,
break-up values, EBITDA calculations, these are all very nebulous
concepts." Another point, producers, generally, are too leveraged.
The typical capital structure for corporate America is about 40%
debt and 60% equity, Olson said, whereas producers are at about 55%
debt and 45% equity, "a little bit too leveraged."
At the CERA conference, Dynegy CEO Chuck Watson predicted the
capital squeeze on producers will delay a pick-up in drilling
activity despite stronger commodity prices. "I believe there will
continue to be somewhat of a delay in that response because of this
[industry] consolidation because frankly Wall Street's been
disenchanted by the E&P business of late, and I think they're
going to really have to reestablish some credibility in financial
markets, get their balance sheets in a little bit better order. I
think there will be a delay in the pick-up of drilling, certainly
in the U.S."
Thomas Boren, executive vice president of PG&E Corp., and
other speakers at the CERA conference noted the utility sector
significantly under-performed the S&P 500 last year. "The
industry has had one of the lowest earnings growth rates of any of
the major sectors during this time, which has resulted in P/E
ratios that have been consistently below the rest of the market."
He noted one way companies have been creating value for
shareholders has been through mergers and acquisitions. However,
"consolidation in and of itself is not the answer to closing the
For Baum, the answer to regaining the favor of Wall Street is
reinventing the company to take a bite out of the deregulated
marketplace, not to appeal to the taste buds of the dot-com hungry.
"I don't think any of us are going to reinvent ourselves as dot com
companies. And we're not going to transfer from the Big Board onto
the Nasdaq and pick up [price-earnings] multiples that are in some
cases almost limitless, particularly if you have no earnings or if
you have negative cash flows."
Energy markets need to open up to energy service providers, Baum
said. One place where this has yet to completely happen is
California "partly because of the way the transition cost has been
handled there. We are advocating and putting our money where our
mouth is, advocating a position in which we are trying to stimulate
our utilities to encourage the load growth in the marketplace of
energy service providers." One way Sempra is striving to open up is
by creating employee incentives for the load growth of energy
service providers on both the San Diego Gas & Electric and
Southern California Gas systems.
Although UtiliCorp United last year had its third year in a row
of 8% earnings growth and deployed $2.7 billion in capital with
accretion of 15 to 18 cents per share, the stock market's reaction
was "'so what,'" said CEO Richard C. Green Jr. "Yes, we, too, are a
member of the undervalued club, and the doors are open and we need
the shoppers to come in and get their bargains."
Judging by his remarks, Green seems to think events unfolding in
the industry mean they eventually will. "All of us who are in the
energy industry today are extremely fortunate in my opinion. We are
on the threshold of the building of a global energy industry and
marketplace that has never existed before. That's an extremely
Joe Fisher, Houston