Sempra Burns Bright

Much of the talk during the past year or so involving energy prices has focused on the price of oil. In fact, during the past year, I've written in this column about several oil companies, including Chevron (CVX - commentary - Cramer's Take), Marathon Oil (MRO - commentary - Cramer's Take) and ConocoPhillips (COP - commentary - Cramer's Take).

But oil isn't the only energy source around -- and not the only one with a rising price. Natural gas has seen its price shoot up like a rogue Bunsen burner flame. The Energy Information Administration, part of the U.S. Department of Energy, estimates that this year, "the representative average residential price of natural gas will be more than 43% higher than last winter."

It's not surprising then that the guru strategies I follow have identified a natural gas utility and energy services company that promises to be very hot. San Diego-based Sempra Energy (SRE - commentary - Cramer's Take) is the result of a merger of the utility companies, San Diego Gas & Electric and Southern California Gas. The company reports that it has the largest customer base of any energy utility in the country.

But Sempra is more than a utility. Where the vast majority of its revenue came from its utility customers at the time of the merger, 1998, now these customers account for about half. During the past several years, Sempra has moved into energy trading, building and owning pipelines and storage and liquefied natural gas. It also generates power through power plants it owns, and just announced the sale of a plant in Texas.

More than some other utilities, Sempra tends to put its money back into the company rather than pay higher dividends. Sempra's yield is 2.4%, while those of other utilities are higher; Consolidated Edison's (ED - commentary - Cramer's Take) yield is 4.8% and The Southern Company's (SO - commentary - Cramer's Take) is 4%.

Also, a cloud that hovered over Sempra has been lifted. In early January 2006, the company reached a settlement in a $23 billion class-action lawsuit involving the energy crisis in the western U.S. in 2000-01. Sempra was charged with artificially driving up prices, which it denies. It settled for $350 million, it says, in order to remove this potentially ruinous lawsuit from the company's future. "Earnings in future years will not be materially impacted by the settlement," says Sempra.

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At the time of publication, Reese was long Sempra, Chevron, Marathon Oil and ConocoPhillips, although holdings can change at any time.

John P. Reese is founder and CEO of Validea.com, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of the best selling book, The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback. Click here to send him an email.

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