ENERGY PLAYS

The Street.com May 22, 2001

How Bush's Energy Plan Will Power Stocks

Chris Ellinghaus of Williams Capital Group says companies across the board should benefit.

By Lee Barney Staff Reporter

Last week, President Bush suggested numerous ways that the country can increase energy, including increasing oil and natural gas exploration, reviving the nuclear power plant and building thousands of miles of pipelines.

Chris Ellinghaus, a principal with New York-based investment banking firm Williams Capital Group , says Bush's plan is both bold and imperative for the overall health of the economy. He estimates that the ideas Bush is calling for will require $1 trillion worth of investments from the private sector, and that electricity and coal stocks in particular will benefit. While the investments might lead to higher energy costs and greater pollution to some extent, Ellinghaus says that if the country doesn't improve its energy capacity, prices will go sky-high.

TSC: Are we really heading for an energy crisis, and if so, what forms of energy in particular are under strain?

Ellinghaus: We are in one right now. We have a significant shortage of energy infrastructure at all levels of the energy value chain. That means from exploration and production of oil and gas, to the processing and transportation of that oil and gas, to the creation of electricity and all of the other energy products in the energy chain.

If we don't do something to improve infrastructure, things will get dramatically worse, and not just in California but in many parts of the rest of the country. While this might lead to some higher energy prices, it would be a lot more expensive if we don't implement this plan. If we don't, prices will spike sky-high.

TSC: How did we reach such a crisis?

Ellinghaus: Part of it is due to inaction. Part of it is due to deregulation. And part of it is due to NIMBY [not in my back yard] and environmentalists. The proliferation of so much computer and telecommunications equipment along with the Internet and intranets has also really strained the infrastructure.

We have a steadily growing economy. We have immigration and a rising standard of living. Americans have been through energy crises before, but we demand ever-increasing amounts of energy at low cost.

TSC: So you approve of what President Bush is proposing?

Ellinghaus: He's gone a long way toward proposing some very good solutions. In fact, if I was drawing up a plan, my plan would look largely like his plan.

The Clinton Administration put out a directive to the industry that everything should be natural gas because it's domestic and it's cleaner. I believe that is generally a good plan, but you can see already what's happened. By dramatically increasing the demand for natural gas, you spike the price.

Bush wants to create greater diversity among the fuel sources. Coal, even though it's less environmentally friendly than natural gas, is an absolutely critical element of our future energy sources. Bush is very correct when he says that electricity is really the fuel of the future. Virtually all service and technology industries are completely fueled by electricity.

The only thing I disagreed with is I think it's more of a 10-year plan than a 20-year plan. We need it earlier.

TSC: So which energy subsectors would you point to as good investments?

Ellinghaus: His plan and our needs go from the very bottom at the oil well to the field service industries to the pipelines to the gas processing businesses, all the way up to the power plants, the transmission lines and the utilities. You name it, it's going to be affected in a big way.

One of the key points of his plan was adding 38,000 miles of pipelines. That's like adding a Williams Companies (NYSE: WMB - news) to the energy mix. Instead of having four principal pipeline companies, you'll be adding one more. And 1,300 to 1,900 power plants is a big project, so that will definitely be a contributor to the growth and profitability of that subsector. I don't know of any company in the U.S. that owns more than 40 or 50 materially sized power plants.

It will also affect the wholesalers because we'll be increasing the size of the energy market dramatically and at the same time deregulating it.

We're also talking about increasing the size of the gas market by perhaps over 50%. That's really going to have a major impact on the major oil and exploration and production companies. Bush assumes a big increase in gas and oil consumption, along with coal. The ancillary industries that provide equipment and services will also be impacted pretty amazingly.

I think there's a minimum of $1 trillion of investment required.

TSC: Where is this money going to come from?

Ellinghaus: Hopefully, it's coming from Wall Street. Let's put it this way; if you don't invest $1 trillion in the energy infrastructure, you can't significantly add to the Internet capacity. If we think that's going to be a big driver of the future, we had better reinforce the infrastructure to support it or we won't see economic growth. The private sector is going to respond to this call for infrastructure in a big way.

TSC: Are you saying that all energy stocks will be good investments?

Ellinghaus: I think some will be better than others. The energy sector is something you would overweight in a portfolio.

TSC: Since this proposal is likely to take a long time to make its way through Congress and already there are many opponents, do you think the energy sector could remain volatile for a long time?

