Slip-Slidin' Away
After months of heady gains, oil stocks are falling amid fears of lower crude prices
interactive.wsj.com
By Jack Willoughby
AUGUST 20, 2001
In an otherwise bleak year for corporate earnings, the oil sector has been a gusher of good news. Consider the latest quarter, in which earnings for the companies in the S&P 500 index collectively slid some 17%. Not so the oils, however. Buoyed by lofty prices for crude and natural gas, the S&P's oil components reported a handsome profit gain of 26%.
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Chet Needelman, of the California money manager Palley-Needelman, already has beaten a path out of energy shares. The firm had whittled down a 637,257-share position in Exxon Mobil to 53,388 shares as of June 30. Similarly, it cut a 974,725-share stake in British Petroleum to 39,988 shares, and pared a 94,996-share holding in Total Fina Elf, the French oil producer, to 24,949 shares. Needelman believes the global economy will remain weak at least through mid-2002.
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Crude recently was trading at $27.50 a barrel, down from last fall's peak of more than $37. But Thomson Financial/First Call reports that analysts have been marking down their estimates, and now expect prices to drop to $23.62 a barrel in 2002, and $22 in 2003.
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Bear Stearns analyst Fred Leuffer thinks these subdued forecasts may be still too rosy. Last spring, he laid out a case for $18 oil, based on his assessment of changes in Saudi Arabia's oil policy. Leuffer notes that some refined products, such as gasoline and home heating oil, earlier this summer sold below the cost of the crude from which they were derived -- further tesimony to the market's view that oil prices are not sustainable at current levels.
Another ominous sign of a probable drop in crude is the massive speculative short position in futures contracts that has built up on the New York Mercantile Exchange. Last month, net short positions climbed above 68,000 contracts (each of which equals 1,000 barrels of oil); two years ago, ahead of the sharp rally in crude, the so-called non-commercials, or non-industry traders, had a net long position of 100,000 contracts.
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In Leuffer's view, Hess' wrist-slapping represents a warning to other oil-company managers to keep their wallets shut. And that may be another reason why investors like Chet Needelman are exiting the sector. Thanks to last year's spike in oil prices, company coffers are brimming with more than $40 billion in cash. But history shows that the energy industry is prone to squandering fortunes on dubious drilling adventures and fault-ridden acquisitions. So any way you look at them, oil and gas shares are running on empty. |
