IN THE NEWS / Oil Stocks On The Outs?
Oil companies are digging in their heels to weather the storm, layoffs expected
Following the lead of its three largest competitors, Mobil Corp. said Wednesday it will cut costs by $500 million and reduce capital spending for 1999 -- a sign that oil executives harbor no illusions of a speedy industry recovery.
Most analysts agree that the sector's big name players are well positioned to weather the storm created by a global glut of undervalued crude oil. Some, however, say the continued industry malaise may precipitate a sea change in the way oil stocks are perceived on Wall Street.
"We are seeing much more competition in this industry than we've ever seen before," said Brown Brothers Harriman analyst Ben M. Rice. "I think that gradually portfolio managers will start to realize this is not a safe haven. These stocks are expensive."
Black gold, Texas tea
Until recently, Rice said investors hung their hats on the relative safety of cyclical oil stocks, prompted by the sector's healthy dividend returns.
"You could always play the oil," he said.
The nation's largest oil companies are averaging 3 percent dividend yields, Rice said, double the overall S&P 500 average of about 1.5 percent.
According to him, Amoco (AN), Exxon (XON), Chevron (CHV), Mobile, Royal Dutch/Shell, Texaco (TX) and Arco (ARC) are collectively coughing up dividends of about $2.02 a share on earnings of $2.22 cents a share -- a 90 percent payout.
Some, like Amoco and Royal Dutch are rewarding investors with nearly 100 percent of their earnings, he said, while Arco pays out more than it earns.
That's been part of the allure -- reason enough for investors to stockpile their portfolios with the high-priced sector shares.
But oddly enough, it's those same dividends that may be undercutting the industry's long-term financial stability.
"This is like eating your seed corn, if you pay out more than you earn," Rice said.
Moreover, he said, corporate cutbacks and industry mergers are no longer giving these companies the competitive edge they once did.
"You have to look at the recent rash of mergers in the refining industry," Rice said. "They are not aggressive, but defensive moves to try and somehow form a larger position in the market. But when everyone does the same thing, the effects are soon competed away."
Cutting back
Mobile told investors Wednesday its spending levels will be lower next year than the $5.9 billion originally projected, due to lingering record low crude oil prices.
Mobil Chief Financial Officer Eugene Renna said the company believes it is "prudent to take out some insurance against the possibility that depressed oil and chemical market conditions will continue for some time."
The news followed similar reports earlier this week from Texaco, Exxon, Chevron.
"To me that's the greatest indication that they think it's going to go on for a while," said S&P Equity Group analyst Norman Rosenberg.
On Monday, Texaco Inc.'s Chairman Peter Bijur also noted that capital spending for 1998 will be about 20 percent lower than projected earlier this year.
He said actual capital spending for 1998 should come in around $3.6 billion to $3.7 billion against the company's initial expectations of $4.6 billion. He declined to project actual capital spending in 1999, but said it would be less than the initial 1998 projection.
Bijur said later that Texaco will announce several money-savings efforts, but did not disclose details.
Exxon, too, said its capital spending budget will be finalized in December, but already company chairman and chief executive Lee Raymond said he expects next year's spending to be down from 1998's $10.2 billion.
And Wednesday afternoon, Unocal Corp., a smaller, less international oil company, announced its capital expenditures would be 30 percent to 40 percent lower next year from 1998.
"Our challenge in the near term is to deliver earnings, maintain production and keep a manageable level of debt while funding key growth projects in a world of depressed commodity prices," said company Chairman and Chief Executive Roger C. Beach.
Credit Suisse First Boston analyst Jim Clark said spending reductions on exploration missions and other high-prices projects, and the inevitable layoffs that go with it, are a necessary evil in today's tough marketplace.
"There is overbuilding in this business," he said. "There is too much capital chasing too little demand. We expect to see capital spending reductions for the major oil companies of around 10 percent next year."
Asia
On Tuesday, however, a group of industry heavy hitters offered a glimmer of hope that the situation for the oil industry may be improving.
The executives said at a convention in San Francisco that the worst of Asia's economic woes could be over and a recovery could be under way by 2000.
Those following the industry believe oil prices and supply and demand ratios are at least six months away from recovery.
In the meantime, Clark said Wall Street can expect "big spending reductions and continued consolidation activity."
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