Goldman Sachs: 10 Year Lows
"We believe investor sentiment regarding merchant generation is at an all-time low...In some cases, we believe stocks are trading below the replacement cost of their assets, making them attractive consolidation candidates.
...At current valuations...we think the market is anticipating a material deterioration in earnings power...the generation focused electrics are trading at close to their lowest P/E over the past ten years.
...the average P/E for the generation focused companies is well below historical averages and close to (I'm sure now is - PQ) the lowest level P/E over the past ten years.
...With stocks in the sector trading at historically low valuations, other energy companies may take this opportunity to acquire strategically placed assets at low values. In the IPP space, companies such as NRG Energy and Reliant Resources are trading at a 2001 enterprise/KW ratio below $400/KW, a level that we believe is well below replacement cost. In discussions with various generators, we beleive the all-in average cost for combined cycle generation in the US has grown to a level exceeding $600/KW.
...In addition to trading below replacement costs, many generation companies are significantly undervalued, in our view, (even) if we assume growth completely stops after 2001. Assuming each IPP stops growing this year and simply pays out 70%-80% of its operating cash flow (or earnings) in the form of a dividend would support much higher stock prices for many IPPs. The most compelling stocks under this analysis include (in order of attractiveness): Mirant, NRG Energy, & Calpine.
...(addressing the spinning reserve issue of additional capacity bringing reserve margins in 2003 to 31% assuming all announced projects are built) WHen we account for the fact that the current US supply base has 155,000-160,000 MW of oil and gas-fired generation that is more than 20 years old (and inefficient heat rates), it tells a different story about future profit opportunities. Adjusting our reserve margin forecast for this inefficient generation, we estimate a 2003 national reserve margin of 8% with several power pools actually showing negative adjusted reserve margins in 2003. Understanding that it is very likely that much of the inefficient/older technology will still be necessary gives us confidence that strong profit opportunities should persist.
>>Taken from a report on Calpine Corp. |
