The diversified energy group has seen a “profound change in itsmarket perception,” with players growing faster than ever before,benefiting from the deregulated power industry, expansion intelecommunications and bandwidth trading and emerging technologies,according to Dain Rauscher Wessels’ analyst Mark Easterbrook.

Easterbrook, who presided over several diversified energypresentations yesterday at his company’s eighth annual energyconference in Houston, said that the market is rewarding “new,innovative companies that should benefit from developing cleanpower,” and also pointed to bottom line improvements for thosemarketers and generators who have taken advantage of thederegulated industry.

“The group has definitely seen a bifurcation of the sector intothose who can grow earnings and those that ‘seem’ to have staticearnings growth,” he said.

The natural gas and electric industries have converged more thanin the past, and as the natural gas/power sectors move together,”we have seen deregulation manifest itself and change the makeup ofseveral different markets and companies. We have seen size becomeimportant as the convergence of these two sectors has led to theinevitable mergers and consolidation process.” Also, the “DE”companies now are looking into new market segments, includingtelecommunications, for “higher, non-regulated returns.”

On the natural gas side, Dain Rauscher’s analyst believes thatmergers and acquisitions will slow down even though there are a fewcandidates left. However, on the electric utilities side, heexpects to see an acceleration in the consolidation process becauseseveral states have completed deregulation legislation this year.

“Other acquisition targets could surface in Canada, where accessto Canadian gas by the U.S. markets should fuel exploration andbeef up the midstream assets.” He said a “great example” was theannouncement by Williams Co. in early August to buy most ofTransCanada PipeLines Ltd.’s remaining ownership interests innatural gas liquids (NGL) and extraction facilities and oneprocessing plant, as well as a one-third interest in a keyAlberta-to-U.S. gas liquids pipeline from Dow Chemical Co. (seeDaily GPI, Aug. 4).

Major trends seen by Easterbrook include:

-Growing non-regulated EBIT: Although diversification is notnew, companies are diversifying their portfolios now with higherreturn non-regulated segments outside of the energy industry, andthese new segments are expected to grow at a faster rate than theenergy segments.

-Deregulation of electric utilities: This is a major boon to thegroup with several companies establishing power merchant and/orpower-production activities.

-Generation growth: Electric markets are tight and more naturalgas-fired generation is needed. Those companies that saw thisseveral years ago and invested in generation are benefiting today.

-U.S. Clean Air Act: This legislation should continue to impactthe energy markets as further reductions in emissions and additionsin new technology are made.

-Telecom convergence: This is one of the biggest opportunitiesfor the DE group, and those companies involved will “profitimmensely.”

-Online trading: Once companies see that their tradingoperations can handle oil and natural gas, they will look for moreproducts to commoditize and extend their platforms.

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