HOW some utility companies have remained a good bet for investors, despite the burden of ever-tighter regulation, is an enduring mystery of the sector.

Water companies are a good example. Regulators are always asking for more investment to clean up beaches, improve the quality of drinking water and to stop leaks. But despite these pitfalls, bidders are falling over themselves to get into the sector, with a queue of big names vying to pay £7 billion for Thames Water, and a 3i-led consortium making a £2 billion approach last week to AWG, owner of Anglian Water.

The explanation comes in the double-edged nature of the regulatory regime itself. Regulators can ask for more investment, but must then allow the utility company to increase prices to customers to pay for it. The trick for the regulator is in judging how much extra money an efficient company would need to pay for investment.

What regulators may have been getting wrong is how much interest water companies pay on their borrowings. This makes a real difference: if the regulator thinks they are paying more than they are, the companies are quids in.

In a piece of research last week, Oriel Securities (which is broker to Northumbrian Water) pointed out that some water companies were paying a lot less for loans than was thought. Companies are issuing long-dated bonds with real interest rates of less than 2%. If this is factored into the equation, water companies as a whole are about 5% undervalued, and if you take a more bullish view of the amount of risk involved in these companies, which private-equity bidders will do, the sector could be worth 18% more than it is now valued by the market. I think more bids might be on the way.

Premier Oil

IN the oil game, you are only as good as the drilling results of your last well. It is a rule that has hurt Premier Oil in the past. Premier, which reports interim results this week, was known for having quality but somewhat controversial assets, but since Simon Lockett took over as chief executive in March last year, the company has adopted a far more aggressive exploration plan and landed a couple of successes in India.

This year it is drilling 17 wells, including four “high impact” wells — jargon for potentially huge finds. Even without a major discovery, Lockett reckons that Premier could almost double its oil and gas production by 2010 just by developing its existing interests.

In the past few weeks the shares have been boosted by rumours that Premier had caught the eye of one of the oil giants, with Shell tipped to make a bid at about £13 a share. Such a move would make sense: Shell needs to find new reserves and Premier has some decent prospects. On the surface, a £13-a-share offer would look a reasonable premium to the present £10.07 price.

For now, the Shell rumours have died down, but other names, such as Kuwait’s Kufpec and Mexico’s Pemex, are doing the rounds. The latest City chatter is that the Premier board would be loath to sell out at less than £15 a share.

Despite a 500% rise since 2002, the shares look undervalued and are trading at a discount to the group’s net assets — against a premium for most rivals in the sector. This looks at bit harsh. But as a lifelong Manchester City fan, Lockett knows the pitfalls of failing to deliver.