|Chris Edmonds and Dan Pickering Chat on RealMoney.com|
By Christopher Edmonds
Special to TheStreet.com
Originally posted at 8:11 PM ET 2/14/01 on RealMoney.com
Christopher Edmonds and Dan Pickering chatted on RealMoney.com at 4 p.m. EST Wednesday, Feb. 14.
TSC-RealMoneyLaura: Thanks for joining us today. We'll be chatting with RealMoney.com columnist Chris Edmonds and his special guest Dan Pickering about the energy crisis.
CSEonTSC: Welcome all, and a special welcome to Dan Pickering, director of research at Simmons and Co. in Houston. Dan is one of the brightest minds in the energy investment field. And, we are both ready for your questions. Happy Valentine's Day. ... Here we go!
rfmo-guest: Dan: Utility companies are building six power plants within 50 miles of where we work in California. Guess what, they are all natural gas-fired. What other source of fuel could be used for power plants since gas is as expensive as the power the plants will produce? Thanks for your input.
RM_DanP: Gas is primary choice ... but hydroelectric, coal and fuel oil are all options.
RM_DanP: For those under construction, it's too late to change 'em -- expensive.
CSEonTSC: It wouldn't surprise me at all to see a resurgence in clean coal technology in the coming years. Certainly, if you look at coal stocks that is being priced in.
CSEonTSC: And, don't discount -- a longshot I know -- a resurgence in nuclear as a possibility. Limited, but it sure makes some sense.
RM_DanP: Coal costs more to build the plant, but much less to operate. If clean coal works, we will see more coal planned
rfmo-guest: Chris: What are your thoughts on Chevron? We have record earnings, a P/E of 10 and the Texaco purchase with what looks like lowering interest rates for borrowing the money. Also, Berkley has just hit some major gas wells near us in California's San Joaquin Valley. Thanks for your thoughts, RFM.
CSEonTSC: Good question I'm not sure I'm terribly comfortable with the combination yet. But, maybe I'll get there.
CSEonTSC: As for the Berkley discoveries, they are soon to be a part of Anadarko. I spent part of lunch with Bob Allison of Anadarko today and he is very high on the purchase. They paid a nice price, but it looks like a good buy for them over time.
RM_DanP: The street pays for size/scale. CHV/TX should see multiple expansion. Going forward, volume growth will become the focus. It isn't enough to generate cash, but successfully reinvesting that cash is becoming ever more important.
CSEonTSC: Dan makes a good point -- reinvestment of cash flow is going to become a big focus this year, especially if these companies throw off as much cash as they could.
SleepingMan-guest: How do you think the energy crisis will affect the stocks of other companies which are not related to the energy industry?
CSEonTSC: Look at the warnings you are seeing from companies across sectors. I think you are already seeing a decline in demand as a result of price. I think it is still a bit too early to know for certain, but it has had an impact on the economy and will continue to do so. I think the commodity to watch, however, is gas. That is where the biggest hurt will come from.
RM_DanP: Higher energy costs have begun flowing through -- either in higher prices (inflation!) or in compressed margins -- downward pressure on earnings! Neither particularly bullish.
kathi_sanger-guest: Hi guys ... opinion of APA, APC, and SLB?...thanks.
RM_DanP: APA = buy and exploit. Pretty cheap. Our favorite in the E&P sector.
RM_DanP: APC = finds oil and gas. Relatively expensive, but have earned the multiple. Like the stock around $60.
RM_DanP: SLB = recent acquisition has spooked people. Downside = low $60s, more likely = return to mid-high $70s. Don't sell. Buy aggressively below $60.
CSEonTSC: Like the APA story as well. I heard them this morning at the UBS energy conference and they are on track to have a good year. I agree with Dan. Anadarko -- I like the management team a lot. I agree with Dan that they are pricey but you buy quality. As for SLB -- agree again, but also think that Jim Cramer makes an interesting point in his missives about the overreaction to the acquisition.
RM_DanP: APA clarification: Company is a buyer of assets, then exploits.
