ICE Shares Surge On Bullish Analyst Report

NEW YORK (TheStreet) -- InterContinental Exchange (CS) was upgraded to "overweight" from "neutral" by JPMorgan Tuesday as the stock has fallen some 10% since peaking in mid-March, consistent with the trend in financial stocks generally.

Shares opened more than 3% higher on Tuesday following the report.

A rebound in natural gas prices bodes well for the exchange operator.

"ICE is one of our favorite stocks as a true growth company within financials," writes analyst Kenneth Worthington at the start of a 26-page report on the exchange operator. His report cites strength in ICE's European business and "expectations for near-term and long-term growth" in trading of energy derivatives, among other factors.

In natural gas, for example, Worthington argues there has been a "paradigm shift with regard to the longer-term outlook for natural gas prices lead to dramatic shifts in both production and consumption" of natural gas. For ICE, that has led to "a meaningful increase in activity levels and trading volumes, and ultimately to commission dollars collected," according to the report, which contends activity will go much higher with an anticipated rise in natural gas prices. As for crude oil and electric power, Worthington argues they are lately "showing good activity levels, something that was missed in both March and April."

Worthington also sees what he calls a "free option" on carbon trading futures. While these are largely "buy and hold" products that don't trade, he says that could change if the industry shifts to auction-based delivery of carbon contracts. Furthermore, cap and trade--the trading of carbon credits among industrial companies--while largely dead as an idea in the U.S., is active and growing in Europe, Worthington contends.

One factor Worthington argues has been weighing on ICE's shares is the possibility it could acquire the London Metals Exchange. ICE has not acknowledged it is a bidder, but it is "widely believed" to be, according to Worthington's report, which cites a report in The Wall Street Journal that it could end up winning with a bid of $1.5 billion. Worthington argues that would be "disappointing," though he believes "there are ways to make the deal work and lead to accretion in 2013."

-- Written by Dan Freed in New York.

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