Revenge of the ’70s

Deck: 

A guide to the galaxy of low growth, high interest rates, and the dark side of the Force.

Fortnightly Magazine - June 2005
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Many executives are hoping to avoid a repeat of the 1970s, when Stars Wars first hit the big screen, and when inflation, nuclear cost overruns, and diminishing returns came calling in an economic climate that today's markets threaten to emulate.

The salvation was to come from natural gas, but even that prophecy could prove wanting. Too much reliance on a single resource poses risk. Look at crude oil. In a recent research report, Morgan Stanley equity research analyst Kit Konolige notes that integrated utilities with single commodity exposure are falling out of favor. The only exceptions still in favor are companies with unregulated nuclear [nuclear capacity that is sold into unregulated wholesale markets] or companies that have locked in low coal costs and can take advantage of wholesale markets where prices are set by higher-priced gas. But even this is not a given.

There has been much discussion among industry experts about the recent decline in gas prices, driven by mild weather and bulging gas inventories. The decline has occurred in the short term; at the end, however (where utilities are bigger players), prices have fallen only slightly.

In fact, as a result, Konolige predicts that this may be the beginning of a period of out performance for regulated utilities, where regulated utility stock will trade at a premium to integrated utilities. Konolige and his team break down the prospects in this way:

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