Kobe guest: It has been said that there is enough oil in the U.S. right now to combat an immediate energy crisis. Is this a fair statement?
RM_DanP: I don't think it's fair. On a days forward usage basis, oil inventories are as low as they have been in the past decade.
RM_DanP: The only way we have enough is if demand falls a bunch -- not a pretty scenario.
RM_DanP: I wouldn't call oil a crisis, but don't think we could handle a big jump in demand without much higher level of imports.
CSEonTSC: It depends on what you mean by crisis. Are we at risk of running out? No. Are we at risk of pricing pressures if supply slows materially or demand picks up as the economy regains steam? Absolutely. That said, I think you will see marginal production gains this year and more next year, with prices settling into the mid-20s. OPEC will get what they want and the economy won't suffer from prices at those levels.
SleepingMan-guest: What do you think, with the current energy crisis is the probability of scientists coming up with a new cheap and efficient energy resource, with the priority for such a resource continually growing?
CSEonTSC: Assume you are talking about power -- clearly, fuel cells hold promise, although are at least three to five years away from mass commercial and retail use. You can also exploit natural power sources -- wind, hydro, etc., although we are loath to increase hydro for environmental reasons. Fuel-cell technology holds the greatest long-term promise. I think it is promising but application is too early to tell how successful.
RM_DanP: High, sustained prices create the incentive to do a lot of R&D. Still will take at least a decade to identify and develop a realistic and widespread alternative.
TSC-RealMoneyLaura: When do you think the fuel cell tech will be available and in use. Won't they meet with resistance from the traditional energy providers?
CSEonTSC: It's available now; production is the issue. You are seeing pilot projects on line now. As for resistance, of course they will resist but the technology will largely supplement traditional fuel sources.
RM_DanP: As fuel-cell technology approaches commercial reality, expect energy companies to actively get involved (acquisition or internal R&D). They won't let themselves become obsolete.
Kokomo guest: Do other countries have energy crises like we do?
RM_DanP: Take a look at Russia right now. Literally people freezing because the infrastructure is so old.
RM_DanP: Interesting thing is that many Third World countries live in constant state of intermittent blackouts.
RM_DanP: We're catching up rapidly. Most other significant countries have more excess capacity in power than we do ... but not much.
CSEonTSC: As an aside, infrastructure -- especially in the power biz , is going to become a major issue in the U.S. Watch that for the next major story in power in the U.S.
stujohns-guest: With all the increased drilling activity, how much more room is there for the service cos. like KEG and the pipe suppliers like MVK to run?
RM_DanP: Decent upside remains. Work-over activity (KEG) is still below the peak levels of last cycle ... so more rigs likely to go back to work.
RM_DanP: MVK makes pipe a consumable ... demand up as drilling increases. Expect volume and price to improve.
RM_DanP: Pipe is a tough business... I like KEG better.
CSEonTSC: If you look at the valuation on the energy service companies, I think Dan is right. You can find some key metrics in a piece I penned last night from the UBS Warburg Energy Conference in New York going on right now. . .
gjohnson5613-guest: Given the ramp-up in gas demand, is pipeline capacity an issue in the next two years?
CSEonTSC: Absolutely -- there is no question that one of the reasons gas became so expensive in California this fall and winter is the lack of capacity to get the gas to the state. Part of that was the explosion on El Paso line. But, clearly, there is a need for more capacity.
CSEonTSC: And, there is clearly need to bring gas from Canada and, possibly, from Alaska. Pipe can't be built quickly. Alaska and the North [it] will be at least 2006 before meaningful capacity is available there.
cscomsft-guest: The Calpine Encal deal looks to be a winner for CPN reserves, pipeline space, and only paid about 2.5 times cash flow. Any thoughts?
RM_DanP: The big benefit is that CPN is locking up supply of a precious commodity ... the natural gas needed to power their plants.
RM_DanP: I expect to see more of these vertical integration -type deals.
CSEonTSC: Calpine has made it clear they want to own reserves to fuel their plants. I think Dan is right. . .. you'll see more of that.
jhavice-guest: Do you think we'll get the seasonal end-of-February selloff in energy stocks this year?