Ellinghaus: I wouldn't say that every stock in each of these subsectors is going to be a great outperformer. As a whole, the energy story is pretty compelling. You could pick any of the principal generators and do well. And if you believe that we are going to have tight energy markets until we complete this plan, they'll have strong economics in those plants as well.

If you are talking about increasing the size of the gas market by maybe 50% or more, that means that the exploration and production companies will grow 50%. The gas pipeline industry could also grow that much, which will affect the wholesalers. The utilities could grow pretty significantly, although I would put that at the bottom of the list.

It's a very good story across the energy sector, but you still have to be a stock picker. If you are going to make a bet on an industry across the board, though, this is probably one of the sectors that you want to bet on.

TSC: And what about concerns about what this will mean for the environment?

Ellinghaus: I think it's a little courageous on Bush's part to take a little heat by essentially saying, if we don't increase the emission of pollutants, then we are going to have a stagnant economy.

But we can try to implement the cleanest technologies, and face it -- plants that were built in the 1940s look nothing like the plants that are built today. Additionally, this whole process might allow us to replace a dirty infrastructure with a cleaner infrastructure.

TSC: So can you name some specific stocks that you believe are good investments now?

Ellinghaus: The plan indicates that there is a significant shortage in electricity. The company that is best positioned to add more capacity to the grid is Calpine (NYSE: CPN - news) .

There's also Energy Partners (EPL:) and AES (NYSE: AES - news) and Reliant Energy (NYSE: REI - news) and Mirant (NYSE: MIR - news) and Dynegy (NYSE: DYN - news) and Enron (NYSE: ENE - news) .

These are the principal companies that are going to help the natural gas and electricity infrastructure.

-- (Paracelsus@Pb.Au), May 22, 2001

Answers

Nothing but BS. It is important to be aware of the long-term and environmental implications of the options being discussed. Among the provisions contained in the bill that threaten public health and degrade our natural resources are those that would:

Open the Arctic National Wildlife Refuge to drilling. According to an U.S. Geological Survey estimate the economically recoverable oil supply from the Refuge would only be enough to provide for 180 days worth of American oil consumption. The Interior Department also estimates it would take at least 10 years before any oil found there would be available to U.S. customers. The price for this short-term, speculative supply is to permanently damage an irreplaceable international treasure and the last 5% of Alaska’s Arctic coastal lands off-limits to exploitation.

Restrict the U.S. Bureau of Land Management's (BLM) and Forest Service's authority to set conditions on oil and gas drilling projects that are needed to protect fish and wildlife, water quality, and other environmental values. It would also delegate to the states the authority to make all post-leasing decisions on those federal lands and would waive the Secretary of the Interior's authority to manage these operations on federal lands, even if they are causing significant environmental impacts. State regulation of oil and gas effectively would give industry the opportunity to make the regulatory decisions about federal lands, putting the fox in charge of the hen house.

Increase air pollution by weakening standards for power plants. The bill includes a provision that would effectively repeal the Clean Air Act programs designed to prevent large coal-fired power plants from harming public health or the environment. Coal plants would be exempt from additional Clean Air Act regulations for as long as ten years. This provision could also exempt power plants from pending enforcement actions.

Increase global warming pollution by encouraging dependence on fuels that produce the most carbon dioxide: oil and coal. The bill encourages the development of new fossil fuel supply, but does nothing to limit emissions of carbon dioxide produced by fossil fuel combustion. Carbon dioxide is the largest contributor to global warming, which is occurring more rapidly than previously expected.

Increase subsidies to coal, oil, gas and nuclear industries. This bill is a laundry list of give-aways, new programs and subsidies for many of the nations worst polluters. It should be noted that these new subsidies come on top of a heap of existing subsidies and programs for coal, oil, gas and nuclear power. Higher oil and gas prices have already boosted the gas rig count from 392 in April, 1999 to more than 800 today. In other words, the "incentives" to stimulate exploration and production are already in place. When coupled with the record profits for oil companies in the last quarter, it is hard to see why we taxpayers should offer even more. The tax code is already full of special exemptions and loopholes for energy production.

