Less sexy outlook for energy stocks as Maui gas ends

Energy stocks have had spectacular gains over the past few years, but the outlook is for more stable, "less sexy" growth in the future. As the transition from a Maui gas-dominated world is nearly complete, the days of big share price jumps could be over.

Forsyth Barr analyst Greg Main said he expected the rate of future power price increases to fall, as new generation was built.

Previous high growth in shares such as Contact Energy was unlikely to continue.

"It's gone through a growth phase. It's attractive in that its earnings are defensive, but where the growth is going to be delivered is in doubt at the moment, because they have to go through the investment process. There is a bit of risk involved here," Main said.

"We feel it is still a positive sector to invest in - because people are investing, there's new plant going in."

This new generation investment was getting a return on the capital.

Main did not necessarily believe the strong performance the sector had delivered over the past three years would be replicated in the next three.

The past few years had been "the paradigm shift"- where the whole generation sector moved from the high-fuel to low-fuel scenario. More incremental growth was likely in the future, said Main, making the energy sector a "less sexy part of the market".

Analysis from Macquarie Research has a set 12-month price target of $2.80 for Vector shares, which closed up 5c at $2.69 yesterday.

Vector is a lines company, with the bulk of its earnings controlled by Commerce Commission regulation. It wants to become a generator of power itself, but its monopoly lines business means it is precluded from law from being an electricity retailer.

Macquarie has a similar 12-month price target for Contact shares of $7, some 55c above yesterday's close at $6.45, but still well down on its July high of $8 a share.

TrustPower's performance during the past few years has been reflected in a steady growth in share price - rising from $1.79 at the start of 2003 up to $6.30 in August last year. It closed steady at $6.20 yesterday.

Ratings agency Standard & Poor's looks at the whole sector, listed and state-owned.

S&P director Mark Legge said the agency considered the outlook for the big power generators as stable because they seemed to have reacted well to the pressure on their businesses imposed by the fuel shortages.

While exploration for new gas fields had met with little success over the past year, the generators were carefully looking at future fuel sources. "Perhaps this time next year, if there's no progress, then there will be a little bit more concern and we'll be more concerned and we'll be asking more questions."

Less sexy, more stable may be, but it appears that there is still a decent dose of risk when it comes to investing in the energy sector.