Commodity prices are up, and the financial performance of anumber of energy companies is on the rise. The question being askedlast week in Houston was why are Wall Streeters treating energycompany stocks like ugly stepchildren?

“We’re scratching our heads because although our companies looka lot different than they used to, our stocks stubbornly behavelike utilities,” said Reliant Energy CEO Steve Letbetter, who spokeat the 19th annual Cambridge Energy Research Associates (CERA)Executive Conference. Joining him on the same panel was SempraEnergy 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, onearnings, three cents above the Street’s consensus, and a yearahead of time all of our unregulated businesses have metprofitability. None of this made any difference as far as WallStreet was concerned,” Baum lamented. “Our multiple didn’tincrease, and our stock price went down. And we were not rewarded.We had strong cash flows and good earnings growth, as many of theparticipants in our industry do. And it doesn’t make anydifference.”

Also feeling unloved is the exploration and production sector.”If you look at the big stock market indexes, you’ll see hardly anyrepresentation anymore of exploration and production. Technology isabout 30% of the S&P 500 stock market index, which is one ofthe universal indexes on Wall Street. I think E&P stocks outthere are maybe a quarter of one percent,” John Olson, senior vicepresident of the Sanders Morris Mundy natural gas group, told aWednesday producers’ luncheon.

According to all three, one big reason for the energy sector’slackadaisical stock performance is the Internet and the flurry ofactivity surrounding dot com stocks. “People are falling all overthemselves to get into Internet IPOs,” Olson said. “I don’t see anyE&P IPOs… Hopefully this will change, but it’s going to takeyou all to continue to engineer the change.”

Olson told producers to focus on profitability. “This is whatsells on Wall Street, ladies and gentlemen. Cash flow, I think,break-up values, EBITDA calculations, these are all very nebulousconcepts.” 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 thecapital squeeze on producers will delay a pick-up in drillingactivity despite stronger commodity prices. “I believe there willcontinue to be somewhat of a delay in that response because of this[industry] consolidation because frankly Wall Street’s beendisenchanted by the E&P business of late, and I think they’regoing to really have to reestablish some credibility in financialmarkets, get their balance sheets in a little bit better order. Ithink there will be a delay in the pick-up of drilling, certainlyin the U.S.”

Thomas Boren, executive vice president of PG&E Corp., andother speakers at the CERA conference noted the utility sectorsignificantly under-performed the S&P 500 last year. “Theindustry has had one of the lowest earnings growth rates of any ofthe major sectors during this time, which has resulted in P/Eratios that have been consistently below the rest of the market.”He noted one way companies have been creating value forshareholders has been through mergers and acquisitions. However,”consolidation in and of itself is not the answer to closing theearnings gap.”

For Baum, the answer to regaining the favor of Wall Street isreinventing the company to take a bite out of the deregulatedmarketplace, 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 comcompanies. And we’re not going to transfer from the Big Board ontothe Nasdaq and pick up [price-earnings] multiples that are in somecases almost limitless, particularly if you have no earnings or ifyou have negative cash flows.”

Energy markets need to open up to energy service providers, Baumsaid. One place where this has yet to completely happen isCalifornia “partly because of the way the transition cost has beenhandled there. We are advocating and putting our money where ourmouth is, advocating a position in which we are trying to stimulateour utilities to encourage the load growth in the marketplace ofenergy service providers.” One way Sempra is striving to open up isby creating employee incentives for the load growth of energyservice providers on both the San Diego Gas & Electric andSouthern California Gas systems.

Although UtiliCorp United last year had its third year in a rowof 8% earnings growth and deployed $2.7 billion in capital withaccretion of 15 to 18 cents per share, the stock market’s reactionwas “‘so what,'” said CEO Richard C. Green Jr. “Yes, we, too, are amember of the undervalued club, and the doors are open and we needthe shoppers to come in and get their bargains.”

Judging by his remarks, Green seems to think events unfolding inthe industry mean they eventually will. “All of us who are in theenergy industry today are extremely fortunate in my opinion. We areon the threshold of the building of a global energy industry andmarketplace that has never existed before. That’s an extremelyexciting happening.”

Joe Fisher, Houston

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