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Personally, I think there is much more risk of a derivatives meltdown in
energy than in forex or rate products. Why? Look at a chart of electricity
or NG for the last few years. 10x price moves...third world currencies
don't even move that much. And players who are not, for the most part,
prepared for it.
My longer term work suggests huges declines are coming for the
utilities -down by at least half...Enron could be just the start.
Chris
----- Original Message -----
From: <cwest@xxxxxxxxxxxx>
To: "Omegalist" <omega-list@xxxxxxxxxx>
Sent: Friday, November 30, 2001 7:55 AM
Subject: the post ENRON market place
> I though some discussion about ENRON's (ENE)so far unofficial demise
might
> be interesting. Below is an extract from an analysis/news service to which
I
> subscribe. The conclusion is that gas prices will rise. The objective of
> this post is to hear of varying ways one can profit from this perception.
>
> After Enron: Higher Energy Prices
> 2200 GMT, 011129
> Summary
> Reverberations from the collapse of Enron Corp., the United States'
largest
> energy trader, will be felt for some time. The biggest winner is Dynegy
> Inc., the only company that can easily incorporate Enron's assets into its
> own operations. But U.S. consumers will lose: Enron developed an efficient
> method of getting energy to customers. As the power market reworks itself
to
> compensate, natural gas and electricity prices are sure to rise sharply.
> Analysis
> Enron Corp., America's largest energy trader, collapsed spectacularly this
> week.
> With analysts only now picking through the debris of the company, which
was
> the United States' seventh-largest company and biggest energy trader, it
is
> apparent that no company other than Dynegy can pick up more than tidbits
> from Enron. The company is simply too large to be replaced. That's great
> news for Dynegy, the new industry leader, but signals increased costs for
> power producers, distributors and consumers alike.
> One immediate effect of the company's collapse will be higher heating
bills
> this winter. The low price of oil had raised expectations that winter fuel
> costs would be much cheaper than the record highs of last year, but as the
> market reshapes itself around Enron's corpse, that hope is shrinking into
> oblivion. Neither the rising costs nor the collapse of one of its largest
> companies will help the United States as it attempts to shake off a
> recession.
> Enron will enter the history books as a well-executed revolutionary idea
> that was sabotaged by cronyism and which left mixed results.
> On the positive side, the company successfully demonstrated that power
> trading was a uniquely efficient way to manage the United States'
patchwork
> of power generators, utilities and distributors. Prior to the
power-trading
> era, much of the country's trading was point-to-point: Individual
producers
> sold their natural gas and electricity to individual distributors and
> utilities. Enron inserted itself between these groups, buying power from
> providers across the country and reselling it to a variety of buyers. In
> effect Enron engineered vast economies of scale by managing the energy
> sector's risk nationwide. For energy consumers, producers and retailers,
> this meant more reliable and cheaper contracts.
> On the negative side, power trading depends upon the marketer having deep
> reserves of good credit. Good credit is not maintained by writing down
$1.2
> billion in shareholder equity and overstating earnings by $586 million, as
> Enron has admitted doing. Once it leaked that Enron's books were cooked
and
> senior officers were accused of fleecing the company, all three major
> credit-rating agencies -- Fitch, Moody's and Standard and Poor's --
tripped
> over each other in the rush to cut Enron's credit rating.
> Any energy trades now must be backed with hard cash. When Dynegy abandoned
> its planned buyout on Nov. 28, Enron's rating was cut to junk status,
> bringing forward $3.9 billion in debt for immediate repayment.
> That reduced Enron's cash reserves to zero; it cannot even pretend to
> service its contracts. Loans are impossible as Enron put up most of its
few
> assets as collateral in the past two months simply to stay afloat. Its
last
> scrap of cash likely disappeared Nov. 28 when it suspended EnronOnline,
the
> Internet trading operation that accounted for 90 percent of its business.
> With no credit, no unclaimed assets and no cash, Enron is now unofficially
> dead. At last check, its stock was valued at 33 cents per share.
> Now, the United States faces a unique problem. Enron brokered about 25
> percent of the U.S. power market, and revenues in the year to Oct. 1
totaled
> $140 billion. It is by far the largest U.S. company to crash, and no
single
> company can even pretend to absorb all of its business.
> Dynegy, now the single-largest player in the U.S. energy market, can
absorb
> a portion, however. Dynegy shrewdly negotiated its early takeover plan and
> should be able to snag the 16,500-mile Northern Natural Gas Pipeline
network
> from Enron. That would give it a dominant position in a swath of territory
> stretching across the Midwest from the Canadian border to northern Texas.
> But Dynegy holds only about 5 percent of market share. It lacks the
> bandwidth to absorb all of Enron's contracts, which would quintuple its
> size. Also, Dynegy leaders are far more conservative than Enron's when it
> comes to expansion -- as evidenced by their ultimate refusal to take a
risk
> on the Enron merger, even with the backing of partner ChevronTexaco. With
> Enron's spectacular collapse, the tendency toward caution has certainly
been
> reinforced.
> Many of the contracts Enron serviced will revert to point-to-point
> operation, but because many of its customers dealt only with Enron, they
> have long since dropped their marketing arms. Enron's collapse catches
them
> all off-guard. Instead of selling their power to Enron, they must locate
and
> negotiate with individual consumers. This will add time, risk and cost to
> each step of the process.
> This large-scale switchover from pooling to point-to-point will be
> laborious, chaotic and hugely expensive.
>
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