What's Up With Calpine (CPNLQ)?

Fundamental Picture:

WSJ's Head On The Street column had a good article on Calpine, so I'm going to reprint the necessary excerpts.

Plugging Into Calpine

"Calpine recently told the U.S. Bankruptcy Court for the Southern District of New York that it is considering raising money, possibly from private-equity firms or others, as part of its strategy to emerge from bankruptcy court this year.

There even is speculation of buyout interest in the company, the nation's largest owner of natural-gas-fired power plants, in terms of megawatts of capacity -- and that could make its shares even more attractive.

The company's price/earnings ratio is far below that of the independent power sector as a whole, with Calpine trading at 17.6 times its estimated per-share earnings for 2007, compared with 35 times for the sector.

Since filing for Chapter 11 in December 2005, Calpine Chief Executive Robert P. May has been selling assets and patching up the balance sheet. The company has sold eight power plants, using the proceeds to cut debt by $1.2 billion, and it has renegotiated seven power-sales agreements to improve its position by $1.8 billion. It has eliminated about one-third of its creditor claims so far, and has cut staff by a third.

Calpine's prospects have rebounded, in part, because of dimming prospects for the construction of coal-fired power plants by others due to fears of global warming and stepped up regulation.

Future carbon-limiting rules would be fine with Calpine because it doesn't own coal-fired generating plants on which restrictions would be toughest. It operates 66 clean-burning gas-fired power plants, which emit only 40% as much carbon dioxide as coal-fired plants, and 19 geothermal plants that tap the Earth's heat to make electricity.

Of the 20 top power generators in the U.S., Calpine emits the least carbon dioxide. That means it could benefit from new regulations because the rules would likely force other generators to charge more for electricity to cover greenhouse-gas compliance costs, making Calpine's power more competitive by comparison.

With coal plants looking iffy and new nuclear plants perhaps a decade away, "You have a situation where plants like Calpine's look like the only alternative for at least the next five years," said Daniele M. Seitz, analyst for Dahlman Rose.

The value of Calpine's portfolio is rising. Generating capacity that was valued at about $400 a kilowatt two years ago now fetches about $650 a kilowatt of capacity.

Another plus for Calpine is the example set by other generators that have emerged from bankruptcy protection. NRG Energy's stock price has soared to about $80, four times as much as it fetched in December 2003, when the New Jersey company emerged from Chapter 11. Stock in Mirant has doubled in price since it reorganized in 2006. The Atlanta company recently said it is seeking a buyer."

• Investors should be cognizant that Calpine reported better than expected results on May 9th, 07. Net loss was $459 million, 96 cents EPS vs. loss of $589 million, $1.23 EPS last year.
  
  
• Sales rose 19% to $1.6 billion for the quarter ending March 31, said Calpine, which operates 25K megawatts of generating capacity in 18 states and sells power to the wholesale market. CPNLQ said it benefited from a $246 million gain on asset sales as part of its restructuring activity.
  
  
• Given the environment-friendly nature of CPNLQ's business, management's push to concentrate on core areas of operations through restructuring, and the political aspect of Democrats controlling the senate and likely hood of winning the White House (recent polls favor Democrats), legislation to curb greenhouse-gas emissions looks quite realistic.

Technical Analysis

As you can see in the daily chart, CPNLQ has responded well to Fibonacci levels. Right now it's retraced 38% of it's recent move, and thanks to the aforementioned positive story in the WSJ, the stock traded higher yesterday.



This is a weekly chart. The Fib magic seems to be working well. If you look the volume on the weekly time frame, it looks a lot more bullish. Also note the hammer formation, which typically signals a trend reversal.



My problem with CPNLQ is ever since it started its retracement, the stock has not seen a high volume up day. As you can see from the chart below, the red arrows point out increased distribution than accumulation. The next few days are key for the stock, I would like to see how CPNLQ trades.

Ideally, I'd like it to break the trading range highlighted below on good volume. I'm not trusting today's move because of the WSJ article.



One of the positives I really like is that the stock has seen buyers step in each time it has approached the 50-day MA. This shows that traders still believe in the stock.

Therefore, considering the fundamental aspects highlighted in bold above and the stock being bought at the 50-day MA, tells me the bullish story is intact. This is one to watch very carefully for upcoming developments.

** My bullish stance should not be construed as a buy signal.