Dennis,
Article from Wall Street journal
Julius
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[The Wall Street Journal Interactive Edition][Personal Journal News]
Dow Jones Newswires -- November 25, 1997
Worries Over Oil, Gas Prices Depress Oil, Oil-Services Stks
By LOREN FOX
Dow Jones Newswires
NEW YORK -- Investors worried about falling prices of crude oil
and natural gas took their anxiety out on the market Tuesday,
hurting oil and oil-services stocks.
Two commodity-price trends converged to bolster shareholders'
pessimism: the Organization of Petroleum Exporting Countries,
which starts a regular meeting Wednesday, has been talking about
raising production quotas; and expectations of warmer U.S.
weather has depressed gas prices.
"This is a pretty bearish statement ahead of the OPEC meeting
that starts tomorrow (Wednesday) in Jakarta," said James Carroll,
a portfolio manager at Loomis Sayles & Co.
Observers said the oil sectors are rife with pessimism, despite
that the fundamental strengths of many of the companies are
pretty good. As one money manager said, "No one seems to want to
pay attention to fundamentals."
This has left the oil sectors vulnerable as some money managers
exit to lock in profits. For example, unconfirmed rumors spread
through the market that mutual-fund giant Fidelity Investments
was dumping its oil-services stocks.
The major oil companies were the biggest decliners in Tuesday's
session among industry groups. Exxon Corp. (XON) fell 1 3/4, or
2.8%, to close at 61 1/8 and Mobil Corp. (MOB) fell 2 7/16, or
3.3%, to close at 71 5/8.
Also hard hit were the independent exploration and production
companies. Oryx Energy Co. (ORX) fell 1 7/16, or 5.1%, to close
at 27. Burlington Resources Inc. (BR) fell 1 1/4, or 2.7%, to
close at 45 1/4.
Oil-drilling stocks also fell significantly. Diamond Offshore
Drilling Inc. (DO) fell 2 1/16, or 4%, to 50. Nabors Industries
Inc. (NBR), the largest land driller, fell 11/16, or 1.9%, to 35
5/8.
"I'm befuddled," said James Lovoi, an oil-services analyst at
Morgan Stanley Dean Witter. Lovoi said all indications point to
oil companies increasing their spending again in 1998, which is
bullish for drilling companies. But many investors are convinced
that spending will decline.
In the past few weeks, the benchmark U.S. oil price dropped from
roughly $21 a barrel to roughly $19.50. At the same time, the
chief U.S. gas futures price dropped from $3.30 per million
British thermal units to roughly $2.50.
Those who follow the oil industry noted that any increase in
OPEC's production quotas is meaningless outside of Saudi Arabia,
since the other OPEC members already ignore their quotas and
produce as much oil as possible.
That means a surge in supply that drives down prices is unlikely,
and the outlook for oil companies is less bearish than the stock
market indicates.
As for gas, observers said investors seem to be reacting to El
Nino, the South Pacific ocean-atmosphere phenomenon that disrupts
world weather patterns. El Nino was expected to bring a
colder-than-normal fall and a warmer winter.
To some, investors and traders have created a self-fulfilling
prophecy. Natural-gas prices, which typically peak in January,
seem to have peaked in September this time around. That has hurt
the stocks of E&P companies, since they tend to be more leveraged
to gas than oil.
However, even E&P companies with promising production growth
plans have been hammered, and the entire E&P group is off about
10% since the start of November. "The ones getting hit harder are
the ones that have been the high-flyers," said PaineWebber Inc.
analyst Robert Morris.
Oil-drilling stocks, which also got pummeled last week, again
lost ground on profit-taking and commodity-price concerns.
Short-term moves in oil and gas prices have no effect on oil
companies' spending plans on rigs and oil services, but they can
affect investors' trades.
"The sentiment is as bad as it was in February and March," when
the oil-services and oil-drilling stocks plunged by more than
10%, said Morgan Stanley's Lovoi. Then, as now, the group had
recorded robust gains, leading many investors to take some
profits off the table.
But with fairly good fundamental reasons for bullishness,
observers said they expect some catalyst will emerge to turn
investors psychology around. Still unknown, though, is when that
catalyst will emerge.
"The sentiment is very negative now, but it can change quickly,"
said Loomis Sayles's Carroll.
-Loren Fox; 201-938-5267; loren.fox@cor.dowjones.com
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