The current crisis in the energy trading market largely will have blown over by the time 2003 rolls around, predicted John Olson Wednesday. He is probably best known as the industry analyst who suspected something was rotten in the state of Enron well before anyone else, earning himself an unfavorable reputation in the Enron executive suite prior to the company’s collapse.

Speaking before a well attended Houston luncheon sponsored by the Independent Petroleum Association of America, Olson, the senior vice president/director of research for the Natural Gas Group of Sanders Morris Harris Inc., called his address “The Stunning Collapse of the Energy Traders.” However, while admitting that some energy merchants, particularly Williams and Dynegy, still have a tough row to hoe, he doesn’t believe any other major traders will follow Enron down the Chapter 11 trail.

Olson was especially critical of mark-to-market accounting, calling it the “crack cocaine that blew up Enron.” He noted that some companies such as Oneok are able to use mark-to-market successfully, but said Oneok is really a cash and physical trader at heart and keeps mark-to-market dealing limited and short-term in nature. Generally it’s best to avoid the practice as much as possible, he told his mostly producer audience.

Continuing his advice on what and what not to do, Olson said: “Stay out of debt — no ifs, ands or buts.” Anything that looks like a liquidity trap, such as designer derivatives, that can backfire — don’t do it. Only do deals that are accretive to earnings and cash flow. Cash is going to be king. Don’t be long anything that looks like it’s controversial.

Asked which energy stocks he would be most apt to buy at this time, Olson named El Paso and Duke as the best candidates to emerge from the current troubles in a strong position. But he expects all the major merchants to survive, albeit with fewer assets in most cases. “Houston and Tulsa are beginning to look like pawnshops” with their energy companies selling assets at bargain prices, Olson said.

The key to recovery for some companies, he said, essentially is: will the ratings agencies let them? Olson pointed to El Paso as a key example of an energy merchant with many hard assets and a good financial outlook that still is being unduly “punished” by the credit raters. He looks for new players to come into the market, saying they will see opportunities from the vantage point of having a strong credit position.

There is no doubt that the future market is going to be considerably smaller but with better financial backing, Olson believes. It will continue to be quite volatile because of less liquidity, he added. He noted that trading volumes at such key points as Henry Hub, the Chicago citygate and the Southern California border have been cut approximately in half since April, although Chicago has bounced back a bit. Borrowing data projections for the energy marketing business from Ben Schlesinger and Associates, Olson laid out these numbers: counting the sales/trading, accounting/systems and specialists (T&E, etc.) segments, there were 12,000-15,000 participants in the market as of December 2001; by December 2002 those numbers are expected to have fallen to 4,000-6,500.

It was around the mid 1990s when Olson says he first began to think that Enron might be bending the accounting rules. “I couldn’t connect the dots” in their financial reports, and they entered into a lot of transactions that made no economic sense, he told NGI Wednesday. He considers the LJM off-balance sheet partnerships as the single biggest factor in the company’s downfall.

©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.