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Enron Mail |
-----Original Message----- From: DRW-Email@dainrauscher.com [mailto:DRW-Email@dainrauscher.com] Sent: Thursday, October 25, 2001 10:13 AM To: rwirth@westerngas.com Subject: ENE:MARKET FOCUSED ON LIQUIDITY CRUNCH AND UNKNOWN Dain Rauscher Wessels a division of Dain Rauscher Incorporated *Market overly concerned on cash flow liquidity and assuming the most dire assumptions, in our opinion. *Concerns regarding ENE shares have also impacted the entire diversified energy group. *We have developed a net asset valuation assuming further write-downs/equity adjustments and come up with a valuation of $27-$35 per share. *For investors with a 12- to 18-month time horizon, ENE shares represent a bargain, in our opinion. We advise investors purchase the shares at current levels. Enron Corporation NYSE:ENE Rating: Strong Buy Risk: Aggressive Price Target: $ 76 , ____________________________________________________________________________ _ Price: $16.41 | Fiscal Yr Prev EPS P/E 52-Wk Range: $85-$16 | Dec/2001E $1.80 9.1x Tr. 12 ROE: 9.70% | Dec/2002E $2.15 7.6x 3 Yr EPS Gr: 18.00% | Dec/2003E $2.55 6.4x Shares Out: 862.00 million | 2001 Q4 $0.48 Book Value: $13.05 | Market Cap: $14.15 billion | ____________________________________________________________________________ _ Cash Flow Prev CFPS P/CF 2001E $2.85 5.8x 2002E $3.30 5.0x 2003E $4.05 4.1x ____________________________________________________________________________ _ __________________________________________________________________________ DIVERSIFIED ENERGY/MLPS Mark Easterbrook, CFA (214) 989-1408 mseasterbrook@dainrauscher.com Neal Dingmann (214)989-1402 ndingmann@dainrauscher.com ENE:SB-Aggr;MARKET FOCUSED ON LIQUIDITY CRUNCH AND UNKNOWN Cash Flow Liquidity Crisis: We believe this market is assuming the most grim valuation for these off-balance sheet partnerships and other investments . . . that they have no residual value. In addition, Enron cannot issue debt to fund the short-term cash flow need (as the company needs its investment grade debt rating for its Wholesale segment). Management has discussed various asset sales that should benefit the cash flow situation ($600 million in the 4Q01 and Portland General in late 2002), but the market is unwilling to believe these asset sales will be timely. Shareholders have paniced as 75.8 million shares were traded yesterday, but we believe even with dire assumptions the stock can rebound from current levels once the liquidity situation clears up. Diversified Energy Group Drawn In: The market now is taking it out on other diversified energy stocks as they declined significantly yesterday. We believe investors are worried about two factors that may impact the group: 1) if these companies extensively using the off-balance sheet structure and; 2) if the natural gas/power merchant business will be negatively impacted by the 'wounded' Enron, which is the largest merchant player in North America. If this continues to impact the group, there could be an excellent buying opportunity at some point. Long-Term Valuation: We have included a net asset valuation on Enron making several dire assumptions. <ol<1) Enron will be impacted to the full extent of the off-balance sheet partnerships-our assumption is $3.6 billion; 2) The company writes down their investment in broadband (our estimate-$700 million) and their entire net investment in the Dabhol Power Plant in India (our estimate-$800 million); 3) Valuing the three major business with the corresponding EBIT multiple: Pipeline-8x, Wholesale-12x, and Retail Energy Services-12x. We derive the EBIT multiple on Wholesale (and Retail) using Dynegy's (NYSE: DYN; $37; SB- Avg) current EBIT multiple on our expected 2002 EBIT (which includes the $5/share drop from yesterday). Although these EBIT multiple seem to consistent with the current market trends, they are well below historical norms for the group. </ol<We have looked at the asset valuation in two ways. First, we have assumed no asset sales and used equity funding as a 'plug' figure, which dilutes shares outstanding by 24%. Our 'worst case scenario without asset sales' comes up with a net asset valuation of $27.92 per share (including additional shares issued at $15 per share). Our second valuation assumes asset sales of $2.5 billion, assumed debt reduction of $1 billion from the Portland General sale, and no equity financing. With those assumptions we derived a valuation of $35.05 per share. Of course, our net asset valuation is based on a long-term view and does not take into consideration the short-term