Did you say PDE & RDC?
September 7, 2000
Dow Jones Newswires
High Prices Good For Oil Co Profits, But Some Stocks Lag
By BOB SECHLER
Of DOW JONES NEWSWIRES
AUSTIN, Texas -- Recent high crude prices are certain to lift oil producers' earnings, analysts said, but pricing uncertainty may remain somewhat of a drag on stock performances in the sector.
"Obviously, any company that's producing the stuff is going to be a beneficiary" from a profit perspective, said Alvin Silber, an analyst with Herzog Heine Geduld.
Oil stocks as a group have been stronger in recent months, partly because of improved commodity pricing. But some of the major integrated oil companies, such as Chevron Corp. (CHV), Exxon Mobil Corp. (XOM) and Texaco Inc. (TX), still remain well off their highs, partly because of investor fears that crude prices have nowhere to go but down.
"As far as the market is concerned, it has taken this (crude pricing trend) in stride throughout the course of the year and hasn't really pushed the majors up," said CIBC World Markets Corp. analyst Bruce Lanni. "The thinking is oil prices are approaching peak levels, so they have to come back down."
But that hasn't happened yet.
Oil prices recently climbed to their highest point in 10 years, with October crude hitting $35.19 a barrel in overnight trading Wednesday. October crude recently was trading down slightly at $34.95 a barrel on the New York Mercantile Exchange.
Some stocks have benefited strongly from the trend, such "pure play" exploration and production firms and some oil services firms.
Exploration firm Anadarko Petroleum Corp. (APC) recently set a new 52-week high, as have oil services giants Schlumberger Ltd. (SLB) and Halliburton Co. (HAL).
But analysts say investors aren't confident that commodity prices are at levels that can be sustained, which has served as a drag on some of the major integrated oil stocks.
The major companies themselves have fed that uncertainty, some say, by basing their own spending on expectations for lower prices.
"There's still a lack of credibility in the $35 (a barrel) oil prices, and even the $30 oil prices," said Silber, of Herzog Heine Geduld.
In addition, "the whole group is perceived more as a mature industry, a cyclical play where (crude) prices right now are at a peak and you don't want to jump in," he said.
But he and other observers say investors should consider putting aside that perception and looking anew at some of the integrated oil firms, which increasingly appear to be good buys based on anticipated earnings.
Lanni, of CIBC World Markets, likes three in particular, BP Amoco PLC (BP), Chevron and Exxon Mobil. He said none has had a strong move yet attributable to this year's strong commodity prices but all historically perform above average in down-cycles, making them potential hedges for investors worried about oil-price stability.
"What we tell people is everyday that goes by in which commodity prices remain high, these companies get stronger and stronger and stronger," Lanni said of the entire integrated oil group. "The net effect is you're going to continue to see stronger earnings power for this group going forward."
Lanni has a $65, 12-month price target on BP Amoco, trading recently at $57.19. He has a $100 target on Chevron, trading recently at $88.63, and a $95 target on Exxon Mobil, trading at $83.88.
Meanwhile, some oil exploration and services stocks have been hitting new 52-week highs, a combination of tighter leverage to short-term oil prices and a perception that major oil firms must increase spending.
"Pretty much all the oil-services companies should benefit from higher capital spending" by the major integrated firms, said Poe Fratt, an analyst with A.G. Edwards & Sons Inc.
The major oil firms have put off such increased spending for much of the year, "so there's investor confidence that they'll have to spend money and increase production," Fratt said. The recent crude price spike "makes it seem more inevitable that it will happen."
Fratt likes several oil-services stocks at the moment, such as Rowan Cos. Inc. (RDC) and Pride International Inc. (PDE). He also likes some drilling stocks, including Apache Corp. (APA) and Talisman Energy Inc. (TLM).
He has a 12-month price target of $38 on Rowan, which hit a 52-week high of $33.50 Wednesday and was trading recently at $32.56. He sees Pride, trading recently at $25.94, climbing to $35 within 12 months.
Fratt's 12-month target for Apache is $70. The stock was trading recently at $66 after hitting a 52-week high of $66.38 Wednesday. Talisman, trading recently at $34.69, should hit $50 within 12 months, according to Fratt.
"Some of these have not moved up as much (as others in the sectors), and therefore the risk/reward ratio still looks good," he said.
Even if crude prices come off their recent highs, Fratt still thinks the outlook remains solid for many oil-related stocks.
"The way we look at it, at $20 a barrel, it's still good for both ends of the equation," he said. "The overall long-term potential is still very positive, with strong cash flows at the majors, growth in demand and limited capacity."
-By Bob Sechler; Dow Jones Newswires; 512-236-9637 |
