Raymond James: Energy Earnings Best Ever

Phenomenal energy demand and higher prices will lead to one of the best financial quarters ever for the energy industry, according to Raymond James & Associates. Energy companies are expected to post "some of the greatest year-over-year earnings growth rates of any of the 11 S&P groups," the investment bank said in a equity research report last Monday.

Relative to the rest of the market, energy companies should provide some of the greatest annual and quarterly increases and some of the greatest upside earnings surprises, the firm said. "Simply put, most of our energy coverage is in the `sweet spot' of what we believe is a secular upward move for the group that should last for many quarters."

Overall market fear has brought down energy stocks recently, and lower gas prices could hold prices down in the short-term. But Raymond James expects strong earnings performances to be rewarded in the long run by investors.

The oil services sector is expected to show some of the greatest growth with triple digit annual earnings increases, high-double digit quarterly growth and low-double digit earnings surprises, Raymond James said (see related story this issue).

In the E&P sector, Raymond James expects earnings to slightly exceed record fourth quarter results and significantly exceed 1Q 2000 earnings (see related story this issue). "Gas prices have been the primary driver for E&P financial results. Henry Hub gas averaged $7.08/MMBtu in 1Q 2001 (average of Jan.-March settlement prices), which is 34% higher than the average gas price in 4Q 2000 and 181% higher than the averaged gas price in 1Q 2000.

"Going forward, we've noticed two significant trends that warrant continued attention. First, higher oil service costs have contributed to significantly higher finding and development (F&D) costs for E&P companies. F&D costs are running 20-30% higher in 2001 relative to 2000. Second, E&P companies are paying more in cash taxes (less deferred). We do not believe that first quarter numbers will provide a meaningful catalyst for E&P stocks, since oil and gas prices have softened during the second quarter. Yet, current E&P stock prices suggest that most E&P companies have significant upside."

Raymond James expects results from the electric power sector to be "rather shocking" because of strong wholesale power prices "north of $100/MWh" on average throughout the United States during the first quarter and because of high utilization rates due to cold weather. The firm predicts investors will begin to refocus on the electric sector once strong results overshadow the California crisis.

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