Energy Stocks Bubble as Dynegy Burns Bright
By Melissa Davis
01/08/2003 13:48
An emotional celebration continues to ignite shares of Dynegy DYN and its troubled peers, even as analysts caution that the party is getting out of hand.
Fueled by a rosy outlook, Dynegy rocketed Wednesday to $2.44 a share -- double its price of a week ago -- despite analyst warnings meant to bring investors back to earth. Dynegy shares, which surged 45% Tuesday after the company's bullish comments on its outlook, gained an added 17% on Wednesday and are now trading at highs unseen since the company escaped a brush with bankruptcy last summer.
Dynegy surprised the market Tuesday with 2003 earnings projections that beat analysts' best guesses. The Houston-based company expects to turn a meager profit this year after exiting its cash-sapping energy trading and communications businesses.
Analysts tried in vain Wednesday to remind investors of Dynegy's weak earnings power and the serious challenges that still lie ahead. Both Williams Capital and Gimme Credit insisted that upbeat earnings projections from Dynegy CEO Bruce Williamson failed to justify the fire beneath Dynegy's shares.
Offering his first financial guidance as the company's CEO, Williamson projected Tuesday that Dynegy could deliver profits of up to 15 cents a share this year. Analysts were expecting profits of 3 cents a share, and some were even betting on a loss.
Still, some analysts downplayed the significance of Dynegy's "upside" earnings surprise.
"Beating the forecasters' relatively uneducated guesses does not meet our test for a major EPS surprise," Williams Capital analyst Christopher Ellinghaus wrote Wednesday. "Dynegy's financial guidance is still relatively dismal and ... the survival of the company is still in question."
Ellinghaus pointed out that Dynegy, which faces two significant bank maturities this spring, remains at the mercy of its lenders.
Analyst Carol Levenson of Gimme Credit also raised serious concerns. Levenson questioned whether Dynegy continues to remain in compliance with its bank covenants, since Williamson offered no reassurance on this matter in a conference call Tuesday. She also stressed that Dynegy is counting on nearly $1 billion from asset sales and recovered cash collateral, currently pledged to its skeletal trading operation, to meet its obligations.
"There's no guarantee this cash will show up in time to meet Dynegy's estimated $1.2 billion in second-quarter maturities," she warned.
Given Dynegy's continued challenges, Levenson said she was "baffled" by the stock's powerful rally. Even Ellinghaus, who ultimately expects Dynegy to survive, warned that the stock will probably fall in the meantime.
"Any time a company is in as much hot water as Dynegy and communication has been scant, it is not surprising that one sees a knee-jerk positive response from a little disclosure," Ellinghaus said. "However, investors should expect some retreat of Dynegy shares."
Instead, Dynegy managed to launch other distressed players like Aquila ILA and Mirant MIR Wednesday. Aquila soared 25% to $2.15. And Mirant, which also topped Dynegy's Wednesday gains, jumped 20% to $2.53. All this came despite a broad selloff elsewhere in the market.
To some, like industry critic Karl Miller, the sector's current rally defies logic. Miller in fact counts Aquila and Mirant among companies that could wind up insolvent this year.
"The banks are keeping these firms alive to avoid massive charge-offs of debt, similar to telecom and tech," said Miller, a former industry executive who now leads an energy-related acquisition firm. "Security interests are a little better, but the damage is severe and outstanding debt extremely large.
"We believe this is the real story in the market right now, which must be recognized and dealt with as soon as possible."
In addition to Aquila and Mirant, Miller believes the following companies face potential insolvency in 2003: Allegheny AYE , AES AES , Calpine CPN , Reliant Resources RRI , Williams WMB and Teco TE . |
