How Bush's Energy Plan Will Power Stocks
By Lee Barney
Staff Reporter
5/21/01 10:09 AM ET
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
Principal,
Williams Capital Group
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 (WMB:NYSE) 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 (CPN:NYSE) .
There's also Energy Partners (EPL:) and AES (AES:NYSE) and Reliant Energy (REI:NYSE) and Mirant (MIR:NYSE) and Dynegy (DYN:NYSE) and Enron (ENE:NYSE) .
These are the principal companies that are going to help the natural gas and electricity infrastructure.
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