4, 2002; Weak Hands Hold Energy Infrastructure
funny thing has happened on the way to deregulation. Regulated companies grew accustomed to high levels of debt
when the companies were protected by regulation from default.
Many have continued to carry those high levels of debt in an increasingly
deregulated environment where protection from default is up to the market place
rather than a friendly regulator. We
are seeing the consequences of that in the bankruptcy of Enron and in the stock
market failure of one infrastructure stock after another.
a quantitative measure of debt exposure we calculate the ratio of debt to
present value. We place the measure
in the second column from the right in our valuation tables suggesting that it
is the second number to look at after McDep Ratio (see Tables L-1, M-1, S-1).
The strongest companies, the Mega Caps, have a median ratio of debt of
0.14. At the other extreme, Mid Cap Energy Infrastructure companies have a
median ratio of debt of 0.54. We
are leery of any company with a ratio of debt over 0.50.
When we have made exceptions, we have regretted it.
Thus we have to conclude that energy companies with ratios of debt over
0.50 are in effect, "junk stocks".
doesn't mean that a shrewd investor could not make money with junk stocks.
It just means that we don't feel confident we can know enough to make a
good long term return in those stocks on a risk-adjusted basis.
is opportunity in the debt woes of infrastructure stocks.
Assets are likely to shift from weak hands to strong hands at attractive
prices for the buyers.