Dynegy Sparks Another Energy Rally

A sector only recently left for dead has shown impressive gains in this year's market muddle.
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The same energy companies that once lost their steam and nearly evaporated are fueling a powerful rally these days.

Right now,

Dynegy

(DYN)

-- a 50-cent stock last summer -- is leading the pack with news of a

profitable first quarter. But two more recovering energy traders,

Aquila

(ILA)

and

Mirant

(MIR)

, were riding along with Dynegy to post double-digit percentage gains on Tuesday. And several other battered players, such as

Williams

(WMB) - Get Report

and

El Paso

(EP)

, continued to extend surges that kept their stocks near multimonth highs.

Still, at least one respected energy analyst stopped well short of calling the recent gains justified.

"All of these stocks -- the so-called 'train wrecks' -- have doubled year to date," said John Olson, an analyst at Sanders Morris Harris with long-term investments in

Duke

(DUK) - Get Report

, El Paso and

Oneok

(OKE) - Get Report

. "The market's taken these companies from being oversold on liquidity concerns back to somewhat optimistic levels right now.

"We're on a honeymoon, I guess."

Sweet and Low

The sector's latest rally was powered by good news from Dynegy. The Houston energy company surprised Wall Street -- which was bracing for another loss -- by ending the first quarter of 2003 in the black. Excluding special items, which actually pushed profits even higher, Dynegy reported first-quarter earnings of $50 million.

Counting special gains, Dynegy posted first-quarter profits of $147 million or 17 cents a share, reversing a steep loss from a year earlier. Analysts polled by Thomson First Call had expected Dynegy to suffer a 15-cent loss this quarter before going on to become profitable through the rest of the year. News of the company's surprising profits sent shares of Dyngey surging 20% to $4.52 -- their highest price since last summer.

Dynegy attributed its sudden turnaround -- which ends a long losing streak that began with Enron's downfall -- to a favorable business environment and the company's underlying strengths.

"Higher commodity prices increased operating margins across all commercial areas of our business, and weather-driven demand resulted in greater volumes produced and sold," CEO Bruce Williamson said. "Our results for the first quarter demonstrate the value that the new Dynegy can deliver."

While he doesn't formally follow the stock, Olson said Dynegy had an "excellent" first quarter that was far better than he'd anticipated. But he pointed out that Dynegy benefited from cold weather -- a factor beyond its control -- that contributed to strong business economics. And he hinted that Dynegy shares may now be overvalued.

"They're trading at 30 times this year's earnings," he said. "Hopefully, they can do measurably better next year."

For now, Dynegy is boosting 2003 guidance to between 10 cents and 18 cents a share. Analysts were expecting profits of only a nickel a share, well short of even Dynegy's previous guidance of 8 cents to 15 cents a share.

Wall Street analysts were generally cool on the stock ahead of Tuesday's earnings. None of them rate Dynegy a buy, and some have already dropped coverage on the name after recommending that their clients sell.

Hairpin Turn

But some former Dynegy bears began betting on the company earlier this month, just ahead of a successful financing deal that diminished the chances of a near-term bankruptcy. They now believe Dynegy -- and many of its struggling peers -- have rounded the corner toward recovery.

Following Tuesday's rally, Dynegy is up 275% for the year. Williams, which jumped another 3% to $7.17 on Tuesday, has also more than doubled. Aquila and Mirant are posting year-to-date gains of 43% and 85% respectively. Meanwhile, El Paso has clawed its way back from record lows to record a 13% gain on the year. And that's not all, to listen to some people.

"Dynegy will go a lot higher," said a professional investor who also profited on the stock's steep decline. "The whole group will go up."