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Five analysts and top management from fifteen sector firms examine the energy sector in this special 70-page Energy issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info461.htm.

TWST: John, what effect will the strategic reserve plan have on the energy markets?

Mr. Parry: The initial effect would be the placement of some non-consumable demand on the oil supply side, perhaps on the order of 50,000-100,000 barrels per day beginning early next year, targeting a supply of 700 million barrels. The current storage level is about 550 million barrels, and the US currently imports about 9 million barrels a day. Of course, the idea behind this storage is for the US to have an immediate source of oil supply should there be an import interruption of any consequence. The economic and/or operating environment under which it would be released would then dictate its future impact. We should remember that the Clinton Administration saw fit to release some strategic oil when it looked as if a heating oil supply problem would develop in the 2000-2001 winter. However, its impact on the market didn’t turn out to be that significant as refinery economic issues, rather than the availability of crude oil, was the bigger problem.

TWST: John, how do you see US energy policy changing going forward? What is going to be different following the events of September 11?

Mr. Parry: I think there is a greater awareness on the part of the public and most politicians that we have been given a new mandate to address our energy security. When we look at that, we need to think in terms of a North American or Western Hemisphere context, and that includes Canada, the United States, Mexico and Latin America. Certainly we’ve had a number of warning shots with respect to oil (that’s about 40% of the US energy pie — over half of which is non-US sourced), dating back to the 1970s concerning the Middle East and the uncertain politics that are involved. I think many people already recognize that there is a need to pursue a strategy that will increase regional supplies from Venezuela, Latin America and Mexico, and then, more strategically, natural gas in Alaska and the Canadian Arctic. In fact, many industry people will tell you that developing gas in Alaska and the Canadian Arctic is not a case of if, but a case of when. Of course, well-entrenched political issues are part of the equation here and those will need to be addressed.

TWST: John, which sectors of the energy industry should investors be looking at most closely going into 2002? What weighting should the various segments of the industry have in an investor’s portfolio?

Mr. Parry: I would answer this way. If you’re playing commodity prices, one has to deal with the reality that companies that are heavily driven by commodity pricing (i.e., the E&P component) are going to face a downtrend in earnings momentum. As you know we have a lot of Wall Street players who affect the price of these equities who will not be happy to be onboard while the industry is going through this down cycle in prices. We are probably going to be in the third quarter of next year at least, if not the fourth quarter, before we will see a reversal of this downtrend. Therefore, I would look for other drivers. Turning to downstream, Valero (NYSE:VLO), which is in the process of completing a significant merger with Ultramar Diamond Shamrock (NYSE:UDS), offers considerable upside from current levels. Here’s a company whose earnings have gone up from a little over $2/share in 1999 to over $5/share in 2000 and in excess of $8/share in 2001. Although the popular notion is that the year 2001 is a fluke, current Street estimates call for a retreat to the $5-$6/share level in 2002, even with help from expected merger synergies. With the stock selling in the mid-$30s, we believe the opportunity exists for an upside surprise to these estimates, particularly given the significant retail marketing component that comes with UDS.

1) Outlook for Energy Stocks - In an in-depth (9,000 words) Analyst Interview, Arthur L. Smith, Chairman and CEO, Christopher W. Sheehan, Senior Vice President, Robert E. Gillon, Vice President and John B. Parry, Vice President, all at John S. Herold, Inc., examine the outlook for the sector and share specific stock recommendations.

2) Distributed Power Technology - In an in-depth (4,900 words) Analyst Interview, W. Neal McAtee, Managing Director at Morgan Keegan & Company, Inc., examines the outlook for the sector and shares specific stock recommendations.

3) CEO interviews (average 2,500 words). Top management of fifteen sector firms examine the outlook for their firm and the sector.