CHARLOTTE, N.C. (CBS.MW) -- A warning from Duke Energy jarred the merchant energy group Friday as the company, considered by many to be the most stable among its peers, said it would fall short of analyst expectations for the full year.
Shares (NYS:DUK) fell $1.02, or 4.8 percent, to close at $20.40 after shedding near 15 percent early in the session. Trading was brisk at 19.8 million shares, more than three times the 6.3 million shares that change hands on an average day.
The company, based in Charlotte, N.C., said full-year earnings would miss forecasts because of problems at its North American merchant energy unit. This comes as not too much of a surprise given the environment in which energy merchants operate post-Enron .
"I don't view it as surprising," said Robb Parlanti, a utility analyst at Turner Investment Partners. Turner does not currently own Duke stock. "Duke is a smart company, and they will figure out how to get back on track. The bottom line is the whole sector is seeing pressure."
Duke has been hurt by the same factors affecting the same business divisions at other companies: the prolonged economic downturn, which has allowed supply to catch up to demand, continued low natural gas prices, and decreased market liquidity.
Duke said it has cut 2002 capital expenditures to $6.2 billion from $6.8 billion, and 2003 capital expenditures to $3.5 billion.
And it plans to delay the building of three natural-gas power plants that were to go on line in 2003. The facilities are in Washington, Nevada and New Mexico.
Parlanti noted that Duke had already said it would delay some plant projects. What's new is that the postponement would result in a third-quarter charge of up to $300 million.
Duke now projects earnings of $1.95 to $2.05 for 2002, below the average analyst estimate of $2.46 a share as compiled by Thomson Financial/First Call.
The company added that 2003 earnings may be flat or lower than 2002, while analysts had been anticipating a 6.1 percent improvement.
"Dominion (NYS:D) guided lower just the other day, and some other diversified utilities have, too," Parlanti said. "The realization is that the electric utility space is a low single-digit earnings growth type of sector."
In a statement Friday, Standard & Poor's said Duke's announcement wouldn't affect its ratings of "A" with a stable outlook. But Moody's Investors Service placed Duke's ratings, including the senior unsecured rating of "A1," on review for a possible downgrade.
"With the outlook for 2003 earnings and cash flow flat at best, Duke's ability to improve credit measures will be limited," wrote Moody's analyst John Diaz.
Moody's Diaz said he would review the impact of capital reductions on the company's ability to generate cash; it's financial flexibility and liquidity; how and when it uses proceeds from asset sales; and the outcome of various federal probes into trading operations.
Salomon Smith Barney analyst Raymond Niles lowered his rating on Duke to "in-line, high risk" from "outperform, high-risk." The latter means that the stock is expected to outperform the other stocks that Niles covers over the next 12 to 18 months, while in-line means the stock is projected to perform on a par with the others stocks he follows.
"Duke's pre-announcement surprised us with its magnitude, and suggests less effective hedging than we had assumed in our model," Niles wrote. "We see the magnitude of Duke's announcement as an incremental bearish indicator for the industry, both in terms of earnings forecasts and stock price performance."
The Amex Natural Gas Index lost 1.7 percent at the close. Duke's news hit El Paso hard , forcing that stock down 16.6 percent to close at $11.67. Mirant closed down 7.6 percent to $2.32.
Also Friday, Dynegy (NAS:DYN) named Dan Dientsbier chairman, replacing Glenn Tilton who left earlier in the month to become the chief executive of United Airlines (NAS:UAL) . Tilton was also the vice chairman of ChevronTexaco, which has 27 percent stake in Dynegy.
Dientsbier will continue serving as interim chairman until a successor is named, the company said. Also, John Riley, citing time constraints, resigned from the Dynegy board Friday. A replacement has yet to be named.
Shares closed flat at $1.37.
Among utility stocks, FPL Group (NYS:FPL) shed 8 cents to close at $51.97. FPL eliminated some earnings uncertainty for 2003 on Thursday at a Merrill Lynch-sponsored energy conference. The company said it expects next year's profit to be slightly above that of 2002, even in a worst-case scenario. The Philadelphia Utility Index cast off 1.5 percent to finish at 249.54.
Oils, oil service
Oil service stocks were under pressure Friday as Hurricane Isidore's uncertain movement in the Gulf of Mexico raised concerns. The PSE Oil Service Index (1083:PSE) was off 2 percent at the close. Halliburton (NYS:HAL) lost 1.7 percent to close at $12.98, Transocean (NYS:RIG) shed 2.3 percent to close at $19.89, and Ensco International lost by 2.7 percent to close at $23.77.
Integrated oils moved higher, following November crude. The contract was up 10 cents to settle at $29.84. See Futures Movers.
Dow component ExxonMobil (NYS:XOM) rose 51 cents to close at $32.87, ChevronTexaco (NYS:CVX) added 62 cents to close at $70.55, and Shell Transport and Trading (NYS:SC) tacked on 21 cents to close at $35.88.