Analyst: Short power supply represents investment opportunity

After years in the doldrums, energy is turning the corner as a growth business, says Daniel Ford, managing director and head of US utilities research for ABN AMRO. Independent power producers, upstream gas producers, and gas storage companies are 'incredibly attractive' investment possibilities right now, Ford said Wednesday at PowerMart in Houston.


Kate Thomas
OGJ Online

After years in the doldrums, energy is turning the corner as a growth business, says Daniel Ford, managing director and head of US utilities research for ABN AMRO.

Independent power producers, upstream gas producers, and gas storage companies are "incredibly attractive" investment possibilities right now, Ford said Wednesday at PowerMart in Houston.

"Telecom infrastructure is last year's story," he said. This year's story is independent power and convergence. Over the past 5 years utility companies have tried various strategies to boost their stock prices that have not worked, including securitization, leverage, and paper mergers. Institutions and others pulled out of utility stocks until they represented only 2% of the Standard & Poor's index, making the group irrelevant to big holders who want a diversified portfolio, Ford said.

Now, Ford said, companies have to change what they are doing to appeal to investors and "that's exciting." He says companies will develop nonregulated generation business and expose it to the marketplace. Unregulated companies appeal to the market because, among other things, they have better access to capital, Ford explained. "The market hates rate cases," he said.

The change comes not a moment too soon. With price swings ranging from 10% to 14,000%, electricity today holds the distinction of being the champion of volatility, exceeding even Holland's great tulip craze.

"That tells me we are very, very tight," Ford said. "We will turn the lights out, if we don't do something soon. We need new resources."

He estimated the US will need 24,000 Mw/year in new generating capacity between now and 2005 to keep pace with demand. About 10,000 Mw is scheduled to begin operating this year and about 15,000 Mw next year. Supply will not keep up with demand until 2004-2005, he said.

Investors like the story because of its strong earnings potential, he explained. Investors over the past year have already bid up the price of Calpine Corp., 240%; AES Corp., 131%; Dynegy Inc., 209%; and NRG Energy Inc., 114%. That compares to a 36.2% average rise for utilities with large independent power subsidiaries.

The message is "to capture the value spin it out," Ford said.

Among the independent power producers, Calpine has the "most challenging" business plan, Ford suggested, because it doesn't have a large trading organization backing up its gas purchases.

With its access to Chevron Corp.'s natural gas Dynegy is well positioned as are El Paso Energy Corp., Duke Energy Corp., and NRG, which has a diversified fuel base, said Ford. He predicted gas could hit $6-$7/Mcf and the 12-month strip for gas "could push" $5/Mcf.

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