Enron gripped by 'credibility crisis,' analyst says

By the OGJ Online Staff

HOUSTON, Oct. 30 -- Enron Corp.'s shares lost another 20% in heavy trading Tuesday, while some analysts said the decline reflects a loss of confidence in the Houston energy marketer's leadership.

"The company is undergoing a management credibility crisis," said Jon Kyle Cartwright, bond analyst with Raymond James & Associates. "The market doesn't believe them anymore."

A one-time darling of Wall Street, Enron's shares have lost about 67% in the 2 weeks, closing at $11.16 Tuesday. The free fall began after the company reported a loss for the third quarter and wrote down $1.2 billion in shareholder equity from an off-balance sheet transaction.

Analysts suggested the investment community fears the write-down could be just the tip of the iceberg. Published reports have documented the existence of other off-balance sheet partnerships and trusts that the investment community has said it doesn't fully understand and that have not been fully explained by Enron management. Fear of what the impact could be on the finances of the company is also driving the stock price, analysts said.

Some of Enron's bonds are just being "thrown out," said Cartwright. "The prices are extraordinary. The bonds are trading as if the company had already defaulted." Cartwright said this makes little sense because Enron's cash flow and assets are good. He said he still believes the company will retain its investment grade credit rating.

But equity analysts said fear of the unknown continued to be a drag on the stock value. "There are two swords hanging over the head of Enron. One is Moody's and the other is the SEC," said Andre Meade, analyst with Commerzbank Capital Markets Corp. in New York.

Moody's downgraded Enron's long-term and short-term debt Monday and left the ratings open for further review. The Securities and Exchange Commission moved its inquiry into Enron's off-balance transactions from Fort Worth, Tex., to Washington, DC. Analysts interpreted the action to mean the inquiry might turn into a full blown investigation. Enron has said it is cooperating with investigators.

But other analysts said Tuesday's big run on the stock was driven by Wednesday's yearend activity of mutal fund managers. Managers were balancing portfolio losses and gains.

"Mutual funds were selling off Enron because of the deadline," said John Olson, analyst with Sanders Morris Harris in Houston. "Management hasn't been forthcoming with financial information so they sold them off."

He thinks the selling pressure should ease Wednesday. He estimated the pure book value is at $9-$10/share. "But who is to say for sure," he said. "The stock is unanalyzable."