Pain for Utilities in 2009

As you know, we don’t do financial advice here, but we do take an interest! The first of CU’s predictions for 2009 was this:

Oil will be the investment opportunity, with never to be seen again low valuations in oil companies.

And later he had a look at what’s going on in the sector – which, as Alphaville also reports, includes some crazy happenings.

So what about gas and power utilities, then ? Aren’t they just middlemen, who make a healthy turn irrespective of whether energy prices are going up or down ?

Putting aside the fact that several of them have upstream assets as well as utility operations, we could say that in ‘normal’ times they can indeed insulate themselves from energy price risk, just taking a margin. But these are not normal times, and they are badly exposed to the huge downturn in industrial energy demand. This is because, perhaps surprisingly, even the very largest industrials mostly buy energy like you and I do – we may agree the price, but how much actual gas and leccy we are going to use is a matter of educated guesswork based on historical data, and the supplier takes the full risk that we don’t use the amount he expects us to.

Often, his concern is an unexpected peak in demand: but not in 2009! The utilities have bought gas and power forward, in amounts that reflect past consumption – and they are on the hook for these quantities. But most industrial buyers are not.

This is causing agonies for several of the big suppliers right now, and until the collapsing industrial demand (20% down by some estimates) works through the system, taking at least 6 – 12 months, they will have a very uncomfortable time of it.

It won’t be a happy sector in 2009 - particularly for any of them that haven't diversified into upstream assets.

ND