Drive up demand for gasoline by encouraging the production of gas guzzling SUVs. The bill extends the flexible fuel vehicle credit that awards automakers credits toward meeting CAFE standards by producing vehicles that can run on ethanol or gasoline. There are very few ethanol pumps and no requirement that the vehicles ever actually use the alternative fuel. This program actually increases the number of gas guzzlers automakers can sell, driving up demand for gasoline.

Repeal major electricity regulation laws without ensuring adequate safeguards. The bill would repeal the Public Utility Holding Company Act (PUHCA) and the Public Utilities Regulatory Policies Act (PURPA), two federal laws intended to prevent the kind of problems California is experiencing today. PUHCA was designed to prevent utility monopolies from manipulating power markets. PURPA was enacted to increase and diversify electricity supplies with new renewable energy sources and high-efficiency natural gas cogeneration. Both laws should be reformed to better accomplish these goals, not repealed. Strong measures are needed to protect consumers and the environment and to prevent domination of electricity markets by a handful of large companies.

Provides inadequate gas pipeline safety. The bill seeks to speed up natural gas pipeline siting decisions. The legislation fails to establish processes to assure that proposed new pipelines are needed, and that pipeline safety will be assured. Safety concerns are particularly important given the lax enforcement of existing standards and provision in the draft legislation designed to slow down development of new standards.

-- Cherri (jessam5@home.com), May 22, 2001.

Cherri, if you were philosopher-king, what would you do? Cold-fusion?

-- (Paracelsus@Pb.Au), May 22, 2001.

Bush Plan is BIG Government BS. More control and more taxes.

Not surprising coming from the Ultra-Liberal Republican Party who are against most every freedom under the sun. Can't do this, can't do that circlejerkers.

-- (circlejerkers@kooks.com), May 22, 2001.

I would agree with Cherri on all of this, except for the fact she's backing Gray Davis's calls for massive federal intervention in California's screwups. That bozo wants government subsidization of power in his state via fixed price caps. Two problems with that - it does nothing to reduce demand (hence the problems stay and stay, not to mention that demand is never reduced) and second it's massive big government manipulation. What if the suppliers don't want to, or can't supply at the prices imposed? Then blackouts become black holes.

-- libs are idiots (moreinterpretation@ugly.com), May 22, 2001.

Hey Dumbfuck, the Gray measures are transitional. They are proposed to allow enough time to let the MARKETPLACE provide the resources and balance currently absent in this Republican Extortion model.

The Marketplace will not walk away from a 20 BILLION Dollar market (using old prices btw). Price caps allowing ten times the going rate are not going to scare anyone away.

Time to say to the Big Government-Big Control Liberal-Republicans, go fuck yourselves! Take your massive Energy Agendas and stick them.

-- (nutcases@rehere.shop), May 22, 2001.

Dipshit for brains - federal price controls don't work, they never worked, and they never will work. The people in North Korea graze their lawns becuase of their government price controls. Gray Davis cares squat about blackouts, price caps are about preserving his shitty budget.

-- libs are idiots (moreinterpretation@ugly.com), May 22, 2001.

Yep shithead we need MASSIVE GOVERMENTAL AGENDAS and CONTROLS, just like your Liberal pResident George W Bush just proposed. More taxes, more pollution, and more bs.

Not that it could possibly matter, but there are ALREADY Price Caps in California, ordered by the FERC. Ridiculously high, but Dubya already authorized as much.

Now go back and reread See Spot Run and comeback here in ten years when you have grown-up.

-- (circlejerkers@kooks.com), May 22, 2001.

I support my local Libertarian party, but somehow I believe you're a big government lover, with price-fixing and all the rest. I'll stick around just to annoy the socialist shit out of you.

-- libs are idiots (moreinterpretation@ugly.com), May 22, 2001.

Do so, am I supposed to care? Rolflmao

-- (fuck@of.f), May 22, 2001.

Here is the answer. No muss, no fuss.

-- (DrStrangelove@Maharishi_U.edu), May 22, 2001.

This is great.

-- Carlos (riffraff@cybertime.net), May 23, 2001.

Hey nutcases, what is the "going rate"? It was well over $200 a megawatt hour last December. So I guess ten times the going rate allows for over $2000/mWh?? I guess we can put the price caps there okay?

The spin doctors like to point to an instance in which $1900mWh was seen on the spot market, but that was for power out of a single plant, constrained by California environmental laws to only operate 8 days outs of the year.

-- libs are idiots (moreinterpretation@ugly.com), May 23, 2001.