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Strategies & Market Trends : Stock Attack -- A Complete Analysis -- Ignore unavailable to you. Want to Upgrade?

To: dennis michael patterson who wrote (30453)	9/20/2000 11:18:41 PM
From: dennis michael patterson	Read Replies (1) \| Respond to of 42787

On Oil and Gas Stocks: Party Over? Energy Is Hot By Christopher Edmonds Special to TheStreet.com 9/20/00 12:47 PM ET HOUSTON -- Up and to the right. That could be the theme of the eighth annual Dain Rauscher Wessels energy conference this week in America's self-proclaimed oil capital. Between the whispers in the hallways and the bullish presentations from an overflowing barrel of oil, gas and power companies, you might think you were in the corridors of some Silicon Valley conference of yesteryear. But, no, this is all about energy, and energy is hot. With oil hanging around $37 per barrel and natural gas solidly above $5 per million BTU, oil, gas and power stocks have caught fire. To illustrate, take a look at the chart of the Philadelphia Stock Exchange Oil Service Sector Index, or OSX: Up and to the right. And, a great deal of the price gain is rational. As the price of the commodities increases, profits follow. That should mean positive earnings from a plethora of oil and gas companies. While new Securities and Exchange Commission regulations have stifled the more explicit (now illicit) preannouncements at conferences like this, regulations can't cap all the enthusiasm from rising commodity prices. For example, Kenneth Lay, chairman of energy powerhouse Enron (ENE:NYSE - news - boards), said at the conference he is very comfortable with analysts' estimates, hinting the numbers are conservative. "We should meet or exceed analysts' expectations for the quarter and the year." Others followed suit. Bradley Fischer, president of CMS Energy Oil and Gas (CMS:NYSE - news - boards), ( profiled here earlier ), said his company will post "record production and record income this year," because the fundamentals of the oil and gas business are as good as they have been in his career. "I've been in this business 28 years. The first 10 were good and the last 18 have been difficult. Now, I'm looking for the good times to roll." And this from Diana Naylor, senior vice president at independent power producer Calpine (CPN:NYSE - news - boards), when reacting to analysts' estimates in the coming year. "We look to be making that number and look to increase that [guidance on earnings] shortly." Even the oil drillers and equipment companies are celebrating. Nabors Industries (NBR:AMEX - news - boards), owner of the largest land-drilling fleet, thinks analysts are significantly underestimating its potential. Dain Rauscher estimates Nabors will earn 83 cents per share this year and $1.65 next year -- numbers Chairman and CEO Eugene Isenberg called conservative. He presented calculations suggesting the company could earn $3.27 in the middle of the oil cycle and has the ability to earn $6.81 in the coming years. "The probability of this happening is very high," he said. All because of $37 per barrel oil and $5 gas? While there is little question that third- and fourth-quarter earnings should be strong, there is growing concern that the oil and gas stock rally has been overdone. Not only have stocks tracked the rise in commodity prices but the once-beleaguered sector has also seen earnings multiples expand significantly. That is a warning sign to at least one analyst. While the going is good, the rapid price rise isn't sustainable. Oil stocks stocks "will peak in the next several weeks and trade sideways, probably for the rest of the year," said Jim Wicklund, head of energy research at Dain Rauscher, adding that there may be added selling pressure as funds try to lock in gains before the end of the year. "Stock [price pressure] will also be impacted by portfolio managers' bonus structure." And Wicklund warned that what he sees as the inevitable moderation in oil prices will put pressure on the stocks into the new year. "Right or wrong, stock prices are slaves to commodity prices." If Wicklund is correct, the next move could be down and to the left. The Peoples Court One of the clever and unique features of the Dain Rauscher Wessels energy conference is the annual investor poll. This year, nearly 400 investors responded to the on-site survey and, while the results aren't scientific, they are likely instructive. Power to the People - Investors Speak Dain Rauscher Wessels Energy Conference Survey Results Prediction for price of oil (per barrel) on 12/31/2000 $32.70 Prediction for price of oil (per barrel) on 12/31/2001 27.70 Average price of oil in 2001 28.80 Price of Natural Gas (per MM BTU) on 12/31/2000 5.50 Price of Natural Gas (per MM BTU) on 12/31/2001 4.60 Closing Price of Oil Stock Index (OSX) on 12/31/2000 137.90 Closing Price of Oil Stock Index (OSX) on 12/31/2001 147.00 Will the OSX outperform the S&P 500 in 2000 Yes - 93.7%, No - 6.3% Will the OSX outperform the S&P 500 in 2001 Yes - 67.7%, No - 32.3% Favorite Merger Partners Chevron with Texaco, Unocal or Phillips - 35% Top Energy Stocks for the Next Year Key Energy, ExxonMobil, Enron Presidential Straw Poll Bush 53%, Gore 47% Source: Dain Rauscher Wessels Investors see oil prices moderating a little between now and December and further into next year. However, survey participants do not see the same pattern for natural gas, with estimates for gas prices remaining well above $4.50 through next year. And what may at first appear to be good news for George W. Bush probably isn't. A six-point lead looks nice, but remember -- we're on his home turf, Texas, among his brethren in the oil business. For W., that may suggest down and to the left as well.