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Diversified Energy Companies Benefiting from Changes

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 activities.
  • 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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