Enron Corp. stock last week saw some of its worst days of trading in more than a year following the news that President and CEO Jeffrey K. Skilling, who was credited with much of the energy giant’s successes over the past decade, had resigned. Before the week ended, Chairman Kenneth L. Lay had called a company-wide meeting to assure employees that the company remained on solid financial footing, while senior management officials met with financial analysts in New York to convince them that no other surprises lay ahead.
The announcement of Skilling’s departure late last Tuesday stunned the energy industry and Wall Street, sending the company’s stock into a free-fall for much of last week. By late Thursday, Enron’s per-share price had plunged by about 14% to $36.85, hitting its lowest level in 19 months. The company’s stock continued to drop on Friday, but not as sharply (to $36.67 at 4 p.m.). Its stock had been more than $80/share a year ago.
Wall Street analysts moved quickly to reduce their long-term price targets for the energy giant’s stock and/or remove their “buy” ratings for Enron stock. There was a level of hysteria in the reaction, as some speculated that the reason for Skilling’s resignation was far more ominous than they were being told.
Analysts immediately questioned whether Skilling’s resignation was tied to Enron’s poor stock performance over the past year as marketers and power generators faced mounting criticism for their role in the California energy crisis. While other marketers’ stock also has dropped, Enron, which also has suffered losses in its infant broadband division and has had persistent problems with its massive power project in India, has taken one of the biggest hits. In addition, Skilling often had been the focus of media attention for his informal “tell-it-like-it-is” style and flip, humorous remarks that may not have amused more conservative board members.
While he insisted Tuesday that he his decision to resign was “purely personal” and unrelated to Enron’s business activities, Skilling later conceded in a Wall Street Journal (WSJ) article last week that the pressure and responsibility that he personally felt for the company’s plunging stock prices was the main reason. Enron’s stock performance was a “kind of ultimate score card,” he said, adding that Enron’s share price had dropped by more than 50% this year. If the stock had remained up, “I don’t think I would have felt the pressure to leave,” Skilling told the WSJ.
He said he hadn’t been pressured by Lay to resign. The company’s board of directors accepted Skilling’s resignation, and Lay will assume the responsibilities of president and CEO. Lay has agreed to extend his employment agreement with the company through the end of 2005 to ensure a smooth transition. Skilling will continue to serve as a consultant to Enron and its board. Given that Skilling’s resignation was voluntary, Lay noted there was no severance package.
Lay is expected to appoint two of the company’s executives to the “office of chairman” this week. The company declined to say which executives were being eyed for the top spot.
Key Enron executives whose names are likely to appear on the short list include: Stanley C. Horton, chairman and CEO of Enron Transportation Services; Andrew S. Fastow, Enron’s executive vice president and CFO; Richard A. Causey, executive vice president and chief accounting officer; Steven J. Kean, executive vice president and chief of staff; and Dave Delaney, chairman and CEO of Enron Energy Services.
Skilling, who took over the CEO position from Lay earlier this year, had long been groomed for the post. He served as chief operating officer for four years before becoming CEO. Skilling, noted for his drive and some brilliant initiatives, was credited with changing the company’s strategy from one tied to energy delivery and marketing to one focused on diverse e-commerce ventures involving multiple commodities and risk management activities. Lay, who served as CEO from 1985 until Skilling’s advancement, transformed Enron from a regional natural gas pipeline company into one of the largest energy marketing and trading companies in the world. During his 15 years as CEO, Enron’s market capitalization increased from $2 billion to $70 billion.
While regretting Skilling’s departure, Lay focused on the company’s future last week. “[W]e have the strongest and deepest talent we have ever had in the organization, our business is extremely strong, and our growth prospects have never been better.” He said there were no company problems related to Skilling’s to leave. “There are no accounting issues, no trading issues associated with Jeff’s departure,” Lay said.
Lay further said there would be “no change” in Enron’s business direction and strategy. “The company is in the strongest and best shape it has ever been. I see continuing strong growth in our wholesale business,” the company’s single largest income-producer. Lay also noted the repeated doubling of income from retail operations in recent years, saying “most believe the Enron Energy Services component could become larger than wholesale in six years.”
