The following is an excerpt from this week's Martini Chat, an hourlong, online program on market and current events at 5 p.m. EST every Thursday, hosted by TheStreet.com columnist Chris Edmonds and reporter Eric Gillin. To participate, visit TheStreet.com just before the show begins, and click on the invitation. To read the entire Martini Chat transcript, click here.

Eric Gillin:

Chris, how about that Enron? I've never seen a company look more like Chevy Chase's career -- some interesting successes early on, but a few pratfalls later and no one on earth wants to see you anymore.

Chris Edmonds:

It's a sad story, Eric, and one that probably could

have been avoided. We will talk about it more later, but quickly, I want to point out a couple of things. First, our colleague Peter Eavis was out front early on this story months before anyone else was. He could have made or saved investors a lot of cash. Second, there is a

super column on

RealMoney

today by David Brail , a fund manager in New York, discussing exactly how Enron's demise could have been avoided: simply by Enron being more open and forthcoming with investors.

It's the old Greenberg principles at work: Run like hell from a company that bashes shorts and says, "Trust us, we know what we are doing."

Here to help us answer the "whys" and "what nows" of the Enron power failure are two veteran energy pundits. Jeff Dietert is the merchant energy and midstream energy analyst at Simmons & Co., a Houston energy investment firm. And Bryan Dutt is principal and portfolio manager at Ironman Energy Capital, a Houston energy hedge fund. Both are also members of the elite group of energy analysts that make up the

TheStreet.com

energy roundtable and both join us from Houston.

Jeff, let me begin with you. What happened here? This was once a company that stood at the top of the energy mountain and, now, it couldn't possibly be lower in the powerless valley. Is Enron's unraveling largely of its own doing?

Jeff Dietert:

I think it is. There are three big contributors: A number of poor international investments up to $6 million dollars, with almost no returns, over the past 12 months. The company had a significant loss of credibility with investors, which led to concerns over credit and reduced willingness with partners to do business. In the end, Enron permanently impaired its wholesale business, which at one time was extremely valuable.

Chris Edmonds:

In retrospect, did former CEO Jeff Skilling's sudden departure earlier this year signal the end of this company? After

Skilling's quick exit, Ken Lay never seemed to regain control.

Jeff Dietert:

It's tough to speculate on that. I think the departure was abrupt. It was a red flag. The company could have been spared, but obviously the executive management did not do what was necessary to regain investor confidence, which lead to the cycle that got them to where they are today.

Chris Edmonds:

Bryan, first, congratulations on some very prescient analysis. You have been negative and short Enron for some time now. What raised the red flags in your book?

Bryan Dutt:

For five or six years, it has been mystifying for buy-side and sell-side analysts as to where the company was going financially. It's complicated to say the least, and Enron's never been forthcoming over the past five or six years. It's a result of basically "booking" profits any way they can, and it never showed up as a cash basis on the balance sheet. It's a result of getting several hundred very smart young people in a silver tower in Houston saying "go ahead, book us some profits, you get a chunk of it." And having no one to answer for it. This is the result.

Chris Edmonds:

As a short, you're often accused of pushing the stock lower. In the first-quarter conference call, former CEO Jeff Skilling was taken to task by another fund manager, who was short the stock, about the company's inability to produce balance-sheet data. That exchange went on for about 30-40 seconds before Jeff Skilling cut him off and called him an expletive that looks like the rear of my anatomy. Do comments or actions like that from CEOs raise red flags for you?

Bryan Dutt:

They are huge red flags and I do recall that comment. It signified to me a lack of discipline at the highest level of that company. There is no need to resort to that type of verbiage.

I was disappointed by Ken Lay who was regarded as one of the great premarket people in the energy industry. When Enron was on the ropes in the last several weeks, he hinted several times that the shorts had accelerated the process. All the shorts did was accelerate the discovery of the process. It is a big red flag. When people are under duress and they have things to hide, they lash out at those who are trying to expose them.

Chris Edmonds:

You remain somewhat concerned about the industry in wake of Enron's demise. What does Enron's exit from the business it shepherded from its infancy mean to the industry?

