Firms with substantial gas pipeline holdings generally saw their stock prices rebound in the second quarter as a flurry of newly announced long-haul projects helped boost the value of the gas transportation sector as a whole, analysts agreed.
"Part of it is due to everyone having a bad first quarter" - John Olson, Sanders Morris Harris
A group of 16 companies tracked by Platts reversed two consecutive quarters of weak performances to post an overall 6.49% gain compared with the previous three-month period and a 3.5% average increase from the second quarter of 2005.
The group edged out the Dow Jones Utility Average, which was up 6.41% from the first quarter, and outperformed the Dow Jones Industrial Average and Standard & Poor's 500 index, which rose 0.37% and declined 1.91%, respectively.
"Part of it is due to everyone having a bad first quarter," said analyst John Olson of Sanders Morris Harris. In the January-through-March period, the stocks lost an average of 1.47% of their value compared with the fourth quarter of 2005. But analysts cited another reason for the second-quarter recovery: shareholder activism.
For instance, hedge fund managers recently called on Southern Union to either sell the company or reorganize its pipelines and storage operations into a master limited partnership in an effort to make the stock more attractive to investors.
That move was likely spurred by Kinder Morgan Chairman and CEO Richard Kinder's move in May to lead a $22 billion bid by his top executives to take the firm private.
"The market is starting to value pipeline assets a little bit higher than what they were before," explained analyst Gordon Howald of Natexis Bleichroeder. In the Kinder Morgan deal, "even if you take out 20% in private market premium, you're still talking about really high valuations implied in that takeover. More than anything, that reflects that there's value in the assets these companies have."
In addition, gas company stocks "got hit" last winter when commodity prices fell due to the lack of decent winter demand, Howald said. "But is this permanent? Certainly not. The futures market is still strong into 2007, north of the $10/MMBtu mark."
The recent plethora of proposed pipeline projects is certainly a plus for the sector and "demonstrates that there's definite potential for big, long-haul projects," Howald said.
He also noted that while larger projects such as the Rockies Express system are being built to move gas east, other projects are aimed at transporting Barnett Shale gas out of North Texas or liquefied natural gas from new terminals to consuming markets. "The dynamics are changing, and not everything will come from the Gulf. We'll see more in terms of LNG from the East and West coasts," he added.
A common concern among analysts is the pending Kern River Gas Transmission rate case. The administrative law judge in the case recommended a 9.34% return on equity for the pipeline in a draft decision released in March.
"It's an off-putting, broken chord to think that a 9.34% return on equity would be perfectly fine for Kern River when corporate America is making about a 17% return on equity," Olson said. "Corporate America is obviously unregulated and it's win-or-lose in the marketplace, while pipelines are one-trick ponies that are allowed what they get from FERC in a settlement. But 9.34% is a non-starter for most equity investors."
The impending Kern River decision, which could affect similar pipelines existing or proposed out of the burgeoning Rockies supply area, is "a looming concern," Howald agreed.
Howald cited another factor that could affect the stock prices of integrated pipeline holders for the rest of the year: mark-to-market accounting. He expects the second quarter to bring some negative earnings results traced to the mark-to-market accounting method.
"At least with some companies, they reported these blowout numbers in recent quarters and you say 'OK, they're up 15 cents from last quarter, but 11 cents of that is mark-to-market.' So I think we may be in the opposite situation in this quarter where people have held long positions."
Created on: August 3, 2006
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