2001 Review: Slipping in the Oil Patch

In the oil patch, 2001 will be remembered as the year of the very big story.

From Enron's ENE collapse to the plethora of mergers among major energy companies, the news was full of frenetic energy, derailed hopes, corporate stumbles and a wave of unprecedented consolidation.

A caveat: The slide into recession arguably had the greatest impact on energy markets. With that in mind, we focus on five stories from the energy sector that had a marked effect on investors in the past year.

From Top of the Hype to Worst

2001's top story in the energy sector was the collapse of Enron. Once the darling of Wall Street and envy of other energy companies, the natural gas- pipeline company that turned into an energy-trading behemoth seemingly could do little wrong.

Yet, as it turned out, the Houston-based company had been doing a lot wrong for a long time. A bulk of Enron's success over the past several years is now attributed to accounting gimmicks and off-balance sheet financing that ultimately led to the company's tumble.

Nonstop to the Bottom Enron stock tanked when the curtain was pulled back on Oz

Enron's legacy -- fame turned to infamy -- surely will be the largest bankruptcy in U.S. history. The failure exacted a huge toll on the Houston economy and put thousands of employees out of work. Their retirement accounts -- once worth millions in Enron stock -- are nearly worthless. The deceit and trickery also created havoc in the energy markets and for Enron's industry peers.

Companies such as Calpine CPN, Dynegy DYN, El Paso EPG and Mirant MIR felt the pressure as investors wondered if similar issues lurked beneath the surface.

While the differences are greater than the similarities, these companies faced crises of liquidity and of confidence from investors and rating agencies. Enron's failure also accelerated the shakeout in the energy-trading business, causing all of these companies to become more realistic in their growth expectations.

Wall Street Winces

Big Funds Come Up Big

Restoration Hardware Shakes Off the Dust

Five Stocks That Came Out of Nowhere

Stocks Stuck in the Back Seat

Four CEOs Who Slipped Through the Net

Biotech Talks Turkey

Enron Avalanche Frosts the Accountants

In Wireless, Few Winners

JDS Uniphase and Other People's Money

As for Enron, the ultimate resolution is liquidation. Enron stock becomes worthless in any reorganization.

And, finally, kudos to my colleague Peter Eavis, who began to chronicle Enron's demise far before anyone else. And praise for John Olson at Sanders Morris Harris, who as early as January warned our readers about the problems at Enron.

Dereg Debacle

Second on the list of top energy stories of 2001 is the California energy crisis. A poorly designed electricity-deregulation scheme, combined with an inept governor and a crew of lawmakers and agencies more interested in the blame game than solutions, led to blackouts, lawsuits and, ultimately, the bankruptcy of Pacific Gas & Electric PCG.

The problem -- too much demand and not enough electricity -- sent prices soaring as much as 100 times average levels. Even then, there wasn't enough power available to avert outages across the state, most notably in the San Francisco area, where supply remains perilously short.

While new power supplies and impressive conservation have helped, problems could resurface this spring if demand surges. After all, the plants that have been running full-bore will have to come off line for maintenance at some point this winter or spring.

California's power crisis shocked the nation, with at least 12 other states putting deregulation plans on hold, and a handful of others rejecting deregulation outright as a result.

All Hat and No Cartel

Third on the list is OPEC's stumble. Today's OPEC meeting to once again announce a 1.5 million-barrel-per-day cut in crude-oil output may make it sound like the oil cartel still has clout, but 2001 provides evidence to the contrary. (Remember, they announced the same cut more than a month ago.)

As oil tumbled below $20 a barrel on weak demand and increased supply from countries such as Russia, Norway and Mexico, OPEC's $25 price target and $22- to $28-price band are a distant memory. In fact, the days of OPEC having firm control of oil prices are long gone. If we learned nothing else this year, it is that demand -- not supply -- is the stronger determinant of oil prices.

While OPEC may manipulate short-term oil prices with rhetoric, the cartel's ability to control prices over time is diminished forever. Prices will adjust to supply and to demand but not to the whims of the cartel. Russia, Norway and other oil-producing countries will see to that.

Bigger Is Trendier

The continuation of mergers in the energy space is the fourth story on our list. The creation of BP Amoco BP, ChevronTexaco CVX and now Phillips P and Conoco COC is a big-league trend.

The merger frenzy went beyond the majors. Devon's DVN purchase of both Mitchell Energy MND and Canada's Anderson Exploration creates a new natural gas powerhouse to compete with the likes of Anadarko APC and Apache APA.

The trend should continue in 2002, especially among natural gas companies, as large players jockey to build their stable of productive wells in the wake of ever-increasing depletion of existing natural gas production.

And the Capper...

The final big story from the oil patch is the impact of asbestos litigation on Halliburton HAL. From a giant to a company wearing a scarlet A of a different sort, Halliburton's viability is now challenged by the asbestos noose.

Although Halliburton insists it ultimately will prevail in the courts, the prolific plaintiffs' bar and cascading lawsuits will continue to have a profound impact on the company, perhaps, some say, all the way to bankruptcy.

Our Old Pal HAL Halliburton stock getting burned by asbestos liability

And, while Halliburton appears to be the only casualty in the oil patch to date, there may be reason to worry about other companies' exposure in this changing liability landscape. This is a story to watch in the coming year.

2001 was a tumultuous year for energy investors. Our resolution for the new year is to continue to bring you insight and analysis that will help energize your portfolio. Next up: a look ahead to 2002.

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Have thoughts on the top energy story of the year? Shoot me an email, and the three best suggestions will receive a TSC T-shirt as my way of saying Happy New Year.