Markets & Finance

Not All Energy IPOs Are Hot


Energy-related initial public offerings are expected to be among the strongest performers in the coming crop of new issues this year. Even as the overall U.S. stock market struggled to find its feet after a nasty bout of selling, an ethanol outfit named VeraSun Energy soared in its debut on June 14, rising to $29.22 from its offering price of $23 (see BusinessWeek.com, 6/14/06, "IPOs Keep Rolling On").

Moreover, energy outfits are tapping the equity markets at a far more rapid pace than in past years. Companies in the sector have raised $10.18 billion in the year to date, compared with $4.73 billion during the same period of 2005, according to Thomson Financial.

That's not surprising amid the global runup in energy prices over the past year. But energy companies continue to come to market against a backdrop of protracted weakness for the broader stock market, with major indexes having shed their gains for the year (see BusinessWeek.com, 6/14/06, "A Summer Slump for Stocks").

To be sure, still-lofty energy prices may add some allure to these issues while the market gyrates. But investors may be wise to consider carefully and sift through the sector's upcoming offerings. Case in point: Constellation Energy Group (CEG) said on June 14 that it's planning to sell its coalbed methane reserves in a public offering—but don't expect investors to clamor over this one.

MAJOR CHALLENGES. The Baltimore-based electricity and natural gas supplier's unit Constellation Energy Resources is offering 6,050,000 common shares, according to a filing with the Securities & Exchange Commission. The methane unit is structured as a limited liability company, and intends to make distributions to shareholders based on cash flows from its properties in Alabama.

The offering comes as Constellation Energy Group's Chief Executive Officer Mayo A. Shattuck battles financial challenges. The company's Maryland unit Baltimore Gas & Electric faces potentially higher costs on its more than $1 billion of debt coming due in the next five years, after its efforts to raise the prices it charges consumers by 72% failed in March. The Maryland Public Service Commission approved a new plan on Apr. 28 that would phase in tariff increases over 18 months and generate $189 million. But full implementation remains unclear given a political outcry against it, according to a recent report by the agency Fitch Ratings.

Now Constellation Energy is trying to raise money by turning to the equity markets. "The company has a lot of assets which aren't reflected in the value of the stock," says Daniele Seitz, an analyst at boutique investment bank Dahlman Rose. "They feel those assets have risen in value," she added.

But natural gas products such as coalbed methane have shed value in recent months. July natural gas is trading at around $6.650 per million British thermal units from around $12 per million Btu in January, after the relatively warm winter reduced demand for heating.

UNCERTAIN FINANCES. Constellation Energy Resources did not disclose any information about a price range for its new offering, which the financial-services firms Citigroup and Lehman Brothers are managing.

"The strategy is to generate additional investment to allow for the purchase of more natural gas properties," says Lawrence McDonnell, a spokesman at Constellation Energy Group.

On June 6, Constellation Energy said it is also selling six natural gas-fired generating plants, including the company's High Desert, Rio Nogales, Holland, University Park, Big Sandy, and Wolf Hills plants.

"There's a lot of uncertainty about (the company's finances) right now and until this particular issue is resolved you might want to tread with caution," on the stock, says Mark Sadeghian, a utility-stock analyst at the investment research firm Morningstar in Chicago.

OIL GIANTS SEEK STAKE. Meanwhile, the energy industry is peddling a bunch of other deals in far pricier markets than natural gas, such as oil. While natural gas has retreated, the West Texas Intermediate (WTI) crude-oil contract for delivery continues near historically high levels just below $70 per barrel. That has enticed outfits like the state-owned Russian giant OAO Rosneft Oil, which plans to list its shares on the London Stock Exchange. Its initial public offering, which could happen as soon as July, is expected to raise up to $10 billion.

Other international producers are getting in on the act. The Spanish energy giant Respol YPF SA announced that it may consider spinning off 15% to 20% of its shares in local oil giant YPF SA during an IPO this year, according to the Wall Street Journal. Kazakh state oil and gas firm KazMunaiGas is also mulling a possible offering this year of its unit RD KazMunaiGas, according to Reuters.

While oil prices appear to have held up better, with demand remaining strong and geopolitical risk hovering over global supplies, investing in these outfits may pose challenges, including political risk in Russia, for example. Indeed, whatever segment of the market these outfits inhabit, a healthy dose of skepticism may be in order for investors as energy outfits race to the IPO window.


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