Columbia Energy Group moved into the group of Donaldson, Lufkin& Jenrette’s “top picks” for natural gas investors in thefirm’s latest Natural Gas Outlook 1999-2003. The report is thebiannual update of the firm’s analyses and recommendations in thegas industry.

“Half of our pipeline universe outperformed in the first half of1998 led by Enron Corp., El Paso Energy, and Williams, butvaluations are again depressed, with the group having declined morethan the overall market recently because of low commodity prices,concerns about international activities and some profit taking.”

Still, DLJ gives the group an outperform rating it supports withfive observations. One is an earnings growth rate of 9 to 10%. Twois unregulated capital expenditures amounting to 60% of totaloutlays. DLJ’s third reason to be bullish is an improvingregulatory environment suggesting increased returns on the 60% ofindustry EPS which remain regulated. Four, Demand growth of 2 to2.5% per year and supply increases of about 2% per year point torelative strength in gas prices, and, finally, there will be moremerger and acquisition activity within the industry and in theelectric-gas convergence theme, DLJ said.

The upgrade of Columbia Energy comes from the company’s visibleearnings growth of 10 to 12%, higher multiple-oriented investmentsin unregulated areas, low oil and gas price exposure and lack ofinternational earnings exposure.

El Paso Energy remains a top pick based on the recent decline inits share price, which makes for the “opportunity to invest in thehigh earnings growth rate at low risk and low multiple situationthat [El Paso] represents.”

Enron continues as a top pick because earnings growth is risingand future opportunities are expanding, DLJ said. “We wouldspecifically point to the growth in [Enron’s] traditionalbusinesses (led by Wholesale energy businesses and its neweropportunities, best represented by Enron Energy Services), asharbingers of accelerating growth.”

DLJ downgraded Sonat from a top pick to buy based on recentspeculative interest in the company that has moved its valuationahead of fundamental improvements in DLJ’s view.

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