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Stocks Hit New Lows; Rating Agency Actions May ‘Destroy’ Traders, Analysts Say
Key energy stocks suffered a rout again on Wall Street in the opening days of July, with Williams descending briefly below $5, Dynegy Inc. bouncing around under $7 a share, and analysts predicting that more of the same was ahead. One analyst said she feared the credit rating agencies’ constant downgrading of the creditworthiness of energy traders, which has pushed stocks to record depths, could end up shattering the companies completely.
“So far, the answer to that question is a quick ‘no,'” said analyst John Olson of Houston-based Sanders Morris Harris, when asked if the bleeding of energy stocks was at or near its end. “These stocks are still trying to go down. I expect [them] to find the bottom in 30 days or so. The bleeding will probably exhaust itself by then,” he told NGI.
Olson noted that since Oct. 15, 2001, the “day before Enron blew up,” the stocks of the leading energy conglomerates have fallen by an average of 47% — more than three times the average decline in the shares of the S&P 500 companies (14%). Dynegy stock has taken the steepest dive of all the major energy companies at 84%, and is followed by Williams (82%), El Paso Corp. (64%), CMS Energy (54%) and Kinder Morgan (26%), he said. Dominion Resources was the sole company to post a stock hike (7%).
It’s no coincidence that the sharpest stock fall-offs were at energy companies that had large trading operations mirroring Enron, prompting credit-rating agencies to be skittish and downgrade their creditworthiness, and investors to turn a blind eye to energy company stocks. Further contributing to the stock devaluations have been the investigations being carried out by the Federal Energy Regulatory Commission, the Securities and Exchange Commission and the Commodity Futures Trading Commission into energy trading activities.
“This is the collateral damage from Enron, among other things,” Olson said. The stocks of energy companies with accounting and disclosure issues, and liquidity problems “were decimated” during June, he noted, with per-share prices falling “hard and fast.”
Analyst Carol Coale of Prudential Securities said the “jury is still out” on how long the stock hemorrhaging will continue, adding it will likely persist until energy companies can restructure their operations to achieve “healthy balance sheets and liquidity situations.” She was highly critical of the rating agencies, saying they “were not as well educated on energy trading companies,” and were forcing on them a “business model that is unsustainable.”
The agencies are “uninformed…they’re setting unrealistic goals for these companies to achieve,” she told NGI. If they aren’t careful, she believes the rating agencies could wind up “destroying the businesses that they intend to improve.”
For the second quarter, Moody’s Investors Service reported that credit-rating downgrades outpaced upgrades by a margin of 4.9-to-1, the highest ratio since the record 6.3-to-1 in the fourth quarter of 1990. The rating agency counted 172 downgrades during the quarter affecting $333 billion of bonds, compared to 35 upgrades involving $49.7 billion of bonds. The utility, energy and telecom industries saw the most credit downgrades, brought on by accounting and disclosure irregularities, as well as a slump in merger and acquisition activity, it said (See Related Story).
The stock devaluation has been even worse for independent power producers. Olson estimated that the stocks of IPPs have dropped an average of 71% since the Enron accounting scandal erupted — or 1 1/2 times more than that of the major energy companies. AES Corp. closed at $3.98 Wednesday, off from its 52-week high of $44.50, and Calpine Corp. closed at $6.51, down from its 52-week high of $46.
Olson believes the stocks of Dynegy and Williams are “largely washed out,” but he refused to speculate on when they would begin to turn around. The trouble with Williams is that it has to sell off up to $3 billion in hard assets to improve its balance sheet and restore investor confidence, he said, and by doing so, it reduces its earning power by 20-30 cents. Dynegy faces pretty much the same problem, he noted.
There were some upside notes last Wednesday. Williams stock — which had dropped to as low at $4.65/share at one point last week — bounced back to close at $5.36, or less than one-sixth the value of its 52-week high of $34.40. Dynegy shares were up 8% to $6.74, which was about one-seventh of the value of its 52-week high of $45.12.
CMS Energy shares currently are priced at a little over one-third the value of their year-ago level of $28. El Paso stock has been battered as well, closing at $18.85 on Wednesday. This compares to its stock price of $52 a year ago.
Although it couldn’t boast a stock increase like Dominion, Duke Energy hasn’t been singed as much by the market upheaval as its competitors. The company’s per-share price was at around $30 last week, only $9 lower than a year ago.
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