Doug and all, "In Rocky Market, Big Oil Carried the Day"
e-mail from Barron's.
GM
Weekday Trader
"In Rocky Market, Big Oil Carried the Day"
By Vito J. Racanelli
Stock prices tumbled Monday amid new fears that the Federal Reserve would
hike interest rates later this year.
But as the Dow Jones Industrial Average lost 146.98 Monday to close at
8,917.64, giving up 1.6%, one group did surprisingly well -- Big Oil.
Major oil exploration and production companies were among the big standouts
in Monday's selloff: Chevron added 15/16 to 83 3/8, and Texaco gained 5/8
to 62 1/8. Exxon, Mobil, Amoco and Atlantic Richfield were also up.
One big investor who has sung the praises of oil companies lately is Mark
Baskir, a New York City-based portfolio manager for the Strong Limited
Resources Fund. Although these companies have lagged the market
significantly in 1998 -- thanks to the sharp drop in crude oil prices from
about $20 a barrel last year to around $15 this year -- Baskir says oil
prices might have reached a near-term bottom and could turn up.
First of all, he notes, demand -- particularly in the U.S. -- remains
healthy and in fact is stronger than many think. He points to a Salomon
Smith Barney report of April 24th that pegs growth in U.S. crude demand at
a "healthy" 2.7%, while U.S. gasoline demand grew by 4.7% year to date.
That's better than most people expect, he says.
Perhaps more importantly, refining and marketing margins in parts of Asia
are growing again, and that's critical since Asia represents about 20% of
world demand and had been the fastest growing region before the crisis hit
last year.
At $4.40 per barrel, for example, Singapore margins -- the spread between
the average price paid for feedstock and the average price obtained in
Singapore for refined products made from that crude -- are much improved
from the $3.17 per barrel of February, the report said. For Baskir,
improving refining margins in Singapore suggest that Asian demand as a
whole has stopped falling and is beginning to turn around.
Furthermore, he argues, the tide may have turned for the world oil market
with the late -- March deal by members of OPEC and Mexico to cut crude
production by about 1.5 million to 1.6 million barrels a day. Now that
oil prices have risen from their lows of about $12.80 per barrel, Baskir
maintains it will be easier to cut production even further at the next OPEC
meeting in June.
Indeed, Venezuela Energy Minister Erwin Arrieta has indicated such cuts
could be coming, saying Monday that at their June meeting OPEC and non-OPEC
ministers will review the 500,000-barrel-a-day surplus in world crude
production. (Reducing production by another half-million barrels a day
would amount to a two- million-barrel-a-day cut -- the amount some oil
analysts say is necessary to boost prices.)
Mohammed Abduljabbar, an economist at the Washington, D.C.-based Petroleum
Finance Co. who correctly called the recent decline in oil prices, says
that crude should sell for between $15 and $17 a barrel for the rest of
the year. Perhaps more importantly, he suggests, oil may have found a
near-term support level at $15 per barrel. "I think at this juncture, crude
below $15 per barrel isn't sustainable." he says.
Abduljabbar says several factors are currently helping support crude
prices: continued uncertainty about Iraq's production, improving demand
from Asia (albeit from a very low base) and OPEC's recent talk about
cutting even more production.
But what may be most germane to today's market, the major oils tend to
outperform in a down market, according to ABN Amro analyst Eugene Nowak.
Interest rates -- while certainly affecting their stock prices -- just
don't have as direct an effect on their bottom lines as on groups like
financial services, housing and construction.
Nowak, who's looking for $16.75 per barrel oil this year and $18.25 next
year, says that with the first- quarter earnings problems out of the way
for many of the majors, investors might be ready to look at the group anew.
Nowak moved to a market weighting of Big Oil last month, from an
underweighted position..
"We think [OPEC] has gotten serious" about pricing, Nowak adds.
Like Strong's Baskir, Nowak likes Chevron, which at Monday's close is
trading at about 19X times the consensus estimate for 1999 -- a discount to
its estimated earnings growth of better than 21% next year, according to
First Call. (Except for Exxon, the whole group, in fact, is trading at a
discount to the market: They currently change hands at about 17 times to 19
times First Call's consensus earnings estimates for 1999, while the S&P 500
still trades at about 21x 1999 estimates even after today's drop.)
Chevron also is one of the lowest-cost producers among the majors: its mean
finding and acquisition cost, or the cost of adding to reserves, is $2.95
per barrel, versus $4.02 for the majors on average. That should give it
some downside protection if oil prices hit the skids again.
While few think interest rates -- or inflation -- are ready to make a
serious upward move, oil stocks could be a refuge for investors if they
did. The sustainability of oil stocks' move will depend on whether crude
prices have really bottomed out. If they have, then Monday's gains could be
just a taste of things to come.
BARRON'S Online Weekday Trader is located at
interactive.wsj.com |
