BUSINESSWEEK ONLINE : OCTOBER 16, 2000 ISSUE
BUSINESSWEEK INVESTOR If You Can't Beat the Oil Barons, Join 'em How to invest in a slippery sector You see oil and natural-gas prices going up, up, up and you want a piece of the action. It's possible to jump in--without marrying into the Saudi royal family or running for President of Venezuela. Owning the stocks of companies that find, produce, and distribute oil and gas can give you some of the upside of rising prices. That may just ease the sting you'll feel when filling your car and heating your house. Watch out, though. Picking stocks in the energy sector is maddeningly difficult. Even if you could forecast commodity prices with perfect precision--which you can't--it wouldn't tell you what's going to happen with energy-company stocks. The correlation is loose. From December, 1998, through late September, the price of oil more than tripled--from below $11 a barrel to a brief peak of $37.80 in futures trading on the New York Mercantile Exchange. Yet domestic integrated oil stocks in the Standard & Poor's 500-stock index posted a total return of just 33% over the period, vs. 20% for the overall S&P. And international oil companies managed a return of only 24%, while the commodity they sell was up over 200%. HELPFUL SPIDER. Energy stocks do have one thing going for them: They don't follow the rest of the stock market closely, so they reduce the volatility of your overall stock portfolio. To use the lingo, they have low ''betas.'' By definition, the S&P 500 has a beta of 1. In contrast, ExxonMobil's ( XOM) beta is 0.53, meaning it's only half as volatile as the market. Texaco's beta is 0.46, and Chevron's is 0.42. They're moderating influences. If you do want to plunge into oil, where should you put your money? To play the sector as a whole, one popular choice is the Energy Select Sector SPDR Fund ( XLE), which is traded on the American Stock Exchange. The ''Spider'' tracks an index of 29 energy companies in the S&P 500, ranging from oil-exploration specialists to gas-pipeline companies. It has risen 22% this year. You could also look into stock mutual funds. Some of the biggest are Vanguard Energy, up 29% this year; T.Rowe Price New Era, which covers all natural-resource companies, up 11%; Invesco Energy, up 57%; Fidelity Select Energy Service, which covers oil-field service and equipment, up 52%; and Fidelity Select Natural Gas Portfolio, which is up a handsome 61%. If it's individual stocks you prefer, start by picking your favorite sector. The biggest and most stable is the integrated oil companies, such as ExxonMobil, BP ( BPA) (formerly BP Amoco), and Royal Dutch Shell ( RD). They're naturally hedged: The high oil prices that are good for their upstream businesses of exploration and production aren't so good for their downstream businesses of refining, chemicals, and marketing--and vice versa for low oil prices. The stocks of these giants are a lot like their supertankers: slow to turn. That can be good when commodity prices tumble. When oil plummeted from $32 a barrel in November, 1985, to $10 a barrel in April, 1986, Exxon's shares actually rose a bit. LIMITED SUPPLY. For long-term investors, Fadel Gheit, oil analyst at Fahnestock & Co., likes ExxonMobil, formed last year by Exxon's purchase of Mobil Oil. He says it's highly efficient and has the requisite scale for multibillion-dollar projects in hard-to-reach deepwater fields. The stock is up 13% this year. BP is the choice of Albert Anton Jr., a partner in Carl H. Pforzheimer & Co., a Wall Street investment firm. He admires CEO Sir John Browne's delegation of authority to about 100 highly autonomous business-unit chiefs. Says Anton: ''This is a tremendously managed company.'' BP shares are down 9% year-to-date. Tight supplies of gasoline, diesel, and heating oil are giving refining companies their best year in a decade. The question is, will the good times continue? Lehman Brothers analyst Paul Cheng says that the stocks still have headroom because inventories should remain tight. And, he says, investors are ''still scared of refining stocks,'' so prices remain reasonable. His favorite is Sunoco ( SUN), followed by Tosco ( TOS), Ultramar Diamond Shamrock ( UDS), and Valero ( VLO). Bear Stearns analyst Frederick P. Leuffer Jr. says he's pessimistic about the overall energy sector but still likes Tosco, which he says has exceptionally low production costs and an unbroken record of rising earnings going back to 1994. It's up 15% this year. PURE PLAYS. Less popular with many analysts these days are the pure plays in exploration and production, such as Anadarko Petroleum ( ARC), Apache, Burlington Resources ( BR), and Devon Energy ( DVP). This S&P industry group is up 57% since oil's nadir in December, 1998--and it will be one of the worst-hit sectors if oil prices crash. Still, Gheit likes integrated producer Phillips Petroleum ( P), up 34% this year, which acquired a valuable interest in the North Slope of Alaska from BP at a distress-sale price when BP bought Arco; Triton Energy ( OIL), up 90%, which has a major field off the west coast of Africa; and Unocal ( UCL), up 6%, which is defending a key patent on reformulated gasoline. Also vulnerable to falling oil prices are the oil-field-service companies such as Halliburton ( HAL), Schlumberger ( SLB), Baker Hughes ( BHI), and McDermott International ( MDR). Looking beyond oil and gas, Bear Stearns analyst Michael Dudas thinks that coal-mining companies are poised for a rebound after years of underperformance that was due to falling coal prices and uncertainty about their biggest customers, the electric utilities. He says industry consolidation should firm up prices and recommends Arch Coal ( ACI), down 12% year-to-date, which is shifting its emphasis from Appalachia to low-sulfur Western coal deposits. Feeling green? David Whittall, a partner and senior analyst with the Montgomery Funds, suggests a look at renewable-energy companies such as AstroPower ( APWR), a solar-panel maker, whose stock is up a powerful 92% this year. Investing in energy stocks can be risky business. But having a few shares tucked away might make you feel a little better the next time OPEC oil ministers show up on the evening news. By PETER COY _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS If You Can't Beat the Oil Barons, Join 'em TABLE: Playing the Oil Patch INTERACT E-Mail to Business Week Online

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