Barron's excerpt on SUN.
FEBRUARY 21, 2000
Too Cheap to Ignore
Oil prices soar, but oil shares go begging
By Lauren R. Rublin
On paper, these are golden days for energy shares. The price of crude has nearly tripled from December 1998, and last week topped $30 a barrel for the first time since the Gulf War. U.S. inventories of crude and processed products are at or near historic lows for this time of year. And companies the length and breadth of the Oil Patch -- from the major integrated producers to obscure drillers, from oil-services providers to once-beleaguered refiners -- are poised to show impressive earnings growth.
So, why is Wall Street yawning? To be sure, most energy stocks got a pleasant lift early last week
In fact, say analysts and investors, the oils have been punished precisely because of the market's exclusive love affair with tech. Value funds, the traditional repositories for energy shares, not only haven't attracted new money this year, but in many cases have been hit with unwelcome redemptions, forcing sales of oil-related issues. Would-be buyers, meanwhile, have hewed to the sidelines, reasoning that crude can only decline from currently lofty levels, which reflect the confluence of unexpectedly robust global demand and near-unprecedented discipline among the major oil-producing countries to cap their daily output.
"They're almost inexplicably cheap," says Bear Stearns analyst Fred Leuffer. "The domestic oils today are trading below private-market value, or the cost to find and develop the oil and gas reserves underlying their shares."
Adds Michael Mayer, an oil-stock analyst at Schroders & Co., "The outperformance of the tech sector has created the best buying opportunity I have ever seen."
Oddly enough, U.S. oil analysts wholeheartedly agree. Big Oil and independent exploration and production companies alike have budgeted their capital spending for $14-$15 oil. "If they get $23 a barrel, earnings will be explosive," says David Pursell, vice president of upstream research at Houston's Simmons & Co., an energy investment concern.
Tosco and Sunoco also are good plays on a reversal in refiners' fortunes. Both are more liquid, and Sunoco, at 26 1/2 , yields almost 4% a share. The catch is that both, unlike Valero, also have retail outlets, and gasoline pump prices, of particular interest to the citizenry and its politicians, rarely rise as quickly as wholesale prices.
I think $24 a barrel oil is here for a while and explosive growth is there for those who saw BPA's results last week.
Jack |
