S&P’s 2002 electricity outlook weak; stronger for oil and gas producers

HOUSTON, Jan. 14 — Standard & Poor’s Monday reported a negative near-term outlook for electric companies and the natural gas industry, even though the credit ratings agency expects earnings to increase modestly in 2002.

Electric power company earnings for this year will depend on whether the economy has recovered by the summer months, S&P said, in its 2002 economic outlook. S&P expects contributions from nonregulated operations to help offset the impact of rate reductions and the current economic slowdown. Energy industry consolidation has slowed and that trend is expected to continue.

Independent power producers are suffering because of the fallout from Enron’s Dec. 2 bankruptcy protection filing. S&P cut its outlook for independent power to neutral from positive. Fallout from the Enron bankruptcy” has exacerbated S&P’s concerns about lower energy prices and warrants a more conservative investment posture to the group,” said S&P in its report.

S&P suggested investors will switch from the utility sector into material and information technology in the search for higher earnings and better returns. But the energy sector may offer investors “some upward surprises,” S&P said.

The near-term outlook for natural gas is also negative, it said. The Henry Hub spot price for gas will decline this year to average about $2.91/Mcf, compared to $4.29/Mcf for 2001, S&P said. Long-term the view of the gas industry is much better. S&P said gas utilities’ earnings will benefit from the competition for gas created by rising consumption by the power generation industry.

It recommended investors maintain a “market weighting” toward oil and gas producers and major contractors for oil and gas exploration and drilling services. Oil prices will remain at high levels compared with historical averages based on two pillars of support: interest rate cuts and OPEC, the ratings agency said.

Rate cuts by the Federal Reserve System should lead to a rebound in the economy. With cooperation from non-OPEC producers, the oil cartel should continue to align seasonality of supply to demand, S&P said. Limited production capacity and rising depletion rates have set the stage for strong spending on exploration and production within the oil sector for the next several years. S&P projected the price of West Texas Intermediate (WTI) oil will average about $22.06/barrel for 2002.

S&P expects the recession to stay mild, although the risk that a longer and deeper recession might happen remains “very high.” National economic stimulus from monetary and fiscal policy in place are expected to to strengthen the economy by mid-2002.

Separately, Raymond James & Associates Inc., Houston, said lower energy prices could be providing the economy up to a $1 billion/day boost, more than any other stimulus implemented or even suggested by the government. Energy analyst Marshall Adkins said this represents a 3.5% year-over-year windfall to the economy.

“Clearly, the impact of these cost savings could cause the economic rebound to happen sooner than people think,” Adkins said. S&P, meanwhile, predicted the economy will bottom out in the first quarter of this year with a total drop in real gross domestic product of about 1%.

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