Analysts at Credit Suisse First Boston are looking for a return to positive valuations on merchant energy company stocks because of the current pricing environment and customer demand for risk management and energy services. CSFB analyst Philip Sales said Oneok (OKE) in particular should maintain consistent earnings from merchant energy operations.
“The appropriate valuation of the marketing and trading unit of OKE has become a significant investment question as the share price has risen recently,” Sales noted in an equity research note. He said OKE still has been trading at a 40% price-to-earnings discount to the natural gas group on 2004 earnings per share estimates mainly because of investor concern about the consistency and growth potential of the marketing and trading business, the cash flows to be expected from marketing and trading and the capital drain that will be associated with that business.
But CSFB said investors can begin to start raising their confidence levels from rock bottom when it comes to marketing and trading.
“OKE has demonstrated two years of consistent earnings from this segment during the difficult time in the merchant energy sector. We look for a third year (2004) of consistency in marketing and storage earnings and an expected decline in trading (about 35% of total) that reflects revenue benefits in 2003 rather than an imperfect gas option strategy.”
Sales said that industry fundamentals are solid for the marketing and trading business right now. Gas services such as storage, transportation and procurement are in demand.
“Our macro fundamental research suggests that it is a mistake to think that this merchant business will disappear… In our opinion, the era of zero value creation…is behind us. We believe that a return of valuation for merchant energy (emphasizing customer service as opposed to trading as the business model) and earnings generation should be reflected in a multiple uptick for OKE and others in the industry.”
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