I don't recall having seen this article from S&P posted before, so for your reading pleasure, here it is:
Energy Sector-
A Window of Opportunity for Investors
A TD Waterhouse Investor Services Exclusive from S&P
The sector is in the early stages of a multi-year upturn - not yet embraced by the market despite strong industry fundamentals. S&P oil analyst Tina Vital believes this provides a unique opportunity for investors.
Rising worldwide demand and limited excess supply have lifted oil and natural gas prices to multiyear highs, creating boom conditions for energy companies. The price of oil is up 58% this year, averaging $30 per barrel (bbl.), and the price of natural gas is up 70%, averaging about $3.40 per million Btu. On average the international oils saw third-quarter profits rise over 94% from the previous year on higher oil and gas prices, whereas domestic oils, with a greater exposure to exploration and production (E&P), saw their profits jump 157%.
Most energy stocks, however, don't fully reflect these strong fundamentals, and major oil stocks have declined recently, indicative of a market assuming much lower commodity prices. Still fresh in investors' memories is the 1998 Asian economic collapse, which led to a worldwide oil glut and a retreat in oil prices to about $12 per bbl. Investors should use these opportunities to establish positions, as estimated forward P/Es of oil stocks have dropped off this year and are at a discount to the market, offering substantial relative growth potential.
Attractive Energy Issues
Company (Stock Symbol) Est.
2000 EPS$ Est. 2001 EPS$ Recent Price$ 12-Month Target Price$
BJ Services (BJS) A1.451 A2.611 60 86
Conoco Inc. "B" (COC.B) 2.89 2.57 27 53
ENSCO Int'l (ESV) 0.65 1.86 32 61
Exxon Mobil (XOM) 4.60 4.50 93 106
Global Marine (GLM) 0.65 1.35 27 45
Nabors Industries (NBR) 0.84 1.76 53 81
National-Oilwell (NOI) 0.52 1.22 33 41
Rowan Cos. (RDC) 0.74 1.62 24 45
Santa Fe Int'l (SDC) 0.95 1.90 33 56
USX-Marathon Group (MRO) 3.71 2.98 28 38
Weatherford Int'l (WFT) 0.68 1.64 36 54
Est.-Estimated.
1 Year ending September. Prices as of 11/20/00.
A-Actual.
S&P believes the underlying volatility in the energy market stems from tightness throughout the energy supply chain, which should support high oil and gas prices for the next several years. At a time when worldwide demand is rising, increased strain is being placed on an old and limited energy infrastructure, and lower E&P spending over the past few years failed to replenish declining oil and gas production. We believe this environment will support oil prices of around $32 per bbl. for the fourth quarter and $29 per bbl. average for 2001, well above the long-term $18 per bbl. average threshold for major E&P projects. High natural gas prices should continue, as existing production cannot fill accelerating demand for a clean energy source for electric power generation. Currently, S&P projects natural gas prices will average $5.12 per million Btu (British thermal units) in the fourth quarter, and $4.23 per million Btu next year.
Who are the likely winners in this high-energy-price scenario?
S&P is bullish on selected mid-sized oil services and drilling companies that benefit from spending by both domestic independents and major international oils. In particular, we recommend ENSCO International, Global Marine, Rowan, Santa Fe, Nabors, BJ Services, National-Oilwell, and Weatherford. Currently, domestic offshore drillers are experiencing the greatest gains due to natural gas activity in the Gulf of Mexico. However, because of aging domestic oilfields and lower cost sources of oil internationally, drilling outside the U.S. and Canada is rebounding. E&P spending by the major oils is projected to increase up to 20% in 2001, driven by billion dollar deepwater projects in the Gulf of Mexico, Brazil and West Africa, which could turn the current industry boom into explosive growth for this segment. S&P also recommends integrated oils, such as Exxon Mobil, Conoco, and USX Marathon, that have an improving production volume and cost profile. As finding oil and gas becomes more expensive, we are likely to see increased pressure on domestic oil producers to get bigger. The supermajors have shown the cost advantages of spreading the risk of huge deepwater E&P projects over a larger base, and the value of a basket of deepwater reserve projects from which to choose. Also, the market seems to reward the stocks of the supermajors with higher multiples, implying more stable earnings flow.
Under no circumstances should the information herein be construed as a recommendation or solicitation of an offer to sell a particular security. The article and opinions herein are obtained from unaffiliated third parties and are provided for informational purposes only. While the information is deemed reliable, TD Waterhouse cannot guarantee its accuracy, completeness or suitability for any purpose and makes no warranties with regard to the results to be obtained from its use. Past performance does not guarantee future results. |
