Energy trading and marketing will come back, veteran energy analyst John Olson believes, and “I think E&P will be the sector driving the train.”

Energy trading is something that the industry “needs to have. It’s profitable and it can be a very good business,” Olson said. However, the merchant sector will be completely changed, and there most likely will be several new players — especially from exploration and production (E&P) companies. “I wouldn’t be surprised if there are between 50 to 75 IPOs (initial public offerings) by producers in the next four to five years. We need to have it.”

And on the way back, Olson says energy companies should follow the lead of Coca-Cola, which on the advice of its top shareholder, Warren Buffett, has decided to stop announcing future earnings guidance.

Speaking to reporters at the Deloitte & Touche Oil & Gas Conference in Houston Tuesday, the Sanders Morris Harris chief investment officer said the earnings guidance forecasts are merely “whisper estimates of…near-term this and near-term that, and they keep going around in circles. Then they start cheating.” Added Olson, “It’s exactly what happened at Enron.” Chairman Ken Lay used to regularly pledge 15% earnings growth a year, a target the company was stretched to meet.

In his usual succinct style, Olson said that if companies decided to forego estimates, “it would make my job harder, but this is what I’m paid to do. The ends justify the means.” One of the problems involved with the earnings guidance, Olson said, is that the question surrounding the estimates should be, “how deeply is management in the options programs? The usual is between 5-10%. At Enron, it was 13-14%.”

Since Enron filed for bankruptcy, Olson said simply, “the gas world has blown up.” He also chided the “indifference” of credit ratings agencies, and believes that many of this year’s “headlines” have ruined some good companies as well as some poorly run ones. And overcoming investors’ lack of confidence in the energy sector will be difficult.

“I don’t know if anything is possible to restore confidence,” Olson said. “The ratings agencies have excommunicated the businesses. They were warned five years ago [by the ratings agencies] to clean up their act, and now….there will clearly be overkill in the business. They’re taking too much of the capacity out of the market. Hardly a company has been able to avoid all of this.”

In the anticipated comeback, integrated natural gas companies also can make money in the merchant business, and Olson cited some examples. “Oneok has the most successful gas marketing in the country. It’s a very good success story.” He also cited Westar, which he said “is pushing its own product to its own pipelines.” El Paso Corp. “is far and away the best business model…except for all the problems. It has massive production, massive pipeline capacity.”

El Paso, said Olson, was the “most snake-bitten company of 2002. What could go wrong, did.” Now, he said, El Paso is trying to climb out of its hole, which has sent its stock below $7 — well below what it’s actually worth. “If you look at the value…its pipelines are worth $12 a share…its reserves, $6 a share, and the rest in power plants. I wouldn’t give you a penny for its trading book. But it’s a good company that has been slaughtered by the headlines…mostly negative. You’ve got [shareholder Oscar] Wyatt, basically suing himself. There’s a power struggle. And the headlines.”

Asked whether El Paso would be able to come back, Olson said, “it may be managed or it may be purged.”

Although he declined to name any companies that could be near bankruptcy, Olson said that “losers are easy to define. They are illiquid or liquid. It’s that simple.” Management that shows more profit and reasonable growth will be the winners, he said. “Look at the investment credentials of companies. Is the growth equal in weight to the profit of the assets?”

Olson said a company that “maybe doesn’t pass the laugh test on Wall Street” should be better scrutinized. And investors should question companies using the “new math,” which he said was basically invented by Enron, using special purpose entities and off-balance sheet transactions.

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