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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: shust who wrote (34017)	1/2/1999 4:00:00 PM
From: Crimson Ghost	Read Replies (1) \| Respond to of 95453

From the latest Barron's weekday trader: With crude prices down 50% and natural gas off about 33% over the past 15 months, energy-related stocks make up three of the six worst performing groups. The international oil exploration giants have escaped the carnage, thanks to their sheer size and strong balance sheets, but the much smaller exploration and production (E&P) companies were decimated this year. The Dow Jones secondary E&P group finished 90th in 1998, off about 30%, far worse than the 1% rise last year. Short of some extraordinary event, "we are going to see crude in the low teens for an extended period," predicts Fahnestock & Co. analyst Fadel Gheit. "Whether it's $11 per barrel or $14 per barrel, it doesn't matter. Not many of these [exploration and production] companies can continue operations at $14 per barrel oil," he adds. And the factors creating this drop -- low demand growth and overproduction -- are not likely to change significantly in the near term. Consequently, these stocks are likely to be laggards once again in 1999, adds Thomas Driscoll, an E&P analyst at Salomon Smith Barney. Even after this year's collapse, the risk to these stocks continues because they still don't fully discount the current commodity price, he argues. Many E&P companies still sell at price to earnings before interest, depreciation and amortization (EBITDA) multiples that are higher then their historic averages, he adds. For example, Apache Corp., down 29% this year, trades at 7.0 times EBITDA versus a 6.3 average, while Vintage Petroleum, down 58%, sells at 6.9 versus a 5.9 average. Fahnestock's Gheit says that recent E&P mergers like Kerr-McGee with Oryx Energy and Seagull Energy with Ocean Energy will intensify in 1999. He doesn't expect the majors to target the E&P firms primarily, but adds that Burlington Resources, for example, is big enough to attract attention from the smaller majors like Atlantic Richfield (Arco), Texaco or Chevron. Burlington is down 20% this year. Other large E&P companies like Phillips Petroleum or Unocal, down 12% and 25%, respectively, could also be on Arco's list, he speculates. Like a canary in a coal mine, the oil drillers and service companies were among the first to suffer when crude prices began falling in late 1997. The Dow Jones oil drilling group has the dubious distinction of being dead last at 95th in 1998, down about 60%. The oilfield equipment and services group is close at 93rd, down about 40%. Mark Baskir, a portfolio manager of energy funds at Scarborough Investment Advisors, concedes that if petroleum prices were to dip into the single digits for a sustained period, these beaten-up stocks could suffer significantly again in 1999. But he doesn't believe that's likely. Furthermore, oil at current $11 per barrel simply isn't "tenable" over the long term because it is "uneconomic" for so many parts of the industry, he adds. The crude market is in the incipient stages of self-correcting, he argues. Consolidation is already at work across the industry; 1999 exploration budgets have been slashed by 15% or more, and recent International Energy Agency data show that oil production growth is starting to slow outside the Organization of Petroleum Exporting Countries (OPEC). Natural gas production is falling sharply. And, of course, in the unpredictable world of international oil prices, a spike should never be ruled out. "This isn't a buggywhip industry. It's an essential industry that the world relies on," Baskir notes.