As the dust began to settle last week, Enron top management met with UBS Warburg analyst Ron Barone and other energy analysts to assure them of better days for the company. They “emphasized that, although there are challenges ahead, there are no other shoes to drop and that Enron remains poised for unprecedented growth,” Barone said in a “Research Note” Friday.
Enron management further stressed “the breadth and depth of its [the company’s] remaining bench strength,” and revealed that the company plans to announce “executive reshuffling” as early as this week, including the “possible appointing of an individual(s) to ‘Office of the Chairman,'” he wrote.
They further assured Barone and the other analysts that Enron would strive to have a “more candid relationship with the Street with a further opening of the lines of communication,” Barone said. Enron management “dispelled rumors of credit issues, noting that it has already met with the ratings agencies and has been in contact with all of its global lenders.”
The senior executives said they saw “tremendous opportunities” to expand EnronOnline into other commodities and countries, while they plan to focus on “cost-cutting measures in the Broadband segment,” although they still anticipate “significant long-term potential in bandwidth marketing/trading. They also noted that they “[were] committed to making material international asset divestitures.”
Given these assurances, “though the road back…will be a long one, we believe the dust is officially settling on the Skilling departure and that [Enron] shares are in fact nearing a bottom…We believe Enron will be heading back on track to delivering a cleaner and more openly communicated financial performance,” Barone said.
He continued to rate Enron stock as a “strong buy” at its current level — in the high $30s — while he reduced his 18-month target price for the company’s stock to $60/share from $70. This projection seems to reflect doubt on Barone’s part that Enron’s stock will rebound significantly in the short term.
Curt Launer of Credit Suisse First Boston in New York City urged cooler heads to prevail last week. The slide in Enron’s stock, he warned, was a “short-term thing based on rumor and speculation and outright fear that there is something more to this than meets the eye.” He expected Enron stock to recover and do so “sharply.”
In the meantime, Enron wasn’t the only company being buffeted by the hysteria, Launer said. The stocks of Duke Energy, Dynegy, El Paso Corp.,Williams and Reliant Energy were temporarily dragged “down” in the wake of Skilling’s announced departure, but most had recovered partly in response to the news last week of a record low net storage injection for August of 3 Bcf/d.
The reaction to Skilling’s resignation “has spun out of control on unsubstantiated rumors,” Launer noted, adding that “people are overcomplicating the story.” He noted “fraud and trading losses” were being cited as the reasons for Skilling’s departure, “none of which are true.”
“If there had been anything untoward, there would have been some disclosure of that” in the quarterly 10-Q report that Enron filed with the Securities and Exchange Commission (SEC) last Tuesday. Launer, who reviewed the report, said “I didn’t find anything out of the ordinary.” But “that’s not to say there haven’t been any problems at Enron,” he noted, citing the continuing problems with the company’s plant in India and in the California electricity market.
“A lot of us feel bad” about Skilling’s exit from Enron because he was the “architect” of many of the company’s accomplishments in the trading arena, Launer said. But he noted Enron is solid and has many talented people, so “business will continue on” after Skilling.
Merrill Lynch analyst Donato Eassey last week reduced his intermediate-term rating for Enron stock to “neutral” from “buy,” and his long-term rating to “accumulate” from “buy” in the wake of Tuesday’s disclosure.
Enron “could very well trade down closer to its peers at 16.6 times [its earnings] versus its current 20 times-plus for 2001 and 2002 as this ‘new’ uncertainty brings into question its sustainable growth outlook,” Eassey said in a Merrill Lynch “Bulletin.”
The analyst took this position even though Enron’s Lay plans to resume his role as CEO of the company. “While we have a great deal of faith in Mr. Lay’s ability to return [Enron] to its [preeminent] position, we are moving to the sidelines for the intermediate-term because we believe the premium price/earnings [ratio] is not likely to hold up during that time,” he wrote.
“Longer term…we have a great deal of confidence in Mr. Ken Lay as he was the original architect of [Enron’s] — and for that matter the entire industry’s — tremendous transformation for the past decade. But we believe this new event will take some time to shake out, and for a catalyst to take shape,” Eassey said.
Although Enron’s “wholesale business is doing just fine, it is the noise surrounding its other investments that will once again test Mr. Lay’s ability to right the ship.”
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