RM_DanP: Stock seasonality is a dangerous game to play when the market is choppy and the commodities are tight. Who knows?
amendonca-guest: Government has a role to play in encouraging alternatives. Do you see any action there?
RM_DanP: Government will have to play a role ... we need incentives and tax relief to encourage new energy sources of all types.
RM_DanP: Although government can also help encourage conservation, price is the biggest stick in that game.
CSEonTSC: They do, and the way not to do it is the way they are doing it in California. The reason there hasn't been significant power conservation in California is there are no price signals. There can be tax breaks and other incentives but they have to be combined with market-based priced signals.
cscomsft-guest: There cannot be very much storage injection upcoming by the LDCs ... if not, are we setting up for a real crunch from Nov. gas year?
RM_DanP: Storage injection will be lower than typical because of tight supply.
RM_DanP: This implies potential for strong gas prices through the summer and into fall. Might see typical shoulder months (August/September) as the strongest of the year!
CSEonTSC: The injection season will be much shorter and less pronounced than normal because of the increase in summer gas demand from power generation. Next winter could be very interesting.
dkmulle-guest: What's your read for whether any of PCGs creditors will force them into bankruptcy?
CSEonTSC: It grows by the day, but I don't think it will be the big creditors you might suspect. If there is not material state action by the end of the month and the federal courts don't grant a rate hike, bankruptcy is almost certain. I'd say the chances are a little less than 50% one of the utilities ends up in court.
RM_DanP: Anything possible where politics and money involved. Bankruptcy likely a last resort as it significantly lengthens the process to get paid -- which is what the creditors want.
firefire-guest: Hey guys, what is the prospect of the pipeline business in general and of Shaw Industries that does the coating for pipes big and small?
RM_DanP: Lots of pipe activity is likely over the next few years ... with a big opportunity in 2004-2007 with Alaska pipelines.
RM_DanP: Not a bad ancillary play.
firefire-guest: What are your like and dislikes about WMB and do you find its current price compelling, a push, dangerous?
RM_DanP: WMB has been a tough stock because of the significant telecommunications component.
RM_DanP: With telecom getting "cold" and energy getting "hot," there are lots of moving pieces. WCG --Telecom segment, spinout increasing likely. Prefer the energy piece. Telecom could fall in the dangerous area.
CSEonTSC: Agreed on the telecom issue I'll be interested to see what El Paso has to say tomorrow about their telecom business. I think telecom has now gone from an asset to a distraction.
sonodoc-guest: Why isn't solar more widely utilized, especially in the American Southwest?
RM_DanP: It's expensive. Solar is a great idea with very poor economics. Needs to be much more efficient before it is ever meaningful.
keetz4-guest : Thanks for getting to the oils on chat. I don't know them as well as tech. Do you see drillers leading the sector in terms of stock prices or natural gas or oil and gas? There are so many divisions I am unclear whether they will all do well. And what about the oil shippers like FRONY they are posting great earnings?!
RM_DanP: Rising energy tide will lift most of the sectors. Drillers showing best year-over-year earnings growth and have been the leaders.
RM_DanP: Likely continues until the economic outlook gets a little clearer.
RM_DanP: Tankers are cheap, but fear is business has plateaued. Decent yields. Not fast money stocks.
brent99-guest: Where is the Street generally on oil/gas prices as far as earnings models are concerned?
RM_DanP: Simmons is using $27 per barrel oil and $4.30 per mcf for gas. We are probably a bit above consensus on both.
RM_DanP: For what it's worth, we think we will probably be low on both commodities assuming the economy holds together OK.
CSEonTSC: I think, generally, you are seeing oil in the $25 range from the companies and gas between $4-4.25. However, you see longer-term price assumptions for gas as low as $2.75-3.00.
raypeg-guest: MSFT invested 6%? in PNM in New Mexico. Any thoughts?
CSEonTSC: Bill Gates also owns a piece of Avista, the former Washington Water Power. These are Buffett-like investments he must have come up with while playing bridge with Warren.
