Oil Stocks Aren’t Out of Gas Just Yet, Many Analysts Say
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Energy stocks soared in frenzied trading Tuesday, as Wall Street abandoned any remaining doubts about the rising trend of oil and natural gas prices--at least for the near term.
Of the 10 most heavily traded issues on the New York Stock Exchange, the top eight were energy-related. Many major oil stocks jumped more than $3 a piece, which translated into gains of 5% or more for the day. Arco, for example, rocketed $6.125 to $117.75; Mobil Corp. leaped $3.625 to $67.
The rally added to the substantial gains that energy stocks had already scored since early April. But many analysts say the stocks still have further to run, in part because large institutional investors are scrambling to get back into them.
The catalyst for Tuesday’s surge--news that Saudi Arabia is ready to support higher oil prices--merely bolstered the recent dramatic improvement in investor sentiment toward oil and gas stocks.
Earlier this year, many of the stocks reached their lowest prices since 1989, as oil prices remained weak and natural gas prices hit their lowest levels since the 1970s. Investors seemed convinced that the industry was doomed to face increasing energy supplies and weak demand for years to come.
But as usual when Wall Street becomes gravely pessimistic, the collective wisdom was wrong.
Helped by the improving U.S. economy, oil prices had been been strengthening even before the Saudi shift. (That should be evident to anyone who has filled a car gasoline tank lately.)
What’s more, a cold spring in much of the country has caused demand for natural gas to boom--just as many loss-weary natural gas producers finally began to limit output. The result: Natural gas wellhead prices have soared from 96 cents per thousand cubic feet in February to about $1.65 now, a recovery that has stunned investors.
Of course, veteran energy-stock owners also know that trying to guess exactly what oil and gas prices will do next is almost always a futile exercise. But the energy bulls say that if you’re willing to assume that prices will just be stable in the next few months, there’s a strong case to be made for a continuing rally in oil and gas stocks. Some reasons:
* Investors are hunting for recovery plays, and the energy group fills the bill nicely. If you’re making a bet on renewed economic growth, after all, you’re betting on rising consumption of goods and services--which logically has to include oil and gas.
Paul Ting, analyst at Oppenheimer & Co. in New York, notes that oil stocks in particular traditionally decline at a steeper rate than the broad market during recessions, then rise much faster than the market when the economy begins to grow again.
Because the oil stocks have only been rallying for two months, Ting sees much more to come: On average during recoveries, the oils rise faster than the market for an eight-month period, he says.
* Big investors have “under-owned” the energy stocks for the past year or longer, and thus have a lot of buying to do just to bring the stocks to a normal weighting in their portfolios.
Indata, a Connecticut-based service that tracks stock transactions by large investors, says its tally of 1,302 portfolios shows energy issues make up 9.5% of stocks held by those investors. In contrast, energy stocks make up 11% of the benchmark Standard & Poor’s 500 stock index.
“There’s no question that the (average) investment account is under-weighted in the oil stocks,” says Michael Young, analyst at Smith Barney, Harris Upham & Co.
* Many oil and gas stocks boast hefty and secure dividends, which should increase their attractiveness for investors still on the fence.
Even after its share-price rally of the last two months, for example, Mobil’s $3.20-a-share annual dividend provides a yield of 4.8% at the current stock price. That’s 1.3 percentage points above the average yield on money market mutual funds.
* Many oil and gas company insiders have been heavy buyers of their own shares in recent months, suggesting that they are confident in the business outlook. Among about 60 industry groups tracked by the Insiders newsletter of Ft. Lauderdale, Fla., natural gas utilities now rank No. 1 for insider buying, oil refiners and marketers rank third, and oil and gas production companies rank 15th.
Which individual energy stocks have the greatest potential from this point? Young of Smith Barney favors L.A.-based Unocal, which has already jumped 32% since March 30.
Young believes that Unocal could appreciate another 30% to 40% as energy prices firm, despite its major presence as a gasoline marketer in depressed California. “Unocal’s earnings are going to be determined much more by national and world events than by the California economy,” Young says. He sees the company’s operating earnings rebounding from 58 cents a share last year to $1.15 this year and $1.95 in 1993.
Michael Mayer, analyst at Wertheim Schroder & Co., sees Arco, Texaco and USX-Marathon as the smartest plays on a recovering U.S. economy. Arco’s upside potential is probably $135 to $140 a share, Mayer says, a 14% rise from the stock’s current price. He also notes that oil stocks in general “tend to move fast when there’s a change in psychology.”
Among natural gas producers, analyst Foster Corwith at Dean Witter Reynolds recommends Sonat, Enron and Consolidated Natural Gas. The surge in gas prices at the wellhead means “earnings comparisons in the (current) quarter will be very favorable for the group” when results are reported in July, he says.
In addition, if gas prices can stay strong, the companies that will benefit the most are the healthy producers that can increase production at will, thus selling more gas for a higher price, Corwith says--”double leverage,” so to speak. All three of his picks meet that test, he says.
The Energy Stock Rally How shares of some major oil and natural gas producers rose in Tuesday’s rally, their gains since March 30 (the approximate low point for many of the stocks) and their current annualized dividend yields.
Major Oil Stocks
Tues. price Gain from Div. Stock and change March 30 yield Unocal 27 5/8,+1 1/2 +32% 2.5% Arco 117 3/4,+6 1/8 +19% 4.7% Occidental 23,+1 1/8 +19% 4.3% USX-Marathon 23 7/8,+1 5/8 +19% 5.9% Exxon 64,+3 1/2 +17% 4.5% Texaco 66 3/4,+3 +16% 4.8% Chevron 72 5/8,+3 5/8 +13% 4.5% Mobil 67,+3 5/8 +13% 4.8%
Major Gas Stocks
Tues. price Gain from Div. Stock and change March 30 yield Coastal Corp. 28,+1 +24% 1.4% Sonat 37 1/4,+5/8 +22% 5.4% Enron Corp. 41 1/4,+1/4 +14% 3.2% Consol. Nat. Gas 40 1/2,+1 +9% 4.7% Natl. Fuel Gas 25 1/4,-1/4 +4% 5.8% Williams Cos. 30,+1/8 -16% 5.1% S&P; 500 index 411.25,-2.77 +2% 3.0%
All stocks trade on NYSE.
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