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As fast as the stock market pounces on news, you'd think Wall Street would have long ago swallowed up every bit of upside in oil's 12-month rally. Texas tea has already flirted with $30 a barrel several times this year, and sport-utility vehicles are lining up at the pump just so vacationers can have the privilege of paying upward of $2 a gallon for gas. A number of oil shares have already been to the races in 2000. Now many experts predict that crude's price may even tail off by yearend.
Think again, says John Segner, portfolio manager of Invesco's Energy Fund (FSTEX). Sure, gas-station owners are making a mint these days, but plenty of oil-related companies haven't seen an upward spurt in their shares yet. That's because of the gap between demand for oil and the industry's current production capabilities. Worldwide, about 77 million barrels are snatched up every day. Yet the industry has only enough derricks and rigs to produce 80 million barrels daily.
That margin, says Segner is not only the thinnest in 15 years but it's also a sign that exploration is going to ramp up significantly to increase production and cash in on lofty crude prices. Expect oil-service and -drilling companies to clean up in the months ahead as the energy giants loosen purse strings and start hunting for new deposits. "That's why we're big on oil-service and -drilling names," Segner says. "They'll show the greatest growth in revenue and earnings now that worldwide capacity will have to increase."
"NONEVENT."
Things are so good that this week's announcement by OPEC that it will increase production quotas by 700,000 barrels a day didn't faze Segner a drop. "It was a nonevent," he says. To get in on the pending production boom, Segner has steered about 25% of the fund's assets into exploration and production companies and another 25% into drilling and equipment companies.
As his portfolio's two largest concentrations, both segments have paid off handsomely in 1999 and so far in 2000. After logging a 48.7% gain in 1999, drilling and equipment makers have shown a 41.6% increase this year, according to a Standard & Poor index for the group. Exploration and production outfits have provided a 39.6% return so far this year. Last year, it was 16.4%.
Put together, the two subsets helped Invesco Energy to an impressive showing over the last 18 months. For 1999, the fund posted a total return of 41.9%, and up until June, it had delivered an additional 39.2%. By comparison, the S&P energy index was up only 18.7% in 1999 and 4.9% through June 30. Ivesco's figures also stack up well compared to an average return of 30.4% for 1999 and 17% so far in 2000 for the 64 natural-resource funds tracked by mutual-fund research firm Morningstar Inc.
Over the long term, the Invesco fund is the highest-ranking broad-based energy sector fund around. Its tree-year, load-adjusted total return of 16.6% lead all comers, and its five-year average annual load-adjusted return of 20.6% tops the competition also.
HOT PURSUIT.
Segner thinks the drilling and exploration stocks he owns will continue to run, and he's not alone. "They're a good bet right now and my favorite sector in the energy industry," says Jordan Horschak, an analyst with S&P. "This group benefits from higher capital spending by oil companies in the pursuit of more oil, and as long as oil stays above $20 a barrel, drilling projects will be attractive." Horschak estimates that capital spending on drilling and equipment should rise 11% this year.
Two of Segner's favorites in the drilling and equipment segment are Nabors Industries (NBR) and Noble Drilling (NE). The largest drilling contractor around, Nabors went on an acquisition spree in 1998, while its competitors' prices were in a gulch. It's now in a position to see revenues grow as much as 115% this year, according to S&P. Wall Street looks for Nabors to ramp up earnings in the next two years. Consensus estimates look for the company to log 79 cents a share in profits in 2000, and $1.58 in 2001, compared to 23 cents a share in 1999.
Segner's other winner, Noble Drilling, specializes in higher-margin deepwater drilling, which accounts for 50% of revenue. Segner expects the company to earn $2 a share in 2001, almost double the $1.07 a share the Street has predicted for the company in 2000, according to Zacks Investor Research. Look for Noble to double that figure to $4 a share by 2003, projects Segner.
Surprisingly, the international giants that dominate the industry haven't been invited to the oil-stock boom. Of those goliaths, Segner likes Exxon Mobil (XOM) best. The largest oil company going, Exxon Mobil shares have gained only 5.4% this year. Segner says the Street seems to be waiting for evidence that last year's megamerger will produce cost savings. Proof could come Exxon Mobil hosts a meeting on Aug. 1 to shed more detail on the merger and cost savings it expects to wring out of the deal. Expect an upbeat meeting, says Segner. In fact, expect an upbeat future for the whole oil patch, and probably for Invesco Energy fund, too.
Anderson teaches journalism at the City University of New York. His Sector Scope column appears every other week on BW Online
Copyright 2000 , by The McGraw-Hill Companies Inc. All rights reserved.
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