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Gold/Mining/Energy : KERM'S KORNER -- Ignore unavailable to you. Want to Upgrade?

To: Kerm Yerman who wrote (12481)	9/25/1998 3:03:00 AM
From: Kerm Yerman	Read Replies (3) \| Respond to of 15196

IN THE NEWS / Oil Industry Faces Up To Low Price Paradigm Although oil prices have rebounded from this year's lows and boosted share prices, company executives are now facing up to the fact that there is nothing they can do to bring back $18-a-barrel oil any time soon. From service companies to the largest majors, the oil patch is warning of job cuts and lower capital spending due to sustained commodity price weakness. The latest to do so is leading oil services company Baker Hughes Inc. (NYSE:BHI), which added to the gloomy sentiment on Thursday, when it said it would cut 2,000 jobs in addition to 700 intended layoffs announced earlier, and is bracing itself for a 10 percent cut in exploration and production spending in 1999. It also issued a profit warning, saying it expected third-quarter earnings per share to be half the 36 cents per share expected by analysts. Its shares dropped 2-3/8 by 1147 EDT/1547 GMT, or 10 percent, to 21-3/8. At Thursday's close, Baker Hughes' stock was about the same, down 2-5/16 to 21-7/16. The move from Baker Hughes comes after Royal Dutch/Shell Group (UK & Ireland: SHEL.L) said last week it would close headquarters buildings and cut jobs, and U.S. West Coast oil giant Atlantic Richfield Inc. (ARCO) (NYSE:ARC) said job cuts would be needed to cope with the poor price environment. ''Lower cost is the driving force for big oil. It is a mature industry with slow or no growth. There is no question that we are at a turning point and oil companies can only merge,'' said Fadel Gheit, analyst at Fahnestock & Co. A six-week recovery has added $3 per barrel to the world benchmark Brent blend to $14.68 now, driving shares of integrated oil companies to outperform the wider market by 15 percentage points in the eight weeks to mid-September. Now, analysts say that prospects for further gains in both crude and oil shares are limited. Shell's Chairman Mark Moody-Stuart said last week that $12 to $16 per barrel for Brent was a more likely trading range over the next three years rather than the $18 average over the past 10 years. Perceptions that the current rally in oil prices may be running out of steam chipped at sentiment toward the whole energy group. The Standard & Poor's Oil International Index, which tracks the performance of the world's largest oil companies, on Thursday was down 3.2 percent at 806.55 points. And the Standard & Poors Oil Drilling Index lost 6.66 percent to 2712.95 points. This reversed Wednesday's large gains, which came after a sharp drop in U.S. crude oil inventories and optimism over the impact of output cuts from producing nations. Key to where oil prices and, hence equity performance, are heading is how quickly the wounded economies of Southeast Asia recover and whether the U.S., the largest market for crude oil in the world, keeps up its rapid pace of economic growth. ''Next year, prices could be even lower if the Asian flu spreads through the global economy,'' said Fahnestock's Gheit. The keys to individual stocks' outperformance in the group will be producing enough extra oil to offset subdued prices and success in cost cutting, analysts say. USX-Marathon Group (NYSE:MRO) gave an example of both when it addressed analysts in New York on Thursday, offering production growth in oil and gas and better-than-expected savings in its downstream operations. Despite the weak price environment, Marathon said it was on track to increase liquids output by 65 percent to 270,000 barrels per day (bpd) by 2001 from 164,000 bpd in 1997. ''Notwithstanding the acquisition of Canada's Tarragon Oil, an increase of that magnitude is extremely impressive,'' said Eugene Nowak, analyst at ABN AMRO Inc. Marathon has one of the best production growth profiles of all the integrated oil companies, which are generally targeting growth of 3 percent to 4 percent a year excluding buys, and it is also delivering better-than-expected cost savings in its refining and marketing venture with Ashland Inc. (NYSE:ASH). Marathon, which owns 62 percent of the venture, said it will have cost savings of $80 million this year, equivalent to 15 cents per share in earnings. It also has projected savings of $180 million next year and more than $200 million four years down the line. ''We think that the number could be $250 (million) to $300 million in time,'' said Nowak. Analysts say that companies such as Marathon are the best buys in the sector, trading at 16 times prospective 1999 earnings, while the sector as a whole is trading at more than 19 times that yardstick. Even so, Marathon's stock on Thursday came off Wednesday's 8 percent rise and traded lower in line with the group. Marathon's stock fell 3/4 to 33-9/16 on Thursday in composite New York Stock Exchange trading.