Friday, January 19, 2007

Paperstand (HES, IESC)

WSJ's "Heard on the Street" column out saying that as oil prices are sliding and energy shares are skidding, investors are trying to figure out which co's will be hurt most if oil stays down amid a relatively warm winter and ample global supply. "Some oil shares have held up better than expected," says Jack Ablin, of Harris Private Bank. "But profit expectations are getting slashed." He says Hess (HES) is vulnerable b/c it historically has been sensitive to crude-oil prices but lately its shares have held up surprisingly well. Among larger oil co's, ConocoPhillips (COP) could be hurt if oil prices keep tumbling. Others say that oil-service co's, like Tidewater (TDW), could be risky. In previous oil downturns, drilling co stocks have taken it on the chin b/c they operate with a high degree of operating leverage, or their earnings are most sensitive to moves in oil prices. Larger drilling co's include Grey Wolf (GW), Rowan (RDC) and Nabors (NBR). As oil's price falls, alternative-energy sources become less attractive b/c they usually are more expensive to produce than traditional sources. Ethanol producers could be hurt as rising corn prices send their cost of production higher, and as crude and gasoline prices fall. Publicly traded ethanol co's include Aventine Renewable Energy (AVR), Pacific Ethanol (PEIX) and VeraSun (VSE). Archer-Daniels-Midland (ADM) is the largest ethanol producer based on gallons produced. Large grain producers in the Farm Belt, like ADM, have made investments in part based on high oil prices. According to Credit Suisse research, ethanol makers were able to pull off a profit of 86c a gallon in the middle of the summer when oil was around $70 a barrel and corn was just $2.50 a bushel. Today, with oil near $50 and corn above $4, they incur a loss of 21c for every gallon they produce.

Barron's Online "Inside Scoop" section reports that 2 hedge funds have charged up their buying of shares of Integrated Electrical Services (IESC). In the last 2 weeks, hedge funds Tontine Capital Mgmt and Southpoint Capital Advisors have spent a total of $4.4M on shares of Integrated Electrical. The co's CEO Michael Caliel and Robert Callahan, a SVP, also jumped in with buys totaling $54K during that time period. Both Tontine and Southpoint have representatives on Integrated Electrical's board of directors, which Ben Silverman, director of research at, says boosts the bullish signal from their purchases. "They are not just casual investors here," Silverman says.

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