CSEonTSC: I don't understand the PNM investment. In the middle of a strange merger with Western Resoruces, which I am not high on although the utility holdings are profitable. I wouldn't have made the buy, but I don't have the money Gates has either. Decent dividends.
_05road-guest: Do you think natural gas conservation would derail this boom? I installed a computerized thermostat and cut my consumption by 20%. Isn't this the simplest way to reduce prices, and ensure supply? Also, isn't all the talk of opening up Alaska just a diversion to pave the way for exploration on the federal lands in the Rockies as the lesser of two evils? Do you really need both? Thank you.
RM_DanP: Conservation will certainly slow demand growth ... but new power plants alone will create growth of 2% next year.
RM_DanP: Alaska is not a diversion ... 20TCF annual consumption currently is headed to 30TCF over the next 10 years.
RM_DanP: We'll need the Rockies and Alaska to meet demand!
CSEonTSC: Congratulations -- not sure the thermostat is the solution for the masses, but nice savings. I think you have plenty of time left for gas to work probably not at $8, but certainly around $5, which will be plenty profitable for most of these companies.
justinqueree-guest: What should I be watching for when it comes to the inevitable negative turn in this cycle?
RM_DanP: Watch for large-scale new building of assets like drilling rigs.
RM_DanP: Watch for a flood of interest in the sector -- magazine covers, etc, which will signal investor "overenthusiasm."
RM_DanP: Watch for increasing supplies as a result of higher drilling levels. None of those events has happened in size yet ... good question! It is a cyclical business.
CSEonTSC: One of the things I am watching for is the point where E&P companies begin to raise their price assumptions to lofty levels to justify higher capital budgets. I think they have remained pretty constrained, although I have noticed this week at the UBS conference that there is beginning to be some creep in the assumptions. When you see capital budgets based on $26 oil or above and $5 gas and above, I'd be concerned.
bubabuba-guest: Besides CAT, who are the major suppliers of energy infrastructure to utilities & drillers? Thanks.
RM_DanP: On the drilling side, most of the suppliers of drilling equipment went out of business during the last few busts.
RM_DanP: The two largest suppliers are VRC and NOI ... both have seen backlogs begin to build in the past several quarters.
CSEonTSC: On the power side you have companies like GE that are major turbine suppliers. You also have construction companies like Shaw that are a major beneficiary of the buildout in new power plants.
jeffreybagleymccabe-: Care to name names as attractive E&P targets for the independent power producers?
CSEonTSC: I think you are more likely to see joint ventures. For example, EOG has a joint venture with Calpine to find and produce natural gas. I think you will see more of that. Clearly Apache and Anadarko would be interested as a way to cut their risk in new exploration programs. I'm not sure you will see large combinations as much as you will joint ventures.
RM_DanP: Look for relatively small companies with 10 years-plus reserve lives, primarily North American reserves/production; wouldn't expect deals to be huge, so focus below $1BB in market cap. As a rule, I never name takeover targets because I think it's a tough way to make money -- so many ways for a deal not to happen.
CSEonTSC: The deals you are likely to see are smaller ones of the Calpine-Encal variety.
RM_DanP: I agree with Chris that joint ventures are most likely approach.
shark435-guest:What will happen when it gets really hot in CA this summer?
CSEonTSC: I recommend the beach and the ocean. The power will go out and it will be tough. I really think the chance of major blackouts are significant.
RM_DanP: More of the same ... only this time the Californians will be saying "NOT AGAIN!" instead of "What's happening?" The current problem is not going to go away quickly. The state is fundamentally short of generation capacity.
CSEonTSC: There is a bit of new generation coming on-line but it won't be near enough. Also, you have a huge transmission issue from South to North you can't move power across the state to meet surging demand. If you can't import from the North and San Fran has a hot summer, they are in for trouble, in my opinion.
mikefowle-guest: Chris -- great coverage on the CA electricity story -- my question is ... If PCG and EIX are granted the right to increase, what do you think will happen to the rate of conservation among CA residents and businesses?
