Getting Warmer

Now, that's energy.

Earnings from energy companies are flowing like oil through a pipeline, and investors are warming to the results.

You can't help but get excited when Calpine (CPN - Cramer's Take - Stockpickr) reports earnings up more than fourfold, Anadarko (APC - Cramer's Take - Stockpickr) lobs $2.50 in earnings at investors compared with only 24 cents a year ago, Chevron's (CHV - Cramer's Take - Stockpickr) profits increase 53%, and Mirant (MIR - Cramer's Take - Stockpickr) posts an 84% increase in earnings and raises earnings guidance for the year by nearly 25%, its third increase in less than a year.

And, then there's Faber's favorite: ExxonMobil (XOM - Cramer's Take - Stockpickr) posting more than $5 billion in profits for the quarter.

No wonder -- after tumbling in March and early April -- that stocks of oil, natural gas, power and energy service providers have come to life in the past two weeks. Earnings are good, visibility is clear and, while other sectors struggle to make the grade, investors like what they are seeing from energy companies.

Powering Higher After Sagging in March, Energy Stocks Are Catching Fire

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"Energy stocks clearly have short-term momentum," says Dan Pickering, director of research at Simmons & Co., a Houston energy investment boutique and a member of the TSC Energy Roundtable. "Investors are looking for earnings and visibility and energy is where they are finding it."

That said, it is important to note this quarter's upside surprises -- vs. analysts' estimates -- were not a surprise at all. Analysts and investors expected companies like Anadarko and Chevron to blow through estimates. "Upside surprises aren't that big a deal this quarter," notes Pickering.

However, the first quarter is now history and it's time to focus on the future. That begs the question: Is the upward move in the last couple of weeks sustainable?

That depends on the economy. While strong demand and tight supply have pushed energy prices higher -- which drives profits -- any moderation in demand combined with new incremental supply from exploration and production will put pressure on commodity prices, which could make earnings comparisons more difficult. Not to mention the fact that both analysts and companies are raising estimates, making future upside surprises somewhat more difficult.

"Economic issues which impact demand are the most important longer-term driver, not current fundamentals," notes Pickering. "While there is more upside short-term, the risk-reward is getting tougher. We won't break out of recent trading ranges until we see a little more comfort in the economy."

The recent rate cut helps, and with another possible rate cut at the Fed meeting in May, the economic picture becomes brighter. That's good news.

However, a sharp spike in commodity prices -- which some are predicting for both natural gas and refined products -- could cause demand to slip, suggesting energy companies should hope for the sweet spot for oil and natural gas prices. Indeed, concerns over the price of gasoline and other transportation fuels could prompt a demand slowdown that, ironically, could have an impact on the major integrated oil companies and refiners as early as later this year.

That said, the trend is your friend and it is clearly up; it's now a matter of degree. "We think there is an upward trend," Pickering says. "The slope of that uptrend is determined by the economy. It looks like a good trade right now, but don't get too excited about the upside moves."

Or, as Cramer says, don't fight the sentiment.

Powerful Opportunities

Even with uncertainty, there are opportunities to make money in energy, and the new-era power companies is an area that Pickering believes will reward investors in the coming months. Convergence companies are "beating numbers and raising guidance almost across the board," Pickering says. "You're getting 20 to 25% earnings growth for 2001-2002, with visibility increasing as new capacity and contracts are being added by many companies."

And, while he believes issues in California will continue to surface, investors are looking past California to other opportunities. "The street is finally starting to realize that this is a much broader and longer-lived story than just California," he notes.

His favorites in the group include Dynegy (DYN - Cramer's Take - Stockpickr), Orion Power (ORN - Cramer's Take - Stockpickr), El Paso Energy (EPG - Cramer's Take - Stockpickr) and Williams (WMB - Cramer's Take - Stockpickr).

Other Energetic Ideas

In addition, the possible economic clouds don't deter Pickering from making some select picks in the oil patch.

In the exploration and production sector, Pickering says companies are posting "great absolute results, but few are surprising people." His favorite name in the sector -- Apache (APA - Cramer's Take - Stockpickr) -- is leveraged to natural gas, where there is "not enough supply or inventory." Simmons has recently provided banking services for Apache.

In the oil services sector, Pickering is favoring the drilling companies vs. other service companies, noting that earnings from drillers have been much stronger than those from general services companies, where the larger names have been "held back" by only "slow improvements" in international operations.

In the drilling area, his favorites are Transocean Sedco Forex (RIG - Cramer's Take - Stockpickr), Global Marine (GLM - Cramer's Take - Stockpickr), Pride International (PDE - Cramer's Take - Stockpickr) and Santa Fe International (SDC - Cramer's Take - Stockpickr). Simmons has also recently provided banking services for Transocean.

And while Pickering says "the drillers work better than oil service companies over the next quarter", he does like Schlumberger (SLB - Cramer's Take - Stockpickr), Smith International (SII - Cramer's Take - Stockpickr) and Cooper Cameron (CAM - Cramer's Take - Stockpickr) as solid energy-service plays.

While Pickering doesn't believe you should get carried away, that doesn't mean he isn't energetic about some names in the sector.

FERC's California Plan: Unintended Consequences

Late Wednesday, the Federal Energy Regulatory Commission, or FERC, announced a plan that will limit power prices in California during peak demand periods this summer.

The plan establishes a price cap based on the least-efficient generator's marginal cost selling into California. Using natural gas prices of between $10 and $15, the maximum price should range between $140 to $240 per megawatt hour. The order would expire in 2002.

The cap would be in effect only when California declares a Stage One -- or greater -- power emergency, which signals a supply reserve below 7.5% for a given day and only applies to power sold in the real-time, spot market. Any power sold under bilateral, long-term contracts is exempt from cost-based pricing.

For generators operating in California -- companies such as Calpine, Dynegy (DYN - Cramer's Take - Stockpickr), Duke (DUK - Cramer's Take - Stockpickr), Mirant and Williams -- most of their power has been sold under long-term contracts and is not affected by the FERC plan. Estimates put the amount of power subject to the restriction to be less than 10% of the California supply. Hence, any impact on generators should be small.

However, the FERC plan also requires California to join a regional transmission organization by June 1. That requirement could jeopardize the agreement between Gov. Gray Davis and the California utilities. Under Davis' plan, the state would operate the transmission grid. If the regional transmission organization requirement jeopardizes the state's plan, it again increases the probability that Edison International's (EIX - Cramer's Take - Stockpickr) Southern California Edison unit will follow Pacific Gas and Electric's (PCG - Cramer's Take - Stockpickr) lead to seek bankruptcy protection.

Shooting for the Stars

If you haven't seen it, check out Jim Cramer's comment about Constellation Energy (CEG - Cramer's Take - Stockpickr). It's a solid example of a company in the sweet spot of energy right now looking to maximize value, and another vintage Cramer suggestion that can make you money. Along those lines, look at the action in Aquila (ILA - Cramer's Take - Stockpickr), the recent partial spinoff from Utilicorp (UCU - Cramer's Take - Stockpickr) and the upcoming split at Reliant (REI - Cramer's Take - Stockpickr). If Aquila is an indication, Reliant will be hot and Constellation will only get better.

That's not to mention his strong -- and on-the-mark -- opinion about decisions at Montana Power (MTP - Cramer's Take - Stockpickr).