Because of the Enron Effect, some gas and electric companies have become bargains

When the world is in turmoil, investors often retreat to Big Oil stocks. But with crude prices--inflated by war fears--rising about 25% this year, to $25 a barrel, fast-growing natural gas producers and electric utilities caught in the post-Enron downdraft may be safer plays right now.

U.S. demand for natural gas has been growing, thanks to a surge in power-plant construction. But supply has been lagging. That's why Devon Energy (DVN ) in Oklahoma City, which has been buying up exploration and production companies, is the top pick of Richard Giesen, manager of the $134 million Munder Power Plus Fund.

If natural gas prices--now at $3.30 per 1,000 cubic feet--remain strong, Devon could be a big winner. Some 70% of its production is natural gas, and growth in that area is expected to proceed at 4% to 5% a year for the foreseeable future. In the meantime, the purchases of such companies as Mitchell Energy & Development and Anderson Exploration have extended Devon's debt to about 60% of capital. As a result, Devon trades at about five times cash flow, vs. six for rival outfits. The company is reducing debt by selling noncore properties in such places as Indonesia and Argentina.

Another attractive stock is EnCana (ECA ), a Calgary-based company formed earlier this year through the combination of PanCanadian Energy and Alberta Energy. Robert Shearer, manager of the $119 million Merrill Lynch Natural Resources Fund, says EnCana has some of the strongest projected production growth in the industry but trades at the same cash flow multiple as slower-growing U.S. peers.

Among the company's most promising projects is the Deep Panuke field off the coast of Nova Scotia. EnCana is sinking about $1.1 billion into this field, which contains an estimated one trillion cubic feet of natural gas. It will start supplying Northeastern markets in 2005. Thanks to Deep Panuke and other projects, Shearer figures EnCana will see 12% per year production gains over the next three years.

Concern about Enron-like meltdowns has knocked down share prices of even conservatively run electric and gas distributors, says Eaton Vance Utilities Fund manager Judith Saryan. Two of her top holdings are TXU (TXU ) and FPL Group (FPL ). Dallas-based TXU--with $28 billion in sales and about 11 million electric and gas customers in the U.S., Europe, and Australia--has been selling assets to reduce its debt. By expanding its electricity business into such newly opened markets as Texas and Germany, it expects earnings to grow about 10% a year for the next few years.

Juno Beach (Fla.)-based FPL Group is a smaller operation, best known as the parent of Florida Power and Light. Like TXU, it has been moving into new markets outside of its traditional territory. FPL recently announced plans to take a majority stake in the Seabrook nuclear power plant in New Hampshire and said it was on track to increase earnings 7% a year through 2005.

One member of the Big Oil fraternity that could do well even if oil prices decline is Amerada Hess (AHC ). Since taking the reins at this $13 billion oil exploration and refining company in 1995 from his father, Leon Hess, CEO John Hess has made a strong effort to boost returns. He sold a half-interest in the company's massive Virgin Islands refinery, nearly doubled the number of gas stations it owns on the East Coast, and acquired Triton Energy, an exploration company with promising discoveries off the West African coast. At three times this year's anticipated cash flow, it's still much cheaper than its peers, according to Robert Gillon, an oil company analyst at John S. Herold.

With both the global oil business and the U.S. electric market in turmoil, energy stocks are likely to be volatile. But therein lies opportunity.

By Christopher Palmeri

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