Bryan Dutt:

Short term, it's obvious there will be a decrease in trading volume and activity. In the long run, this may be a big benefit for our industry. There was a lot of wild cowboy and Indian-type games being played by people in the energy/natural gas/power market -- excessive speculation. That speculation has ceased and it will be a long time before it comes back. In the long run, this may be healthy.

Chris Edmonds:

Jeff, Dynegy made an offer to purchase Enron, and there are those who say the offer was never really terribly sincere, but rather a way to give Dynegy and others a way to unwind exposure to Enron. What happened to the Dynegy deal -- do you think the company was ever serious about buying Enron?

Jeff Dietert:

I believe they were serious. If Enron had been able to sustain its wholesale business, it would have gone through. I don't think Chuck Watson is playing games with $1.5 billion. During the period between November 11 and this week, there were a number of additional surprises that Enron had not presented to Dynegy or to Wall Street. In the 3rd Q 10-Q. Over the last three weeks, the wholesale business has been permanently impaired. Those are clearly material outs.

Chris Edmonds:

It is ironic that there's a big difference between today and four weeks ago regarding what the failure of Enron would mean to the gas and power trading markets. The Dynegy offer served as a buffer for companies' underlying positions.

Jeff Dietert:

There's no doubt about it. We had a four week transition period.You can look back before the Dynegy offer.There was a huge red flag.The company had four weeks to a month to establish relationships with other suppliers and provide a transition. One terrific example is yesterday when P&E Eastern refused to schedule gas to flow for Enron. P&E Eastern had to replace the contracts Enron had with other providers and did so in an orderly manner. That shows that this marketplace can continue to work even without Enron.

Chris Edmonds:

Bryan, there have been some big changes in power prices and demand in the last several months, which has lead you to also be short Calpine, one of the largest independent power producers. What don't you like about Calpine?

Bryan Dutt:

There was a beautifully conceived idea from '95 to 2000 when the U.S. was clearly underpowered. That is now over. Calpine still believes in the tremendous growth pattern and the company has sold that to Wall Street. The U.S. is going to be overpowered. You'll see a tremendous number of cancellations. Calpine has a lot of capital requirements because of its growth pattern. It is short roughly $3 billion in capital funds over the next 12 months. The company has a weak balance sheet. It has bought some natural gas properties in Canada where management has recently left. The company will have some writedown in natural gas acquisitions. It has a tremendous number of red flags to address.

Chris Edmonds:

Jeff, there is a lot of talk about exposure of other energy traders to Enron. Does that exposure concern you?

Jeff Dietert:

This transition period has allowed many of the counter parties to reduce exposure. In most cases, it's down to a manageable level.

Chris Edmonds:

Are there any energy suppliers who have more exposure than others?

Jeff Dietert:

What has come out publicly is that Duke's got less than $100 million, Dynegy less than $75 million. El Paso less than $50 million. Meritt less than $60 million. Most are less. Williams not out publicly, but our guess is they're $100 million as well. We think they are probably less than $50 million.

Chris Edmonds:

So what happens next? Can someone replace Enron as the leader in the energy trading business or will there be a real competitive verve that emerges? How do investors play the sector going forward?

Jeff Dietert:

What we'll see is Enron's market share spread over a number of the big players. The companies really in position to benefit are strong players that consumers are comfortable doing business with. They've been around. Have good balance sheets, asset-based companies. I share some of Bryan's concern with the recession we're in. It has allowed the new additions to catch up with the demands from six to nine months ago. Dynasty. El Paso. Williams. These valuations are in the bottom end of where they've traded historically.Despite the uncertainty surrounding the Enron possible bankruptcy.

Chris Edmonds:

Bryan, any response to that?

Bryan Dutt:

Who's going to play Jeff Skilling in the movie?

Chris Edmonds:

Gentlemen, thank you. Our guests, Jeff Dietert with Simmons & Company and Bryan Dutt of Ironman Energy Capital, both from Houston and both members of the

TheStreet.com

Energy Roundtable.