Argentina Energy Woes Hurt Economy, But Boon For UtilitiesLast update: 6/21/2007 1:31:30 PMBy Serena Saitto Of DOW JONES NEWSWIRES BUENOS AIRES (Dow Jones)--Right as Argentina's energy problems appear to be reaching crisis point, with power and gas shortages paralyzing parts of the industrial base, they are having a perverse, positive effect on a key sector of the country's stock market. Investors in various power and gas companies are betting that the situation has become so acute that the government, after more than five years of delays, will be forced to raise rates after October's presidential elections. As such, the energy providers that have born the brunt of the price freeze are now emerging as the darlings of an otherwise lackluster market. Since Tuesday, when the trading week began after a holiday Monday, power transporter Transener SA (TRAN.BA) has gained 6%, investment fund Pampa Holding (PAMP.BA) is 5.6% higher, power distributor Edenor (EDN) has advanced 6.4%, and generators Endesa Costanera (CECO2.BA) and Central Puerto (CEPU2.BA) are up 6.9% and 12%, respectively. These gains came while most other local stocks either stagnated or fell amid concerns over the energy situation. Pampa and Edenor - both controlled by rising energy player Marcelo Mindlin - have done especially well in recent months. Shares of Edenor have risen 26% since their market debut in Buenos Aires and New York at the end of April. Pampa Holding, which listed last year, has posted a 20% gain since the beginning of this year, easily outperforming Buenos Aires's benchmark Merval index, which grew 5% over the same period and lagged much of the rest of the world. Bear Stearns last week started coverage of Edenor with an outperform rating and a $24 target price per American depository Receipt, or 3.83 pesos per share. Its projection was based on expectations for a 41% tariff increase in 2008, implying a 23% hike for final consumers. Echoing other banks' reports, Bear Stearns said its optimism about rate hikes is founded on the belief that the political cost of hiking utility rates will decline after elections in October. It is expected that either President Nestor Kirchner, or his wife Cristina Kirchner, who may run in his place, will win that election. Edenor shares in Buenos Aires Thursday were last quoted up 2.24% to ARS3.34. Meanwhile, Edenor affiliate Pampa Holdings appears to be upping its own bet on a more favorable pricing framework. The company announced this week that it had entered into exclusive talks to buy the 620-megawatt Piedra Buena thermal facility for $85 million. UBS said in a report to investors that the acquisition would increase Pampa's generation capacity and its core profitability by 50%. UBS kept Pampa's target price at ARS3.40 with a buy rating and the stock remains its top pick of the Southern Cone electricity sector. Pampa shares Thursday were last trading up 0.71% at ARS2.81. Energy Rates Have been Frozen Since 2002 Argentina residential utility clients enjoy some of the world's lowest rates. In 2002, the government converted dollar rates into devalued pesos and froze them to shield residents from the nation's economic meltdown. While modest price increases for both gas and power delivery have since been permitted for industrial clients, producers and distributors of both services still face frozen residential rates. While modest residential rate increases have been agreed with a few power and gas distributors, these are yet to be implemented. Analysts attribute the delays to political concerns about the effect on inflation. The increase in Argentina's official consumer price index is expected to match last year's 9.8% increase, but economists say real inflation is much higher. Now, however, with the energy sector nearing collapse, analysts expect the government to accept the inflationary consequences of higher rates in a bid to avert a hard economic slowdown from a lack of energy. A government press office didn't return calls seeking comment. The latest problems stem mostly from a winter cold snap, which has boosted demand for gas from residential users, who by law must be prioritized over others. These have been exacerbated by a drop in the supply of Bolivian gas to Argentina to around 5.5 million cubic meters a day from a contracted 7.7 million cubic meters, amid reports that President Evo Morales's government is prioritizing the domestic market. The result has been a severe rationing of gas to industrial users. Such restrictions are of direct concern to thermal electricity generators, too, which are in turn limiting power supply at a time when low rainfall is contributing to hydroelectricity shortages. The energy cuts, along with strikes and other labor problems, are already eating into industrial output, which grew just 6.3% year-on-year in May, below the expected 7%. The slowdown is expected to be more acute in June results. Reflecting concerns about the impact on broader economic growth, which has run at more than 8% over the past four years, the Buenos Aires's Merval index has lagged other markets such as the Dow Jones industrial Average, which has risen almost 10% since the beginning of the year. But the Merval's 5% gain over that time may not be a good gauge of investors' confidence in the outlook for Argentine business in general. After all, the index is heavily weighted with the kind of energy-related companies that are currently bucking the pessimistic trend. Four of the energy stocks that have jumped this week account for 16% of the Merval 25 index. The fifth, Edenor, is excluded from that and the narrower Merval index and is instead listed only in the broader Buenos Aires General index. Meanwhile, steel tubemaker and Merval bellwether Tenaris SA (TS), which makes up a whopping 18% of the index, is considered somewhat immune from the risk of an Argentine economic slowdown. It too is an energy-related play, with a client base made up of mostly foreign oil producers and with production facilities that are spread globally. -By Serena Saitto, Dow Jones Newswires; 5411-4311-3125; serena.saitto@dowjones
