Diversified Energy Companies Benefiting from Changes
The diversified energy group has seen a "profound change in its
market perception," with players growing faster than ever before,
benefiting from the deregulated power industry, expansion in telecommunications
and bandwidth trading and emerging technologies, according to Dain Rauscher
Wessels' analyst Mark Easterbrook.
Easterbrook, who presided over several diversified energy presentations
last week at his company's eighth annual energy conference in Houston,
said that the market is rewarding "new, innovative companies that
should benefit from developing clean power," and also pointed to bottom
line improvements for those marketers and generators who have taken advantage
of the deregulated industry.
"The group has definitely seen a bifurcation of the sector into
those who can grow earnings and those that 'seem' to have static earnings
growth," he said.
The natural gas and electric industries have converged more than in
the past, and as the natural gas/power sectors move together, "we
have seen deregulation manifest itself and change the makeup of several
different markets and companies. We have seen size become important as
the convergence of these two sectors has led to the inevitable mergers
and consolidation process." Also, the "DE" companies now
are looking into new market segments, including telecommunications, for
"higher, non-regulated returns."
On the natural gas side, Dain Rauscher's analyst believes that mergers
and acquisitions will slow down even though there are a few candidates
left. However, on the electric utilities side, he expects to see an acceleration
in the consolidation process because several states have completed deregulation
legislation this year.
"Other acquisition targets could surface in Canada, where access
to Canadian gas by the U.S. markets should fuel exploration and beef up
the midstream assets." He said a "great example" was the
announcement by Williams Co. in early August to buy most of TransCanada
PipeLines Ltd.'s remaining ownership interests in natural gas liquids (NGL)
and extraction facilities and one processing plant, as well as a one-third
interest in a key Alberta-to-U.S. gas liquids pipeline from Dow Chemical
Co. (see NGI, Aug. 7).
Major trends seen by Easterbrook include:
- Growing non-regulated EBIT: Although diversification is not new, companies
are diversifying their portfolios now with higher return non-regulated
segments outside of the energy industry, and these new segments are expected
to grow at a faster rate than the energy segments.
- Deregulation of electric utilities: This is a major boon to the group
with several companies establishing power merchant and/or power-production
- Generation growth: Electric markets are tight and more natural gas-fired
generation is needed. Those companies that saw this several years ago and
invested in generation are benefiting today.
- U.S. Clean Air Act: This legislation should continue to impact the
energy markets as further reductions in emissions and additions in new
technology are made.
- Telecom convergence: This is one of the biggest opportunities for the
DE group, and those companies involved will "profit immensely."
- Online trading: Once companies see that their trading operations can
handle oil and natural gas, they will look for more products to commoditize
and extend their platforms.
Carolyn Davis, Houston
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