As energy prices soar and California utility companies struggle to stay solvent, large investors have been finding opportunities amid the chaos.
Mike Hoben, president of Benefit Capital Management Corp., which oversees $4 billion in defined benefit assets for Union Carbide Corp., Danbury, Conn., has been buying large international oil companies such as Exxon Mobil Corp. and Conoco Inc. He also likes larger oil service companies such as Halliburton Co. and Schlumberger Ltd.
"The utilities had a huge move last year. It's unlikely that will happen again," said Mr. Hoben. "Oil companies have been under pressure, but they are very stable, with predictable cash flow, and I expect their earnings to improve. They're getting attractive at this point, so we've been buyers. Their price-earnings ratios are below those of the Standard & Poor's 500. We're overweighted in these relative to the S&P 500."
He noted he has stayed away from regulated companies such as utilities. "Because of the political aspect, it's too tough to predict earnings."
Most investors interviewed by Pensions & Investments are avoiding the California utilities, however, because the situation has become so volatile with Pacific Gas & Electric, a unit of PG&E Corp., and Edison, a subsidiary of Edison International Inc., facing possible bankruptcy.
Claude Davis, utility analyst and vice president at MFS Investment Management, Boston, sees positive fundamentals in the overall sector. A lot of investors shifted to utilities last March after the Federal Reserve raised interest rates, which prompted a rotation out of technology and into utilities.
"Then after the Fed cut 50 basis points in December, people moved out of utilities and into growth stocks again," he said. "There is still a great shortage of (electric) capacity in the U.S. and a severe shortage in California. Independent power suppliers have been hit the hardest since the beginning of the year, because of the uncertain situation in California. Many investors are waiting on the sidelines to see how it plays out."
Mr. Davis likes some non-California utility companies such as Duke Energy Corp., which he has been buying, and Dominion Resources Inc., which he already owns. Duke has exposure in California, but it also is extremely diverse. Calpine Corp. is another favorite, but it is in San Jose, Calif., which makes it riskier, so he is holding that position, while waiting for the California power problems to be resolved.
Like most experts on energy, he cautioned that investors should avoid Edison and PG&E because of the level of uncertainty. MFS has small positions in both, he noted, which it is continuing to hold, because current valuations reflect the high level of risk.
Many of the generator stocks have traded off due to the power problems in California, which makes them good buys now, especially if they don't have a lot of exposure in California, said Tara Gately, an equity research analyst at Loomis Sayles & Co., Boston, where she specializes in electric and gas utilities.
She favors Duke Energy and Calpine, noting there are some concerns about their payments getting delayed if the utilities declare bankruptcy. "Some of those stocks have been really beaten up, as have some of the utility companies. They look cheap now. You need to be selective." In the utility group, she recommends Exelon Corp. and FPL Group, the parent company of Florida Power & Light Co.
Oil and drilling
Oil services and drilling companies also are good bets, because they won't suffer any long-term effects from the California power crisis, said Jeff Eberwein, managing director and equity analyst covering energy at SSB Citi Asset Management Group, New York.
"It's difficult to predict commodity prices, but we believe that as a result of the crisis in California, the sector will spend a lot to drill more wells. ... When commodity prices go down, companies tend to cut back on drilling, as they did at the beginning of 1999. Some of those oil services stocks got creamed, falling 80% to 85%. But now these stocks are rallying and I expect that drilling activity will increase over the next two to three years, and earnings could triple."
He recommends Santa Fe International Corp. and R&B Falcon Corp., each with a potential upside of 100%, and Weatherford International Inc.
Mr. Eberwein also likes Halliburton, but pointed out that there is a lingering cloud hanging over the company because of asbestos litigation. He added that its former chief executive officer, Dick Cheney, the new vice president of the United States, is likely to push for a lifting of sanctions that prohibit U.S. oil service companies from investing in Libya and Iran. "He was pretty vocal about this when he was at Halliburton, so I can see him pushing for that. And if the sanctions are lifted, it would help the oil service companies even more," said Mr. Eberwein.
William Adams, senior energy analyst at Banc of America Capital Management Inc., Charlotte, N.C., said he's focused on natural gas, whose prices are rising, but are still a lot lower than oil prices. Among the producers he likes are Anandarko Petroleum Corp. and Devon Energy Corp.