Oil Shares Return to Favor as OPEC Drives for Higher Prices
Bloomberg Energy (London), Monday, March 18
By Thomas Tugendhat
Philip Lawlor at Royal London Asset Management bought shares of oil drillers Schlumberger Ltd. and Halliburton Co. Renee Carret of Carret & Co. likes Knightsbridge Tankers Ltd. and Frontline Ltd., two oil transport companies.
Oil shares are rising as OPEC on Friday agreed to maintain production limits through June. The Bloomberg Europe Energy Index is up 14 percent this year, while an index of 500 European stocks is little changed. Four of the five top-ranked oil analysts have boosted forecasts for crude prices, citing OPEC's discipline.
``OPEC compliance over the past six months means the supply has been (managed) much better than people expected,'' said Lawlor, who helps manage $41 billion. ``Ten days ago, we were thinking of trimming positions, but the shares don't look high,'' assuming oil is $2 to $4 higher than the price of $21.89 a barrel on March 1.
The Organization of Petroleum Exporting Countries said oil prices would have to rise by $5 a barrel, or more than 20 percent, before members boosted production. The world economy is recovering and can withstand a higher oil price, ministers said.
Deutsche Bank AG, UBS Warburg AG, Merrill Lynch & Co. and Credit Suisse First Boston have increased their estimates to about $20 a barrel for Brent crude this year.
In the past 15 months, OPEC has cut supplies four times, removing 5 million barrels a day from the market. That's enough to power South and Central America.
`In Control'
OPEC President Rilwanu Lukman said oil must exceed $28 a barrel for their benchmark index before they increase supply. That marker last stood at $22.79.
``OPEC is in control,'' said Daniel J. Rice III, senior vice president and portfolio manager at State Street Research in Boston, who manages the $138 million State Street Research Global Resources Fund. ``This is the most shut-in production that OPEC has ever had. It indicates a compliance from OPEC that we haven't seen before.''
State Street owns about 10 percent of the shares of Calgary- based Baytex Energy Ltd., Rice said. He also likes Calgary-based Hurricane Hydrocarbons Ltd., which explores mostly in Kazakhstan.
Higher oil prices will mean more cash for the biggest oil companies, such as Exxon Mobil Corp., Royal Dutch/Shell Group and BP Plc, and that will mean more to spend on drilling. Kerr-McGee Corp., an Oklahoma City-based oil and gas explorer, said Friday it will boost spending this year by $120 million, or 13 percent.
``If cash flows are going to grow, spending will grow,'' said Lawlor. ``And I see no reason why, with cash flows expanding, service companies won't benefit.''
Shares of Schlumberger, the largest oilfield-services company, have gained 9.7 percent this year, while those of Halliburton, the second-largest, have jumped 27 percent. The Standard & Poor's 500 Index has risen only 1.6 percent.
Refiners Hurt
While rising oil prices have helped the biggest oil companies -- BP shares are up 14 percent this year -- the higher crude price will hurt their refining divisions, which make gasoline and other fuels from crude oil, said Markus Ilg, who helps oversee about 40 billion euros at WestLB Asset Management.
``Because they rely on selling refined products as well as crude oil, the higher oil price will only add 5 percent to the oil majors' earnings,'' Ilg said.
A recovery in demand may also benefit the oil-tanker companies, which ferry millions of barrels a day worldwide. Tanker rates are at a two-year low equal to 85 cents a barrel for shipments from Saudi Arabia, only a fourth the level in November 2000, when oil neared $34 a barrel.
Shares of Hamilton, Bermuda-based Knightsbridge have risen 8.5 percent this year in expectation of higher freight rates, while Norway's Frontline have gained 6.5 percent.
``The tankers are one of the first areas to pick up from interest in oil,'' said Carret, who helps manage $2 billion and owns shares in both shippers.
Iraq
It isn't just OPEC that accounts for the biggest monthly rally in oil prices since May. The threat of war with Iraq, which pumps 3 percent of the world's supply, accounts for a premium of $2 on each barrel of oil, said the Saudi oil minister, Ali al-Naimi.
The U.S. economy is also recovering from the first recession in a decade. Industrial production increased in February for a second month, and consumer confidence rose in March as the U.S. economic rebound gathered pace, Federal Reserve figures showed Friday.
Now that OPEC has reinstated its price range and New York oil prices are seen averaging $23 to $24 a barrel, oil stocks should be up 30 percent to 40 percent, Rice said.
``The key question is: does it happen next week or does it take two or three years?'' he said. |
