Everybody is getting pretty bullish on energy companies. CNBC has an analyst on right now telling how great OSX companies are. Also this article. Too much bullishness I am started to get scared......
Resources: Golden again?
Oil prices seen on up and up for next 6 to 9 months
By Stephanie O'Brien, CBS MarketWatch
Last Update: 2:42 PM ET Aug 21, 1999
Futures Movers
NEW YORK (CBS.MW) -- A dramatic rebound in oil prices has
supercharged the energy sector.
The 60 natural resources funds tracked by Lipper
were up about 4 percent for the four weeks ending
Aug.12. For the year they're up 36 percent.
The outlook for the group looks bright for the next
6 to 9 months, fund managers say. And while
there's less pressure on companies to join forces as
oil prices improve, the managers say they expect
consolidation to continue in the oil sector.
"The major reason (natural resources funds) are
doing so well is that oil has gone from $12 to $21
(a barrel) since March," says Michael Hoover, who
manages the Excelsior Energy & Natural
Resources Fund (UMESX: news, msgs). "You're in
a nirvana period if you're a producer," he says.
Rosier days
Strong oil prices, a sharp rise in natural gas prices
and low drilling costs mean rosier days for investors
in energy stocks. The sector, had been beaten
down in the past two years by a worldwide
slowdown in demand for oil. The Organization of
Petroleum Exporting Countries also made matters worse through its
inability to enforce production cuts.
"We went through about a 17-month period of declining oil prices,"
Hoover says. But recently, he says, "producers slowed down drilling,
which resulted in a lot of idle drilling rigs. As rig capacity dropped, you
had lower prices. Now, the effect of depleted supply has begun to kick
in," causing prices to rebound, Hoover says.
"OPEC has been to the woodshed," he says. "They're showing discipline.
They have no desire to go back to $12 any time soon."
For next 6 to 9 months, prices continue to look good, he says.
"Higher prices and low drilling costs mean "the best
of all worlds for energy companies," Hoover says.
Mergers among the majors
Merger activity has also re-shaped the industry in
recent months.
Consolidation in the industry accelerated last year in face of low oil prices,
Hoover says. "There's an urge to merge among major companies," he
says.
Royal Dutch, Exxon, Mobil and BP-Amoco/Arco are among the
companies that have made moves to combine.
The series of hook ups puts a great deal of pressure on smaller rivals
Chevron and Texaco, though if oil prices continue to climb, some of the
heat may be off, Hoover says. Unocal, Phillips and Conoco are smaller
companies that also may feel pressure to join forces.
"The imperative is gone with higher oil prices," he says. "Below $17 (a
barrel) and the economics start to fray," Hoover says. When oil prices are
falling, being competitive means being diversified, and having big
scale.Companies buy to get larger," he says.
Hoover also expects continued consolidation among oil-services
companies.Earlier this week, Burlington Resources it planned to acquire
Poco Petroleums for $2.5 billion. See story.
Hoover likes Baker Hughes (BHI: news, msgs), for whom he expects
prospects to brighten. He sees a pickup in oil field services, as higher cash
flows will be put toward more drilling. He also likes Royal-Dutch, which
has been restructuring and cutting costs and Ocean Energy (OEI: news,
msgs).
Surprise! . . . growth industry
As dramatic as the rebound in oil prices has been, the price of natural gas
has also had a big jump in recent months.
"The situation in natural gas may be even more compelling than crude oil,"
says John Segner, who manages Invesco's Energy sector fund (FSTEX:
news, msgs). "Contrary to popular belief, this is a growth industry," he
says.
Segner says robust economic growth, deregulation and the demand for a
clean, cheap source of energy make the long-term prospects for natural
gas look good. "It's the cheapest way to produce electricity," he says. As
deregulation spawns competition, "you want to be the low-cost
producer," he says.
Gas prices have jumped to $2.96 per thousand cubic feet from $1.80 or
so a few months ago, Segner says. Prices fell earlier in the year because
the past two winters have been among the warmest on record. Segner
sees an 8 percent rise in demand from a year ago if this coming winter is a
typically cold one.
Segner also sees the fundamentals for the oil industry remaining strong.
His top performers include USX-Marathon Group (MRO: news, msgs),
an integrated oil company.
The stock's gone from $20 to $31 since February, Segner says. The
company's rate of production is increasing at a low cost, Segner says.
He's buying only companies that have rising production profiles, but
refuses to pay excessively for them. "I want return on capital," he says.
Segner also likes Baker Hughes.
"I loaded the boat on that basically at end of January," he says
The company brought in new management about two years ago. They're
improving margins and getting some really good financial controls, though
revenues haven't increased, Segner says. "We're beginning to see
improvements they've been working on for two years," Segner. Canadian
producer Talisman (TLM: news, msgs) has also been a good performer,
Segner says.
For the next 18 to 24 months the fundamentals for the group look very
strong," Segner says. The energy stocks in general will see a significant
increase over last year.
As long as oil is over $20 a barrel and gas is over $2.40, these companies
should report some pretty big earnings surprises," he says. |
