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OPEC's Moves May Not Save E&P Stocks
By Dimitra Defotis
S hares in some energy companies are near their all-time
highs, partly in anticipation of another expected production
cutback from the Organization of Petroleum Exporting
Countries at its upcoming meeting in Vienna March 16.
OPEC is getting kudos from some fund managers and analysts
who say the 11-nation cartel kept crude prices from free-falling
by tempering supply over the past two years. OPEC, after all,
controls some 40% of the world's oil supply.
OPEC production cutbacks, they add, might help prevent
supply gluts that have already lowered prices to $29 per barrel,
down from their $37 peak last fall.
But while oil prices seem to have stabilized a bit lately, it might
be too soon to declare victory. For most OPEC nations, more
than half of their gross domestic product is tied to oil, so
stability depends on increasing petroleum revenue, even if it
means pumping more crude.
And some analysts have expressed fears that the slowing global
economy will trigger a dive in crude prices. Lehman Brothers
analyst Paul Cheng recently downgraded the refining sector,
whose stocks are near their all-time highs, and others have
taken a harder look at major oil companies. The Dow Jones
Integrated Majors Oil Index is just 7% off its 52-week high.
"I find it difficult to accept [that] OPEC will be able to hold
pricing up over time after so many years of not doing so," says
Lawrence Tedeschi, an analyst with Banc One Investment
Advisors.
That could mean weaker pricing than energy-happy investors
now appear to expect.
Tedeschi is particularly cautious on the volatile oil exploration
and production companies, whose fortunes are tied to
commodity price fluctuations and generally underperform other
energy sectors when prices fall.
Anadarko Petroleum (see Weekday Trader, "Anadarko Shares
Poised for Another Discovery ," August 1, 2000) is just about
4% off its high achieved in late December. And Apache , which
is about 10% off its all-time high, will have a hard time
generating internal growth that isn't tied to acquisitions, says
Fadel Gheit, a senior energy analyst at Fahnestock & Co.
Long term, Gheit thinks oil prices should stabilize between $20
and $25 a barrel vs. Wednesday's West Texas Intermediate
crude closing price of $29. He expects natural gas prices to
hover around $4.00 to $5.00 per million British Thermal Units,
below its closing price of $5.21 per million BTU Wednesday.
That's not good news for some of these E&P companies, which
may have a tough time selling investors on their earnings
stability, he says.
"Near term, I don't think we are going to see tremendous
upside," Gheit says. "Oil stock performance anticipates...price
direction. And if oil prices are $30 going to $25, that is
bearish."
Gheit is concerned about the growth prospects of Anadarko,
now a formidable E&P company after its acquisition of Union
Pacific Resources. (Completed last year, it doubled
Anadarko's market capitalization to $12 billion.) He says
Anadarko will lose its appeal to investors unless it makes
another big acquisition -- or hits paydirt with a humongous
discovery.
Anadarko's consensus annual long-term earnings growth is
17%, according to First Call, although earnings are actually
expected to decline by 12.5% in 2002. Gheit maintains that
even a 100-million barrel discovery, which in years past might
have bumped up the stock price by $2 or $3, will have much
less of an impact now that Anadarko is much bigger.
Anadarko spokeswoman Teresa Wong disagrees.
"The implication that we would have to do an acquisition to
grow is wrong," Wong says. She reels off several drilling
projects in the Gulf of Mexico, Alaska and Canada -- which in
some combination could produce more than 100 million barrels
of oil.
Anadarko is trading at 12.8 times First Call's 2001 earnings
estimate of $5.69 per share and at 14.6x projected 2002
earnings of $4.98 a share for 2002.
Apache, an independent oil and gas producer with a market
capitalization of $8 billion, is trading at 9.2x 2001 earnings of
$7.22 a share and at 11x 2002 estimated earnings of $6.06, vs.
a projected annual long-term earnings growth rate of 12%.
Both companies, however, are overvalued if one assumes
"normalized" oil prices of $20 per barrel and natural gas of
$3.00 per million BTUs, says Robert Hinkley, an analyst and
principal of Petroleum Research Group, a sell-side oil and gas
research firm in New York. He calculates that Anadarko is
trading at 160% of asset value, and Apache, 177% of asset
value; he thinks both should correct to 100% of asset value.
And if oil prices go down, so will Apache's price, says Gheit,
who has a Hold rating on both companies. Further, he
maintains Apache's aggressive acquisition strategy has made it
more of a holding company that has "forgotten completely how
to discover oil."
Steve Farris, Apache's president and chief operating officer,
strongly disagrees
"You cannot have a 25% growth rate if you just drill wells," he
tells Barron's Online. "We have been an acquisition company
for 47 years, and we have had 25% compounded reserve and
production growth in the past ten years. People buy Apache
because we grow."
Of course, a growing middle class worldwide will consume
more energy. That and the technological revolution bode well
for long-term energy demand--and perhaps for patient
investors in oil and natural gas companies. And if natural gas
prices remain above $3.00 per million Btu for the next several
years, some E&P companies will benefit, too.
But for now, slowing global economies have thrown a wild card
into the oil supply-demand equation. And OPEC may find itself
unable to change that equation -- which isn't good news for
energy investors in the short run. |
