Energy Stocks Not Spared in Market Dive
With the exception of some utilities, energy companies were not
spared during the stock market's free-fall early last week. The
volatile market, foreign exposure, depressed oil and natural gas
prices and plenty of gas in storage all served to drive some share
prices to new 52-week lows. While one analyst bemoaned the
market-lagging performance of the utility stocks he follows, some
utilities did live up to their reputation for providing a
relatively safe haven in a stormy market. Looking ahead, though,
investors should note some electric and gas utilities already have
been burned in the increasingly deregulated market, and others are
heading into rougher territory as the march of deregulation pushes
them further into non-regulated businesses.
Although The Coastal Corp. enjoyed second-quarter earnings per
share that were 23% higher than 1997's second quarter, the
company's stock last week set a new 52-week low and was trading
near the bottom of its 52-week range in the mid- to high-20s. The
52-week high is 38 ¬. Coastal's earnings have increased every
quarter since 1993, said Stirling D. Pack Jr., director of investor
relations, but that momentum is apparently being ignored by a stock
market where many energy company share prices are foundering.
"I think that we're caught up in this market downturn, and
particularly the downturn in natural gas prices," Pack said. "I've
spoken with a lot of our big [share]holders who are as confused as
we are about this." There has been no change in Coastal's
fundamental outlook that would precipitate a share price decline,
he said. Foreign exposure is minimal as well. "The only place that
we're exposed is in Pakistan, and we look for a favorable outcome
there as well with the two power projects that we have."
Pack chalked up the decline to profit-taking. In talks with fund
managers over the last week, he said he's heard of forced
redemptions from individual shareholders and research directors
pulling out of equities to strengthen cash positions. "You're hit
by that kind of market sentiment as opposed to any change in
fundamentals." Also, lower gas prices of late have caught the
attention of investors focused on the short-term.
El Paso Energy's fortunes also have waned, at least for the time
being. El Paso also set a new 52-week low last week, diving from
around 28 Monday to about 24. The stock worked its way back up
later in the week, trading in the mid- to high-20s. The 52-week
high is 38 15/16. "We are still comfortable with our earnings
estimate for the quarter which is right now at 42 cents, and we're
also comfortable with the estimate for the year at $1.85," said
Scott Vonderheide in the company's investor relations department.
"All of our projects are on track. Our peer group is down in the
market, down 500 points. It's just been a very, very tough market."
Like Coastal, El Paso had strong second quarter results. ElÿPaso
had record second quarter earnings of 45 cents per diluted share,
an increase of 22% from 37 cents per share in 1997.
Williams hit a new 52-week low of 20. The stock's 52-week high
is 36 15/16. The company rebounded later in the week and was
trading in the mid-20s. The company refused to comment on its stock
performance. In addition to its gas pipeline business, the company
has exposure to the oil market through its oil pipelines and to the
telecommunications market with its fiber optics division. For the
second quarter, Williams reported unaudited net income of $60.7
million, compared with unaudited restated net income of $118.5
million for the same quarter of 1997.
Enron was trading around the middle of its 52-week range,
finishing the week in the low- to mid-40s after taking a dive along
with the rest of the stock market last Monday. The 52-week range is
35 5/16 to 58 7/16. In a report released late last month, Fitch
IBCA called attention to Enron's significant international
exposure, pointing out many of the company's overseas deals have
below-investment-grade stand-alone profiles (See NGI Aug. 31,
1998). Enron did not make anyone available to comment last week.
Also not commenting on its stock price last week was Dynegy,
which was trading at the bottom of its 52-week range of 9 « to 20.
The stock has trended down since November. Dynegy, which has
exposure to oil prices through its gas liquids business, reported
net income for the second quarter of $23.4 million, $17.5 million
on a normalized basis. Results for the 1997 period were $32.1
million which included adjustments totaling $14.6 million.
E&P Under a Cloud
Stocks of exploration and production companies could be in for
continued tough times according to Salomon Smith Barney. The
investment firm concedes its earlier predictions of $2.15/MMBtu gas
and $17/barrel oil now seem somewhat optimistic. "We believe that
it will be very difficult for investors to justify investments on
that basis over the next several months. We think that the shares
could fall another 15% in the near term, and that a buying
opportunity could be created at some point - but we are not ready
to step up yet."