liquidity crunch ongoing at the company. In addition, we are making a fairly bold assumption in that all these partnerships and investments no longer have any residual value. Debt Rating Most Important: Enron management will have to fend off any debt rating downgrades below investment grade, so debt cannot make up the cash flow shortfall. The company, in our opinion, will use assets sale and, if necessary, equity funding to match up cash flows in the short term. Unfortunately, the timing of assets sales can be lumpy, so equity funding is not out of the question. Panic Mode Abound: With the rapid decline of the shares on large volume, we believe investors are panicking and the shares are oversold at 7.3x our 2002 earnings expectations. Although the upcoming 10-Q and 4Q01 probably will not paint a good picture, we believe the company is in better shape than a $15 per-share stock price suggests. With further disclosures on operating segments and on the off-balance sheet partnerships, we believe during the next few quarters we could see ENE come back into our $27-$35 valuation. Stock Opinion We believe that investors with a time frame of 12-18 months should now look at Enron shares due to our assessment of the company's attractive valuation. There are obviously major concerns regarding Enron's cash flow liquidity in the coming quarters, but we believe management should be able to time the sale of assets (and equity financing, if necessary) to bring the balance sheet back into order. Most importantly, the company must keep its investment grade rating to keep its Wholesale operations running smoothly. We believe the core businesses should allow earnings growth of 18% annually (three-year projection). We are not suggesting that Enron is out of the woods yet as investors should pay attention to several short-term events. First, the filing of the third-quarter 10-Q should enlighten the Street on the equity reduction and the cash position of the company. We also look for the SEC to come down hard on these partnerships. We anticipate further disclosures on these partnership going forward. In addition, we anticipate that the company may still have another write-down and/or further reductions of equity in the coming quarters. Our net asset valuation notwithstanding, we keeping our $76 price target using a discounted cash flow (DCF) analysis of the wholesale energy segments and EES segment. In the more-established energy segments, we used a multiple valuation of 10x EBIT. We have changed our risk rating on Enron Corporation from Average to Aggressive to reflect our assessment of risks associated with the issues discussed in this note. We rate ENE shares Strong Buy-Aggressive. Company Description Enron Corporation is the leading integrated natural gas and power company. The company is headquartered in Houston, Texas, with a Web site address of www.enron.com. ____________________________________________________________________________ __ ADDITIONAL INFORMATION AVAILABLE UPON REQUEST. Our Research Ratings Legend can be viewed at www.rbcdrw.com/researchratings. The information contained in this report has been prepared from sources that Dain Rauscher Incorporated (Dain Rauscher ) believes to be reliable but Dain Rauscher makes no representation or warranty as to the accuracy or completeness of the information. This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned herein. The information contained and opinions expressed in this report reflect our knowledge and judgment as of the date of this report but are subject to change without notice and may or may not be updated. Moreover, the opinions expressed herein are not intended as personalized investment advice and may not be suitable for certain clients. Dain Rauscher Incorporated, its officers, directors, affiliates, and/or employees (including the authors of this report) may from time to time have a long or short position in publicly or privately issued securities of companies mentioned or derivatives thereof and may sell or buy such securities for their own or related accounts. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state. Any Canadian recipient of this report that is not a Designated Institution in Ontario or a Sophisticated Purchaser in Quebec (or similar permitted institutional purchaser in any other province) and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC Dominion Securities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada. Copyright ? 2001 Dain Rauscher Incorporated, all rights reserved. Call your DRW salesperson at 1-800-937-4678
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