Hi All,
Another positive article about oil.. This was from Briefing.com under
StreetBeat...
In my opinion, in good time and bad...people still needs oil (especially the cold winter) for autos, heating, cooking....
But like everyone says, you got to keep your "cool" to make money. This is a good sector and the fundamentals are still there... not like semiconductors and some high tech stocks.... There will be always weak hands that needs to be shaken out.
The Asian market should not influence the U.S. market and not even for oil. America is a leader in capitalism and will always be a leader.
That is my opinion, I am "cool" and long on FGII.
Checkout the last oil news.......
Willie
-------------------------------------------------------------------
Updated 10/24/97
The purpose of StreetBeat is to provide you with additional insights on the market from recognized financial experts
on (and off) Wall Street. It should be noted that the views and opinions expressed by the panelists below are not
necessarily those of Briefing.com.
This week, StreetBeat addresses the oil industry with analysts, Joseph Culp, Holly Gustafson, and Bud Tower.
Panelists
Joseph Culp, CFA, Vice President, Energy Analyst at A.G. Edwards. Mr. Culp rejoined A.G. Edwards in 1992
after working for the company from 1975 to 1981, and is a past runner up in Institutional Investor's All-American
Analysts survey.
Holly Gustafson,CPA, CFA, Vice President, Energy Analyst at NatWest Securities. Ms. Gustafson has been
covering the oil industry for over 15 years.
Arthur (Bud) Tower,CFA, Vice President and Research Department Manager at Howard, Weil. Mr. Tower has a
combined 15 years experience both in the oil industry and as an analyst.
Q&A
Briefing: There appears to be a subtle shift of power happening in the oil business with the
major oil companies needing the oil service companies as much as the oil service companies
need the majors. Have the price increases by the oil service and equipment companies
impacted the major oil companies? Do you see the price spikes continuing?
Joseph Culp: The major oil companies would obviously prefer to pay less, but they realize that they are in an
environment now where they have to pay more due to a scarcity of supply. Fortunately, major oil companies are flush
with capital, and they are finding that one of the most productive places to put that capital to work is in deep water
projects. While day rates for these projects may appear exorbitant, they must be looked at in the context of what it
actually costs the major oil companies to find oil deposits. Though the expense of renting rigs is going up, oil
companies are discovering so much oil in deep water that they are lowering unit finding costs in the process.
Ultimately, it boils down to a value versus cost relationship, and the value derived from deep water drilling makes the
costs associated with these projects a drop in the bucket.
With respect to pricing, rates will continue to go up given that drill-rig scarcity is a fact of life in this business. No
simple undertaking, building rigs is a two-year process, and the new rigs that are being built cost more to construct
because the components used in production are more expensive, and the rigs themselves are becoming more and more
specialized. However, I don't see rates going up dramatically from current levels. Even at current levels, oil service and
equipment prices have not been a major consequence given that the prices for oil and natural gas are far exceeding
projections. Keep in mind that oil companies were forecasting double-digit returns using $17 per barrel as a
benchmark. With oil now at $21 per barrel, the difference is simply icing on the cake.
Holly Gustafson: Demand for oil services is typically volatile and tied to the drilling budgets of the major oil
companies. High oil and gas prices in the last two years have increased the coffers for the oil companies, both major
integrateds and independents. In addition, the oil business has been in a restructuring and cost-cutting mode since the
beginning of the decade. Oil companies are now breaking out of this and looking to expand. (Strong worldwide
economies and rising demand for petroleum products doesn't hurt). The stepped-up emphasis on drilling, particularly
overseas and in the deep-water Gulf of Mexico, not surprisingly, has increased the demand for oil services - especially
deep-water rigs. Increased demand pushes prices up. This is not a structural change in the business, just a different point
in the cycle. So far, the major oils are not reporting any significant cost increases that effect their profitability. I think
spot shortages could occur for rigs which could delay some drilling projects, particularly for the smaller companies.
However, I do not think rising oil service costs are going to do much to change the industry trends. As long as the oil
companies have the money, they hold the reins. When and how much they decide to spend will depend on a lot bigger
and far reaching issues than oil service costs.
