Found this positive article on Microsoft Investor, I haven't posted in quite a while, keeping my pain to myself:) Hope this helps:
A slick play in the oilfields
Pumped up for a comeback in oil? Be selective. Here's why the pros like well-positioned domestics like Phillips and Marathon rather than the big boys.
By Roger Hahn
When Chevron Chairman Ken Derr told shareholders in New Orleans recently that $18-a-barrel oil was around the corner, he was only confirming what everyone else in the industry already knew: Sooner rather than later, oil will swing back from its current perch around $13. And before long, industry earnings will be riding the upswing.
Does that make this the time for contrarians to invest in major oil stocks? Yes, but with one caveat: Avoid the front-runners, ignore the marquee names, and stay away from those most obviously poised to benefit from higher prices at the wellhead.
Instead, play the names at the bottom of the lineup -- the singles hitters and defensive specialists -- who are most heavily leveraged domestically to take advantage of the environment created by this year's historic plunge in prices at the gas pum
Both Phillips Petroleum and USX-Marathon offer higher estimated growth rates, lower price-earnings multiples and better relative price performance than larger, better-known peers like Chevron, Exxon and Texaco.
From that perspective, two clear candidates are Phillips Petroleum (P) and USX-Marathon (MRO). Both combine a presence in one of the world's premier production fields with refining-and-marketing operations that are being streamlined and leveraged solely to focus on U.S. consumer demand. And both offer higher estimated growth rates, lower price-earnings multiples and better relative price performance than larger, better-known peers like Chevron (CHV), Exxon (XON) and Texaco (TX).
The problem for the major diversified international oil companies is that they depend on strong commodity prices to make a profit on the "upstream" side of their business (exploration), but they can be brutalized by those higher raw-materials prices on the "downstream" side (refining).
Chevron's earnings in the first quarter of this year, for instance, dropped 46% year-over-year due mainly to disastrous margins in its West Coast refining business when prices were rising. In fact, all the major oil companies, with the single exception of Atlantic Richfield (ARC), are net consumers of crude oil due to their refining operations; that means they've been able to offset recent losses in oilfield income through improved results in their refining and marketing operations.
Yet it's the truly domestic refiners and marketers who will see the most earnings momentum from lower refining costs in the current quarter as well as better prices at the pump later in the year. Another factor in their favor: The domestic refineries are finally recovering from the weight of capital spending on compliance with Clean Air Act regulations as well as the oversupply that resulted when they overbuilt capacity at the same time. The refining industry showed losses from 1992 to 1996, but these firms turned the corner into profitability last year and turned out to be more efficient to boot.
Finally, there is the historically documented tendency of the major oil companies to exploit the perception of rising crude-oil prices by immediately raising prices at the gas pump. Some analysts believe they'll start early enough in the summer to capitalize on the vacation driving season, which this year occurs in the midst of a healthy U.S. economy and strong consumer confidence.
At Howard, Weil, Laboussie, Friedrichs, a Gulf Coast brokerage that focuses on energy stocks, analyst Arthur "Bud" Tower confirms that investors would benefit from a focus on downstream oil companies for the rest of the year.
"People are going to have money to spend this summer," Tower suggests. "And they're going to be spending it at The Gap (GPS), they're going to be spending it at the grocery store, they're going to be spending it on their gas-guzzling four-wheel-drive sport-utility vehicles, and they're going to hit the road.
"Even a modestly rising oil-price environment throughout the year, in an environment where we expect to have very heavy driving this summer, should benefit those companies with a lot of downstream exposure. Part of our thesis all along for 1998 has been to focus on companies with substantial refining interests."
In all, Tower recommends that energy investors account for four steps in their analysis of major oil stocks:
Improvement in comparative price-earnings multiples.
Earnings momentum based on the fundamentals of each revenue component.
Strategic direction of revenue increase and cost reduction
Operating efficiency, which can be measured, if need be, by return on capital employed (ROCE) for each business segment.
Among the big-kahuna stocks, Tower picked Exxon (XON) and Chevron for this year, the former for overall strength and excellence of management, and the latter for exemplary balance and strong West Coast refining exposure, which Tower expects to rebound in serious fashion. Domestically, he's likewise targeted Atlantic Richfield, Occidental (OXY), Phillips and Marathon to outperform their peers.
Defiantly more optimistic is Ed Moran at A.G. Edwards & Sons. Where Tower expects the year to end with oil selling around $18.50 a barrel, Moran's sights are set closer to $19 -- with $20 likely in 1999. In fact, he's anticipating positive earnings comparisons (year-to-year) by the fourth quarter, and double-digit growth in 1999.
"Historically," Moran explains, "when oil prices have dropped this low, they haven't stayed low for a very extended length of time. And whenever they've dropped below $18, within 18 months, they've come back, not just to $18, but well over $20."
Moran tends to favor major oil companies with lower profiles. In addition to attractive valuations, he says, they have the same access to leading-edge technology as the larger majors as well as the ability to cherry-pick exploration projects and partner with the majors in developing them. He has "buy" recommendations on both Marathon and Phillips, the first for dramatic earnings improvement, the second for its relatively low valuation.
Marathon's drilling operations, Moran points out, are mainly focused in the hugely successful Gulf of Mexico fields, with significant exposure to both lucrative deep-water projects as well as natural-gas production, where prices have remained relatively stable. Downstream, he sees efficiency coming from the company's combining U.S. operations with Ashland Inc. (ASH).
Phillips, on the other hand, is concentrating on projects to employ new technology to rework one of the richest fields ever discovered in the North Sea, a strategy that has proved successful for other companies in that and other parts of the world. Downstream, Moran anticipates Phillips benefiting from refinery partnerships with the Venezuelan state oil company, PDVSA, in Texas and Oklahoma.
What kind of money does one of the most optimistic analysts foresee investors making on major oil stocks? Based on earnings of $2.06 per share this year and $2.60 per share in 1999 for Marathon, he anticipates the stock climbing to $44 from $36 before the end of the next fiscal year, a 20% gain. For Phillips, he's looking for earnings of $3.10 and $3.60 per share, with stock moving from around $50 to $58, almost a 15% gain.
Not exactly gangbusters, but nothing to be embarrassed about, either. And you get the opportunity to say you made your money in oil . . . not to mention reaping some of the most lucrative dividends on the market. That's cash you can reinvest in something with hotter short-term potential or salt away in something safe for a rainy day.
Either way, when you're filling your tank this summer and notice that the price of gas just went up again, you're likely to be a little less bothered.
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