PFC Energy 50 firms outpace the market

WASHINGTON, Jan. 16 /PRNewswire/ — The Petroleum Finance Company’s (PFC) index of the world’s largest listed energy firms rose 22% in 2000, far outpacing the S&P 500 (-10%) and the Nasdaq (-39%). “The PFC Energy 50 demonstrates that the energy industry continues to be extremely dynamic,” said J. Robinson West, PFC Chairman. “It is a key link between the New Economy and the Old Economy. The equity markets agree since the Energy 50 substantially outperformed the S&P 500.” The total market capitalization of the 50 companies was $1.82 trillion at year-end 2000. While crude oil and North American natural gas spot prices climbed to new highs, the PFC Energy 50 rise was not driven by share price gains for the major integrated oil & gas companies, but instead by dynamic emerging energy players with new business models. Gas & power companies significantly outperformed the oil & gas companies in the Energy 50. The report can be found in its entirety at http://www.pfcenergy.com .

Companies on the list with the highest percentage gains in market capitalization in 2000 include Dynegy (NYSE: DYN – news), Enron (NYSE: ENE – news) and El Paso (NYSE: EGP – news). Calpine (NYSE: CPN – news) and Reliant (NYSE: REI – news) were also top performers, benefiting from the high electricity prices in the tight California market. However this could end up being a double-edged sword with impending credit problems at California’s two largest utilities, PG&E and Southern California Edison. A number of these wholesale power suppliers have seen their share prices fall sharply in early January 2001.

One reason that some dynamic firms hold such promise for earnings growth is that they are focused on business development models rather than capital asset models. The innovative energy companies have frequently outperformed traditional due to differentiated models that de-emphasize returns on capital employed and instead focus on earnings growth through new business development.

The energy convergence trend — where units of energy are becoming interchangeable — is driven by deregulation, privatization and rapid gas demand growth. Convergence for its own sake adds little value unless a portfolio emerges that holds greater prospects for growth and extends or creates a market. In gas & power, mergers are being pursued on the regulated side of the sector, while unregulated business units are being spun-off and demerged. These include BG (NYSE: BRG – news), Southern Energy (NYSE: SOE – news), NRG Energy (NYSE: NRG – news), Orion (NYSE: ORN – news) and plans for a Reliant Resources public offering (NYSE: REI – news) and an Aquila Energy IPO (NYSE: UCU – news).

There is a unifying challenge among all of these companies: growth in total shareholder return (TSR). One path to higher earnings and TSR is through a business model emphasizing profitable volumetric growth not constrained by existing assets. Successful approaches will come from a portfolio of skills, not just assets. While the full impact of convergence on the energy sector is not yet resolved, it undoubtedly has been a factor in the competition for capital.

The Energy 50 serves as a guidepost for international energy companies competing in a changing and converging landscape. The Energy 50 report covers top performers, M&A, companies poised for growth, and business models, and is updated quarterly. Visit http://www.pfcenergy.com for full details. PFC is a leading strategic advisory firm in global energy with clients worldwide, including major energy companies, financial institutions and governments.