Bud Tower: There is no subtle shift of power in the oil business. The majors have always had and will always have the
power. We include sixteen oil companies in our universe of the majors. Their combined market capitalization is about
$700 billion. The forty-nine oil service companies we follow have a combined market capitalization of about $140
billion. It is clear where the power lies.
The price increases from the service companies have impacted some of the oil and gas prospects, though the impact is
not necessarily profound yet. The bread and butter of US oil production is in the Gulf of Mexico from the shelf to 600
feet (deep water drilling - 1500ft and deeper - is the future). The economics of some of the shelf projects are being
impacted by the service costs and some projects are now rendered uneconomical.
We have not really been seeing price spikes from the service companies, but rather a steady improvement in the
economics of the oil industry as a whole. Oil companies have been restructuring since about 1982. What we see today
is a healthy industry that is well capitalized and has the ability to reinvest in equipment. The drillers and the service
companies are just now reaching replacement cost economics.
Briefing: Recently, the Scottish exploration company, Cairn Energy, partnered with the oil
service firm, Halliburton, to develop the Sangu field off of Bangladesh. This is Halliburton's
first actual ownership interest in an oilfield. Is this the beginning of a shift away from
dependence on capital from the majors? If so, does this pose a threat to the major oil
companies?
Joseph Culp: I wouldn't call it a shift. Rather, I would deem it prudent planning for supplementary income in the
future. Oil service companies realize that a few years down the road they won't be able to add rigs or upgrade rigs at the
same pace they are today, so they're considering other projects. While it is true that major oil companies have come to
rely more on the oil service companies, they are by no means threatened by this residual interest shown by oil service
companies in developing oilfields. The main concern of the majors continues to be rig availability, and they are
certainly willing to share a portion of upside revenue gains, via joint ventures, if that enables them to get access to the
rigs. Thus the perception that there exists an attitude of "this is my turf and you're not allowed into it" is misguided.
Holly Gustafson: A number of changes are taking place in the oil industry in how projects are managed, financed and
owned. We are seeing a lot of joint ventures, alliances and partnering with state oil companies. I think we will see more
oil company involvement in power plant projects, pipelines, and less traditional oil company businesses. In addition, I
think we will have more arrangements like the partnering with oil service and other related businesses if it can cut
costs, spread risks, increase access and/or increase profitability. I think the lines are starting to blur on what types of
companies are involved in which kinds of projects.
Bud Tower:This is not a trend and is certainly not a long-term threat to the majors. When an explorer takes an
equipment company on as a partner, it is usually an indication that business is lackluster for one or both of the players.
Briefing: With the conclusion of summer and the busy driving season, and expectations for a
mild winter due to "El Nino", what is your outlook for the next two quarters?
Joseph Culp: My outlook for the next two quarters remains favorable. Contrary to what the weather experts are
predicting, I believe "El Nino" will have little effect on oil prices. Should "El Nino" produce a milder winter, that just
means people will be driving more and consuming more gasoline. The real risk lies in there being a "normal" winter
since there is currently an inadequate supply of natural gas and demand keeps inexorably growing. Short-term prospects
remain promising because commodities dominate in the short-term; and prospects remain promising in the long run
because oil companies have grown adept at controlling costs while increasing volume. Moreover, oil companies stand a
good chance of seeing multiples change as the business becomes recognized as being more stable rather than cyclical.
Holly Gustafson: Over the next six months, we are expecting oil prices to remain strong, buoyed by strong demand,
political uncertainty and a normal level of supply additions. Obviously, unknown factors, such as a flare-up in the
Middle East or a worsening of the impact of the currency crisis in Southeast Asia could have an impact on the prices.
US natural gas prices will depend upon the weather. However, we are entering the winter with comfortable inventory
levels, and absent a significant EL Nino effect, we expect prices to be in the $2.20-$2.40 per barrel range. Operating
earnings for the major oil companies have increased, year-over-year, in every quarter since the fourth quarter of 1994.
We expect that this trend will be broken in 4Q97, because of a slow-down in chemical and downstream profits.
