Analysts cite uncertainty over Enron price drop

By Ann de Rouffignac
OGJ Online

HOUSTON, Oct. 23, 2001 – Enron Corp.’s stock lost another 20% of its value Monday, and financial analysts were still uncertain if all the bad news had been revealed.

Many analysts were concerned about additional large write-downs and about the company losing its investment grade credit rating.

“Usually you can go through the records with a fine tooth comb and understand. But when it’s not in there, what can you do?” said Michael Heim, analyst with A.G. Edwards, St. Louis. “It’s hard to get a handle on a company that boils down to a big black box.”

Last week Enron reported its first loss in 4 years and took $1 billion in charges. The Houston-based energy company also reduced its shareholder equity by $1.2 billion after ending certain “financing arrangements” with two partnerships. The share price dropped 23% last week.

Subsequent news reports suggested the relationship between Enron’s chief financial officer Andy Fastow and partnerships he headed up might be improper. Enron denied any impropriety. Enron said in a release the “arrangements” were approved by auditors and disclosed in the company’s US Security and Exchange Commission filings.

But Monday the SEC initiated an inquiry into the financial relationship between Enron and the limited partnerships. Enron promised to cooperate. News of the SEC investigation was the catalyst for Monday’s tumble in stock value to $20.65, down 20%, on 36 million shares traded.

Raymond Niles, analyst with SalomonSmithBarney, New York, said he was uncertain about what else might be revealed about the partnerships that could impact earnings. He said he is worried that if the company took a $1.2 billion reduction of shareholder’s equity to “unwind” just one of these partnerships, what about the others? Enron has several of these financing mechanisms.

“Frankly, we have not been able to get enough information on them [the partnerships] to evaluate whether there is a problem. However because of the $1.2 billion hit to shareholders equity from unwinding the off balance sheet vehicle, we are concerned,” Niles said.

Niles called for “clarity and transparency” on the balance sheet and the income statement of any potential financial impacts from the remaining partnerships or off- balance sheet financing arrangements. He also said going forward there must be a “commitment to clear-cut lucid accounting practices.”

Heim complained analysts only found out about partnership problems one day after last week’s analyst conference call. Moody’s Investment Service placed Enron on debt review for possible downgrade immediately following the analyst conference call.

Analysts were miffed because company officials reassured the financial community on the conference call the credit rating was secure despite the write-downs. “Until we gain more clarity regarding these issues, we advise caution on Enron’s stock,” said Niles.

Jeff Dietert, analyst with Simmons & Co., Houston, is “extremely worried” about the investment grade credit rating. If that goes, Enron will have to convert some of its preferred issues of stock, diluting the equity. Then the company would have to issue additional preferred shares which would impact the debt to total capital ratio, Dietert explained.

“But in my gut I think they still have room to maintain the investment grade rating,” he said. However, he is also worried about more write-downs from the conventional assets in Enron’s ‘global asset’ business group.

“That portfolio is at risk for more write-downs,” Dietert said. “EBIT (earnings before interest and taxes) is very tight.” He estimated third quarter EBIT for the global assets business group of $19 million on an asset base of $6 billion to be “pretty small.”


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