Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: Tomas who wrote (7926)	3/15/2002 11:16:58 PM
From: Tomas	Read Replies (1) \| Respond to of 206099

In times of Gulf wars, oil is the 'win-win' buy Financial Times, Saturday, March 16 By VINCE HEANEY The possibility of US military action against Iraq cannot be ignored by investors. A second Gulf War could snuff out signs of stock market resurgence and threaten to derail the cyclical economic recovery. Investors need to look for stocks that offer the prospect of solid performance if the economic recovery continues to develop, but which also offer a degree of protection in the event of war in the Gulf. The oil sector appears to fit the bill. I remain cautiously optimistic about the prospects for UK stocks based on improvements in the macroeconomic backdrop and the technical condition of the market, topics covered in last week's column. But experience suggests war against Iraq would produce a sharply higher oil price. The consequent transfer of income from oil consumers to producers would reduce global economic growth at a time when the scope for policy response is limited by the extent of changes already enacted in the wake of September 11. Some insurance is needed. However, the problem with assessing political risk is that it is difficult to assign a probability to the worst-case war scenario. Paying too high a price for protection can leave you high and dry if the worst outcome is avoided. The FTSE oil sector has performed strongly in 2002, rising by more than 13 per cent year-to-date. The pace of increase has picked up in March as the perceived threat of military action has grown, driving the crude oil price higher. Investors need to ask if there is still value in the sector. Strategists at Merrill Lynch see scope for further upside, describing the European energy sector as a "win-win" proposition. A recovery in global manufacturing will increase demand for oil. If the economic recovery disappoints, Merrill suggests that an attractive mix of characteristics including sound balance sheets and solid earnings growth rates would cushion the sector. Valuations are not excessive. Energy is the cheapest European sector on the Merrill Lynch valuation matrix. According to Credit Suisse First Boston, current share prices for the UK oil and gas sector imply a 10-year earnings growth rate of 7 per cent. By historic standards expectations do not look high - the actual 10-year earnings per share growth rate for the sector is almost 15 per cent. But recent share price increases have introduced a note of caution. "After a reasonable run-up the absolute valuations are starting to look a bit stretched," says Mark Iannotti of Schroder Salomon Smith Barney. However, Iannotti believes the risks are not great - with crude prices above Dollars 18-19 a barrel there will be support from earnings growth. The crude price outlook is brighter than at the start of the year, even excluding the potential for war. In January there were doubts about compliance with the December 28 Opec agreement, and whether it would be sufficient to avert a price war between Opec and Russia. However, "threats of a price war failed to materialise, and ultimately price levels revealed the market's backing of the agreement, offsetting lower-than-expected demand due to the mild winter in the northern hemisphere," said Edward Ennis of SG Securities. The success of the agreement led the cartel to extend the quota cuts through the second quarter at yesterday's Opec meeting. Restriction of supply will help support prices during seasonally weak demand in the second quarter, while resurgent economic growth is expected to increase oil demand as the year progresses. Valuations look reasonable and the crude price outlook is brighter, but it is not all good news. Refining margins remain very weak, suffering from a reduction in demand after the September 11 attacks and the mild winter. Analysts see little improvement in margins in the second quarter. However, the weakness in refining margins encourages producers to reduce production runs and works to reduce stocks of refined products. Lower inventories combined with increased demand later in the year may produce a recovery in margins over the medium-term. There is a strong positive correlation between oil prices and oil stocks. Profit at oil majors BP and Shell increases by around 5 per cent for every Dollars 1 a barrel increase in the oil price. Enterprise Oil suffers from being stuck between the higher returns offered by the majors and the growth potential of the smaller exploration companies, but it offers a more highly geared play on the oil price. Mark Redway of Teather & Greenwood suggests Enterprise is fair value at 670p with oil prices at Dollars 20 a barrel, but if there were a sustainable rise to Dollars 24, not merely a blip, a valuation in excess of 700p would be more appropriate. Enterprise Oil is also a potential takeover target having already rejected an unsolicited bid in December, reportedly from Italy's ENI. The possibility exists for a premium if there is a fresh approach. If the recovery takes off, the oil sector will not be the year's star performer, but it has solid prospects and defensive appeal in the event of war in the Gulf. vince.heaney@ft.com