Already, we are seeing a slippage in R&M margins. Also, US natural gas prices were very high in the quarter,
responding most likely to the shut-down of some nuclear facilities and a strong US economy. While gas prices should
still be quite good in the fourth quarter of 1997, they do not appear sustainable at 3Q97 nor 4Q96's incredibly high
levels. We're expecting, on average, that operating earnings will be off modestly 4Q96 to 4Q97.
Bud Tower: We are calling it "EL Nino phobia" and feel that the fears of a warm winter are overblown. Natural gas
and oil prices are rising. In 1994, the WTI (West Texas Intermediate - US benchmark) average price of oil was $17.19
per barrel. In 1995, the average price was $18.41, in 1996 it was $22.14, and we think that we may exit 1997 with a
price of $22.50-$23.00 per barrel. Our contention is that we have these higher prices because oil and gas production is
not meeting the expectations of forecasters. The IEA (International Energy Agency), the most closely followed
forecasting agency for the oil business, is predicting that we will see an increase in production in non-OPEC countries
which will lead to a surplus in oil, especially when combined with increasing OPEC production. We disagree and think
that the IEA numbers are probably biased by Third World agendas (over-or-underreporting production figures). Based
on production figures from nine of the sixteen majors, worldwide oil production was down 0.7% versus Q2 '97. With
worldwide demand increasing 2%-3% per year, we do not see an oversupply of oil in the near future.
We are in what I consider virigin territory with respect to the price of natural gas. It is currently around $3.05 per
MMBTUs (Million British Thermal Units) which is a price level that historically has only been reached in the coldest
winter months. There are hedges in the gas markets which indicate that expectations by some are for $5.00 per
MMBTUs this winter. People are beginning to say that EL Nino has peaked early and that fall will be cooler than
expected and winter will be normal. We think $4.00-4.50 is a possible price expectation for natural gas by year-end
1997. The increases in the stock prices of the oil and oil service companies reflects a sea change in investors'
confidence that oil and gas prices will remain strong.
Briefing: Which companies are you recommending and /or avoiding?
Joseph Culp: We have BUY ratings on the following stocks: Texaco (TX), Mobil (MOB), and Phillips Petroleum (P)
among the major oil companies. In the oil service sector, we favor Reading & Bates (RB), TransOcean (RIG),
Diamond Offshore (DO), and Global Marine (GLM). A major speculative oil service company we like is 3-D
Geophysical (TDGO). Of the independent producers, we like Apache(APA) among the majors, and Snyder Oil (SNY)
among the smaller, domestic independent producers. Finally, we feel Mid Coast Energy (MRS) is an attractive
pipeline company.
Holly Gustafson: Based on our earnings forecasts and target prices, we favor Mobile (MOB), Texaco (TX), and
Unocal (UCL). Mobile has strong management, good balance, a number of near-term production projects coming-on,
and strong downstream operations. At current prices, it appears under-valued. Texaco is moving forward aggressively
to grow production and increase earnings. Coming from behind, after years of paying down debt, it appears to have
significant growth potential. Unocal, at current prices, also seems to offer investment opportunity. Since the sale of its
R&M assets, Unocal is now the largest independent E&P company and has considerable exposure in Southeast Asia,
where demand is growing rapidly. In addition, the company will most likely benefit from the pending litigation
involving its patent on reformulated gasoline.
Bud Tower: We have a BUY rating on the refiners, Tosco Corp (TOS) and Sun Company (SUN). USX-Marathon
Group (MRO) will do well among the intergrated companies, if refining remains strong through the last quarter. We
have a BUY on Occidental Petroleum (OXY). We expect them to announce a buyer for MidCon Gas Services Corp
before the end of this year.
I also want to mention one interesting small company, Rentech (RNTK). They are one of five companies world wide
with a technology to turn natural gas into a liquid petroleum product. The other companies include Royal Dutch Shell
(RD), Exxon (XON), SASOL (South African), and Syntroleum (private). Rentech is in negotiations with Texaco (TX)
to commercialize their technology. We expect the negotiations to be concluded by year-end. This is not a new
technology but it thus far only economical when oil is at the $20 a barrel level. For those who are interested, Rentech
will present at a natural gas-to-liquid conference hosted by Bloomberg in New York on October 29. |
