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Energy Stocks Not Spared in Market Dive

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&ampP 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&ampP 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&ampP 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&ampP 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 1997.

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&ampE 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&ampE Corp., parent of Pacific Gas &amp Electric and several non-regulated businesses.

PG&ampE 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&ampE Corp. also is in the midst of a stock buy-back program, which gives buoyancy to its share price.

PG&ampE 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&ampE 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 longer."

Joe Fisher, Houston

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