Local gas and electric utility stocks followed by Merrill Lynch
gas analyst Donato Eassey have lagged the S&P 500 so far this
year. Gas distribution and integrated companies Eassey follows were
off about 13.7% from July 17 to Aug. 31 compared to an S&P 500
index that was down 5.6% for the period. From the beginning of the
year through Aug. 31, Eassey's group was off an average of 18.4%
while the S&P 500 was off 1.3%.
"Our group has been, relative to the market, oversold. My belief
is as I look at this particular market, I haven't seen these kinds
of opportunities for upside since 1994." Over the next 12 to 18
months, Eassey said the group has upside potential of about 15%. He
adds that to the group's 5% yield for a prediction of 20% trended
total return. "Fundamentally, the industry is in a very good
position." Eassey predicted competition, spawned by deregulation,
will push further consolidation of utilities.
During the market's violent downturn, domestically-centered
utility stocks with little exposure to either oil or natural gas
prices, served investors well compared with other energy companies.
Duke Energy was trading last week in the low-60s, not too far
off from its 52-week high of 64 5/16 when compared with the 52-week
low of 44 9/16. "We have a pretty strong dividend. We have some
international risk but basically not in the countries that are
being talked about," said Duke spokesman Randy Wheeless. "I think
over the last year some utility stocks have been seen as better
investments, and we'd like to think that Duke is one of those."
Duke Energy reported 1998 second quarter basic earnings of 76 cents
per share, up 77% from 43 cents per share for the same quarter in
Southern Company was off from a high around 29 Monday and was
trading around 26 later in the week, still above its 52-week low of
21 1/16. PacifiCorp, on the other hand, was trading near the bottom
of its range of 20 5/16 to 27 5/16. The end of the week saw the
company trading in the low-20s. The low stock price could be
attributed - at least in part - to volatility in the electric power
market rather than the stock market.
PacifiCorp reported sharply lower second quarter earnings. The
company had second quarter 1998 earnings on common stock of $36
million, or $0.12 per share, compared to $89 million, or $0.30 per
share, reported in 1997. Second quarter 1997 results included $19
million, or $0.06 per share, from the company's telecommunications
operations, which were sold in December of 1997. Second quarter
1998 earnings were reduced by losses from unregulated electricity
trading totaling $32 million, or $0.11 per share. Losses included
charges for known and probable future trading losses totaling $6
million, or $0.02 per share, and reserves for potential credit
losses totaling $20 million, or $0.07 per share.
PG&E Stays Up
Houston Industries was down Monday but still not far from the
top of its range at around 28 later in the week. The 52-week high
is 32, and the low is 20 ¬. "We trade kind of as a surrogate to
bonds and treasury bills," said Randy Burkhalter, director of
investor relations. "We're regarded as a yield stock even though
we're getting away from that." Another company focusing more on its
non-regulated businesses is PG&E Corp., parent of Pacific Gas
& Electric and several non-regulated businesses.
PG&E Corp. was trading near the top of its range of 33 9/16.
The 52-week low is 22 11/16. "We still trade in line with a lot of
big-cap utility companies, and because we have a large dividend
component to our return, you get insulated a bit in these volatile
markets," said Mike Rescoe, chief financial officer. He also said
fund managers seeking to avoid large cash positions will move money
into utilities at the end of a quarter. PG&E Corp. also is in
the midst of a stock buy-back program, which gives buoyancy to its
PG&E Corp. and other companies that have been viewed as
utility safe havens for investors are changing, though. The company
is focusing more on non-regulated lines of business where there are
no guaranteed returns. As a result, PG&E Corp. is attracting
more growth-oriented investors who traditionally have not invested
in utilities. Investors seeking share price stability need to be
aware of the shift. "The folks that accept [share price stability]
as a given, need to be better understanding of what the underlying
strategies are of these companies," Rescoe said. "We wouldn't
expect them to be viewed the way they have in the past very much
Joe Fisher, Houston