Running on fumes. Oil companies' stocks are left behind in racing market
The Dallas Morning News, March 3
By Terry Maxon
Oil company stocks haven't exactly been hot commodities over the last year, and nobody knows that better that Conoco Inc. chairman and CEO Archie W. Dunham.
At a recent energy conference in Houston, a questioner got right to the point: How does Conoco or any energy company compete for top candidates being wooed by technology companies and the promise of Internet riches?
"Well, we can't do it with stock options," Mr. Dunham dryly told the crowd of oil and gas executives. "I'm beginning to wonder whether stock options have value any more."
It's a question many in the energy business are pondering these days. Share prices for oil and gas companies are getting left behind, even as the price of crude oil climbs to nine-year highs and companies turn in robust profits.
A barrel of crude was selling for $31.69 on the New York Mercantile Exchange Thursday, up 192 percent from its Dec. 10, 1998, low of $10.85. Major oil company stocks, meanwhile, have risen a measly 3 percent in the same period, according to the American Stock Exchange's oil index.
Compare that with the technology-heavy NASDAQ index, which is up 136 percent.
"I guess what the oil companies have to do is develop dot.com filling stations," suggested oil analyst George Gaspar. "This stock market is so much over to the tech side {ellipsis} that it has dismissed the oil sector, particularly the [exploration and production] stocks."
Indeed, the popularity -- and wild volatility -- of technology stocks is drawing the hot money that used to go to the energy sector, oil analyst James Wicklund said.
"People used to play energy stocks because they were so volatile. Instead of playing Pepsi or Frito-Lay -- which were good solid companies but didn't have that volatile trading history -- you'd play oil and gas stocks because you'd either get rich or go broke," said Mr. Wicklund, a Dallas-based analyst for Dain Rauscher Wessels.
"Now with technology, oil has fallen out of favor as the volatile sector of choice."
In fact, there is an inverse relationship between the stock performances of semiconductor stocks and of energy companies, he said.
"When oil prices don't look good, people have always tried to find some other commodity-driven sector that offers quick returns. The commodity of semiconductors has been it," he said.
"So virtually every hedge fund in America that has a shorter-term time horizon for their investments plays more volatile sectors. They either play semiconductors or oil and gas. Now that's expanded into technology as a whole."
One oil company executive offered another, simpler explanation: Investors have long memories.
"The winter of '98 was so disgusting that I think we lost some of our following as a group," said Bob R. Simpson, chairman and chief executive officer of Fort Worth-based Cross Timbers Oil Co.
Energy sector investors lost 70 percent to 80 percent of their investment as falling oil prices took down the prices of oil and gas companies, he said.
"That's a big burn. It takes a while to get over it," he said.
Typical of many companies, Cross Timbers is now prospering after a poor 1998 and early 1999. It reported net income of $45 million in fourth quarter 1999, compared with a loss of $71.5 million in fourth quarter 1998. It reported record cash flow and a rosy outlook for 2000.
Its reward: Cross Timbers shares closed at $9.75 Thursday, down more than $5 from its 52-week high and only $1 higher than in December 1998, when oil was selling for $10.85 a barrel. In late 1997, Cross Timbers shares were selling for more than $28.
On the other hand, Thursday's stock price represented a jump of $1.31 from Wednesday's close. Other energy companies have reported stock price increases in recent days, with the Amex oil company index up 7 percent since last Thursday.
"I think Wall Street is going to come around," said Mr. Gaspar, an analyst with Robert W. Baird Co. in Milwaukee.
For that matter, the malaise that has hit the major oil and gas companies has not hurt the oil service sector. Those companies, which include such diverse groups as drillers and well-servicing companies, have seen their share prices more than double since December 1998, and are up nearly 25 percent in the past two months, as measured by an index compiled by the Philadelphia Stock Exchange.
Even so, those companies' shares are still below their levels of late 1997, before a growing oil glut sent the industry into a steep decline.
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Mr. Gaspar said if it appears that OPEC will agree to keep oil prices in the $25 to $28 range, "investors will begin to climb back aboard."
Brad Beago, an energy analyst with Credit Lyonnaise Securities in Houston, said the fundamentals have looked good for the oil and gas business for months. But an analyst can make a strong buy recommendation on a company's stock, only to see share prices continue to drift lower as oil prices continue their climb, he said.
"It's been uncanny. It defies logic. {ellipsis} There's been some good calls, certainly reasonable calls, and we all end up with egg on our face," Mr. Beago said.
However, he has been heartened by the recent signs of life among Oil Patch stocks."From our standpoint, we feel like we've had a year of misery, more like two years. But maybe we're seeing the light at the end of the tunnel."
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