The collapse of Houston energy giant

Enron

(ENE)

has rattled the natural gas and power markets, which are likely to be even more unsettled by the next likely phase, an Enron bankruptcy.

"Could it be huge? Absolutely," says Jeff Dietert, independent power analyst at Simmons & Co, of the effects of a bankruptcy on the gas and power markets. "Just the saga of Enron over the last few weeks has been disruptive to trading patterns in the power and, especially, the natural gas markets," said Dietert, whose energy investment firm is based in Enron's hometown of Houston.

Yet the impact is likely to be much less severe today than four weeks ago, when

Dynegy

(DYN)

stepped up to the plate and made an attempt to acquire Enron. As it now turns out, just the possibility of a deal proved beneficial to Dynegy and its energy trading peers.

The Dynegy Buffer

Though Dynegy's rescue of Enron is dead, the impact of Dynegy's bid is becoming clear -- it provided time for Enron's trading partners to unwind trades and reduce exposure to the former trading behemoth. That buffer may prove to be the difference between disaster and relative calm in gas and power markets as Enron goes down.

"The gas markets will now survive an Enron bankruptcy," says Bryan Dutt, principal and portfolio manager at Houston-based Ironman Energy Capital and, like Dietert, a member of the TSC Energy Roundtable. "Three weeks ago I didn't necessarily think that was the case. The Dynegy offer bought a lot of exposed parties time to take cover." Dutt said he covered his Enron short early Wednesday afternoon.

One natural gas trader agreed. "There will still be a number of large positions to sort out but not nearly what it would have been a month ago," said the trader, who asked to remain unnamed. "Most gas-trading firms have had trading prohibitions with Enron for several weeks. The only volume has been in unwinding positions."

That suggests Dynegy's original offer may have been somewhat self-serving. As Peter Eavis and I noted

in the analysis of the original merger agreement, Dynegy's exposure to Enron could have been part of the motivation for the original bid.

Indeed, Dynegy was able to use the period since the bid to reduce its exposure to Enron. Dynegy President Steve Bergstrom put his firm's exposure at $75 million -- a figure he said is considerably lower because of "roll-offs of transactions in the last 30 days."

Dynegy's bid was also a way to soothe the energy markets, Bergstrom said. "The industry has had several weeks to prepare for this event," he said on the company's Wednesday conference call, apparently referring to Enron's demise. "It is spreading the risk working with many industry players."

Some industry players think Enron's demise could actually be good for long-term competition in the energy markets. "We don't think Enron's troubles affect the pace of deregulation or the energy trading business," says

Southern Company

(SO) - Get Report

spokesman Todd Terrell. "Yes, they are a big player, but there are other players that will step up. It could be good for the market and competition because of Enron's former dominance in that business."

Filling the Void

With Enron almost out of the picture, investors will now look for a new leader in the deregulated energy markets. And even with the potential egg on its face from failing to consummate the Enron deal, Dynegy may emerge as the logical front-runner.

"Dynegy is well positioned to benefit from most of the potential outcomes," says Dietert. "We are confident that Dynegy has anticipated an Enron bankruptcy as a possible outcome and protected itself as best it can." He notes that Dynegy's option to acquire Enron's Northern Natural Gas assets will likely be challenged in any bankruptcy action but that Dynegy will likely prevail. While any accretion from the acquisition would possibly be offset by new shares to be issued to Dynegy's equity partner,

ChevronTexaco

(CVX) - Get Report

, the Northern assets will add to Dynegy's strength over time.

Overall, Dietert says, "Dynegy would clearly benefit significantly from market share gains."

Other energy merchants should also benefit, but not right away. "In the near term, an Enron bankruptcy could be a negative psychological factor that could put pressure on the merchant energy stocks," he says. "Concerns over a bankruptcy's impact on accounts receivable

and the ramifications associated with potential reduction in the pace of deregulation have ... been concerns of investors and could pressure stocks near term."

Dietert says other energy merchants may be forced to be less secretive with financial data, which, in the end, was the cause of Enron's downfall. "We have seen an increase in the merchant energy companies desire to provide additional financial disclosure and better earnings visibility in just the last month," he says. "That will be very important in restoring investor confidence."

The energy merchant stocks could trade off as much as 20% in the short term to the low end of their annual trading range but Dietert says that would provide "very attractive entry points." His favorites are Dynegy and

El Paso

(EPG)

, which he says is the purest play on natural gas fundamentals in the group.

Not all merchants are created equal. While Dutt has mixed feeling about the group, he is wary of companies that have made money in the trading business. "Trading liquidity will dry up dramatically, so those merchants who made the most money on trading will likely suffer the most," Dutt said. "The days of big trading volumes and profits are over."

He remains short

Calpine

(CPN)

, a name he believes still is overvalued. "They have made a significant amount of money on natural gas hedges which will dry up in the coming quarter," Dutt said. "And, power prices have dropped dramatically, demand has fallen and the company is highly leveraged. And, writedowns from the Encal acquisition, a Canadian natural gas company, will hurt the bottom line."

In the end, Enron's competitors will win. But, as Southern's Terrell says, it's not the ending they were looking for. "You never want to see your competitor lose in this fashion," he says. "You want to beat your competitor on the playing field."

In this case, Enron beat itself.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds was long Southern Co., although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to

Chris Edmonds.