CPFL Energia Downgraded to Hold

We are downgrading our rating on CPFL Energia S.A. (CPL) from Buy to Hold as the second quarter results were below expectations. However, the outlook for the following quarters remain positive, mainly considering the growing demand for electricity in Brazil and the positive outlook for the Brazilian economic environment. We also believe that the tariff correction in 2009 will be positive.

Moreover, the company was recently upgraded to AA+ on a national scale by Standard & Poor's and CPL has a solid dividend payout. Nevertheless, a tight monetary policy in Brazil, higher worldwide inflation and interest rates, particularly in Brazil, and above-average valuation if compared to other Brazilian electric utilities are matters of great concern.

The company operates in the States of Sao Paulo, Paran', and Rio Grande do Sul, three major economic and industrial centers in Brazil, which should push the country economic growth in the following years. The company's acquisition of CMS Energy Brasil, subsidiary of CMS Energy and Gas LLC, in the second quarter of 2007, was an important step ahead in the consolidation of the energy distribution and generation in the key areas of Sao Paulo. The company recently created CPFL Bioenergia, a subsidiary that will make investments in bio-energy generation of electric energy from sugar cane bagasse.

But on August 12, CPFL posted discouraging results for the second quarter of 2008. Net revenues reached $2,310.4 million (US$1,400.2 million) from R$2,224.2 million in the second quarter of 2007, representing a growth of 3.9% year-over-year in Brazilian reals.

Grey Wolf Sells for $2B Plus

Long-time Buy recommended oil-rig marketer Grey Wolf (GW) has finally ended its long-term courtship with Precision Drilling (PDS) by agreeing to be purchased by the E&P (exploration and production) trust for cash and stock totaling over $2 billion.' This follows GW turning down an offer from Basic Energy Services (BAS).'

Precision has missed earnings estimates in its last three quarterly earnings reports, but its Zacks consensus for fiscal year 2008 is up slightly in the past month.' For BAS, it has, like Grey Wolf, seen a flurry of upwardly revised estimates for both the eptember quarter and fiscal year earnings.

Zacls senior oil & gas industry analyst Sheraz Mian has covered Grey Wolf for years, and as of his latest Analyst Note has kept his Buy rating on the shares.' A quote: "(T)he termination of its merger agreement with BAS due to shareholder rejection... will bring back the focus to Precision's bid for the company, which overtime may become an attractive alternative."

Natural Resource Keeps Surging

We are maintaining our Buy recommendation on Natural Resource Partners L.P. (NRP). The strong global coal markets should boost NRP's operating in margins and distributable cash flow as its per ton royalty increases will be realized through '09. The partnership is levered to the premium priced central Appalachian Basin consisting of a sizeable metallurgical reserve base, representing 26% of '08 production.

The company released second quarter 2008 earnings of $40.4 MM, a 79% increase over Q2'07 and a 20% sequentially. Earnings attributable to limited partners, which is essentially an MLP equivalent to common stock for a non-master limited partnership, was $30.6 MM or $0.47 per unit, an increase of 68% over Q2'07. Limited partner earnings came in above our expectations due to higher-than-expected average royalties per ton production volumes.

NRP has no direct involvement with the operations of its assets. It collects royalties from the coal properties and infrastructure assets, which it owns based on a fixed price or a percentage of sales, whichever is higher. This allows the partnership to avoid large expenses and liabilities involved in the capital intensive coal mining business. By not having to set aside great deals of capital for capital expenditures or legacy liabilities, which all underground mining operators face, NRP can generate large amounts of distributable cash flow.

NRP will continue to reap the benefits of higher royalties without the operational or price risks associated with operating the mines. We are increasing our target price from $39 to $40 per unit and increasing our 08/ 09 earnings estimates from $1.75 to $1.78 per unit and from $1.77 to $1.85 per unit, respectively.

Clayton Williams Rating Downed

We are downgrading Clayton Williams Energy, Inc. (CWEI) to Hold on valuation grounds. The shift in strategy earlier this year away from wildcat exploration and greater focus on developmental drilling in the oil-prone Permian basin and Austin Chalk regions, helped in no small part by the earlier oil surge, pushed the stock price to new levels.