Enron Corp. shares lost more ground Wednesday, closing down 17% at $16.41.
Shares of the once high-flying Houston energy merchant have fallen more than 50% in less than a week in a sell off analysts said was prompted by credibility issues and uncertainty over the company’s financial situation. After the market closed, the company said former company treasurer Jeff McMahon had been named chief financial officer replacing Andy Fastow, who will take a leave of absence.
Investors have bailed out of Enron stock since disclosures of the company’s off balance sheet partnerships run by Fastow and other negative financial disclosures. Enron earlier said it would write down the value of shareholder equity by $1.2 billion, resulting from financing arrangements with one of its off balance sheet partnerships.
The US Securities and Exchange Commission is looking into the transactions. Fastow has denied wrongdoing, and the company said it would cooperate with the SEC. But the company hasn’t been able to quell investor anxiety.
Wednesday financial analysts said ongoing uncertainty could hamper the company’s ability to issue commercial paper. “The level of confusion is enormous,” said Jon Kyle Cartwright, fixed income analyst at Raymond James & Associates in St. Petersburg, Fla. “It is absolute panic. I frankly doubt they could issue any paper now.”
Enron regularly rolls over about $1.85 billion in commercial paper or short-term debt. Cartwright said he isn’t worried about Enron’s liquidity. He said the company can draw on a $3.5 billion bank credit facility. Enron can also continue to sell assets, Cartwright said.
But bondholders are selling Enron bonds at a discount, he said. The bonds are trading down on the credibility issue. Cartwright Wednesday said he is buying bonds. Falling prices prompted that action.
“I believe the assets are there to support the bonds,” he said. “Do you trade on facts? Or do you trade on a series of unrelated events woven together into one story.”
Cartwright said portfolio managers are anxious about holding Enron securities because they were already on edge from problems with their telecommunications holdings. “Portfolio managers don’t like to hold securities that are in the headlines every day. The good thing is not a huge amount of these bonds are being traded yet,” he explained.
“Everyone is worried about a black hole,” said David Fleischer, analyst with Goldman Sachs & Co., New York, who lectured Enron CEO Ken Lay Tuesday about the company’s murky financial disclosures. “We want to know that there is not something else out there that management is hiding,” he said.
Analysts complained they still don’t have enough information about the partnerships that involve billions of dollars of debt that must be repaid. They said assets backing that debt are not clearly identified.
“These transactions were too cute for God,” said Fleischer. “Only Jeff Skilling (former CEO who resigned in August) could figure them out.”
John Olson, analyst with Sanders Morris Harris, Houston, said Wednesday’s stock price meltdown was “mostly unnecessary and maybe uncalled for.” He called the reaction “emotional” because Enron’s three main businesses — the trading company, retail energy services, and the pipelines– are solid and will generate positive cash flow.
Both Fleischer and Olson wanted to see the financial details about the partnerships but they are mostly satisfied now that the partnerships won’t “bury the company.” But Fleischer complained “trust is in short supply down in Houston.”
Analysts said replacing Fastow won’t do much to restore Enron’s badly wounded credibility. Enron executives have become their own worst enemy, said Olson. “They need someone else to come in and do a point by point rebuttal of all the allegations.”