CSEonTSC: That's a great question and one that shows you are thinking!! I don't think many people are thinking about that issue. Honestly, I wish I knew.
CSEonTSC: I will say that I think the reason you haven't seen more conservation recently is that there aren't price signals to the consumer. If you agree with the free market proponents, higher prices mean less consumption, depending on elasticity of demand.
stujohns-guest: Does the recent strong run-up of MDR related to new coal plant construction signal a big return to coal? Is the new technology and co-generation clean and efficient enough to promote more?
CSEonTSC: I'm not sure a big return to coal. However, I do think coal will return as a new fuel option. Ken Lay of Enron told me last fall that the new clean-coal technology combined with high natural gas prices would push the use of coal to higher levels. How much higher, I don't think anyone is certain. It will return as part of the new power mix, however, in the next couple of years.
dkmulle-guest: I've read conflicting information about whether Capstone Turbine's micro-turbines could be useful to alleviate the CA problem. What's your take? Can they be set up quickly? Can they be plugged into the grid? Do they meet environmental regulations?
CSEonTSC: Distributed generation is part of the solution. However, it is not a panacea. So many of these alternative fuel stocks have run on the California news. The run is not sustainable. While Capstone is an important part of the solution, be careful in all these stocks.
tedhondo-guest: Is it just coincidence that the entire energy spectrum (oil, gas, refinery capacity, electrical capacity) is very tight at the same point in time ?
RM_DanP: Yes and no. Not a coincidence because industry has underinvested in capacity since the early 1970s.
RM_DanP: Is a coincidence in that several crises happened to hit at the same time -- California power, New England heating oil, OPEC/Iraq?
RM_DanP: Watch out for tight gasoline this summer.
youngoak-guest: Have any diversified energy funds and/or fund managers significantly distinguished themselves from the pack yet, or has energy been so hot that some of the top funds may just be skating on beginner's luck?
RM_DanP: There are some new funds, but most run by people that have watched energy for a while.
RM_DanP: It is never beginner's luck when you've had to wade through the 1998-99 downturn. I suggest you look at the funds that have a five-year tenure ... the numbers won't lie.
CSEonTSC: On the sell side, I have my favorites -- for example. I really like this Pickering guy in Houston . . . seems to know his stuff!
gastranger-guest: Dan & Chris, what drove the wellhead-SoCal "basis" so outta whack in December? How is pipeline transport priced/sold?
RM_DanP: Strong demand driven by weather was the start. Competing demand in other Western states added to the situation
RM_DanP: Inability to get gas from Southern CA to Northern CA added fuel to the fire. Then there was shutdown of other power generation (maintenance and problems) that left the gas-fired power as critical ... making demand inelastic.
gastranger-guest: Where does California go from here? The governor talks about 5000MW new generation capacity by summer, but where will he get the gas if the plants do get built?
CSEonTSC: He can find the gas, for a price... and, of course, that will remain a major issue. However, that generation will help, but not solve the supply problem.
sonodoc-guest : What are Gov. Davis' chances at re-election?
CSEonTSC: Lights out
CSEonTSC: Seriously, I think it depends on how he solves the crisis, if he can. He has moderated his position. What I think I can say is that I think the way he has handled the situation will severely limit his national political appeal.
RM_DanP: If the people in California ever realize what a difficult situation they are in, he is toast -- a personal opinion -- the public always looks for someone to blame.
TheStreet-gues0 : Thanks Dan and Chris for a great hour! Any final thoughts?
RM_DanP: Thanks for the opportunity to participate. Energy promises to be an interesting place to be in 2001. It's cyclical and it feels like the relatively early part of the up-cycle. Watch the warning signs for overcapacity and good luck making money!
CSEonTSC: First, a BIG thank you to Dan Pickering. Seriously, when I first started covering the energy sector, Dan took me under his wing and helped me learn the ropes. So, thanks for that and thanks for joining us today. The energy markets will remain exciting. Stay tuned to TheStreet.com and RealMoney for all the latest. Hope to see you again soon. And, now, go buy a dozen roses and head home to your spouse. Happy Valentine's.