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However much high oil prices are hurting the economy, they've been a tonic for stocks in the energy sector, which, along with technology and health care, is one of Standard & Poor's favorites for investing now.
Within the energy sector, Jordan W. Horoschak, energy analyst for S&P, especially likes offshore drilling and oil services. And he downplays all the major oil companies, except BP Amoco. In fact, Phillips Petroleum gets an "avoid" in his rankings. However, he sees a ray of hope for the giants when oil prices stabilize at a lower level.
As for possible bargains in the overall sector, Horoschak singles out two stocks with "accumulate" rankings from S&P: USX Marathon Group and Tosco. He regards fuel-cell companies as the tech stocks of energy but thinks it's premature to invest in any of them, with their technologies yet to be proved reliable.
Horoschak voiced these opinions and many others in responses to questions presented by BW Online's Jack Dierdorff and the audience in a Sept.12 chat hosted by BW Online and S&P Personal Wealth on America Online. Edited excerpts from the chat follow. A complete transcript is available from BW Online on AOL, keyword: BW Talk.
Q: How does the market look overall to you and S&P, Jordan?
A: We at S&P are still buyers in this market. Technology stocks have struggled recently, but we see the energy sector and health-care sector as outperforming the broader market in months to come.
Q: What do you think of RD [Royal Dutch Petroleum]?
A: RD is one of the three "super-majors." The company is trying to cut costs like its rival Exxon Mobil, but the shares are already valued similar to its peers....
Q: So what's your view on XOM [Exxon Mobil]?
A: We currently have a neutral rating on XOM. They recently announced that synergies from the Mobil merger should tally $4.6 billion. I believe that this was a little bit less than what the market was expecting.... The shares are already trading at a premium to its peers. I think there are better stocks to buy in energy than Exxon Mobil at this time.
Q: Why are drilling stocks not rising in the face of the high oil prices?
A: I would disagree with that. The drilling stocks that we have had "buy" recommendations on have increased between 70% and 100% so far this year.... The offshore-drilling sector is the best money-making opportunity available in the energy industry.
Q: How much room is there for growth in price for energy-service stocks?
A: I think several areas of the energy sector still have stock-price-appreciation potential. The offshore-drilling segment is expected to continue to grow, and the oil-services group should post similar stock gains. I am less bullish at this time on the major oil companies.
Q: So what's on your buy list, Jordan?
A: I have just one "buy" recommendation among the major oil companies. That stock is BP Amoco [BP].... We have five "buy" recommendations in the oil-drilling industry. They are ESV [Ensco International], GLM [Global Marine], RDC [Rowan Companies], SDC [Santa Fe International], and NBR [Nabors Industries]. Our favorite E&P [exploration and production] name is Apache [APA]. And our favorite natural-gas name is El Paso [EPG].
Q: What is your opinion of CPN [Calpine], DYN [Dynegy], and DUK [Duke Energy] -- a "buy" at present levels?
A: We like all three of those stocks. In fact, we upgraded DYN to a "buy" recommendation just last week. There are opportunities in broadband marketing that should add to their already-solid core business. We have an "accumulate" recommendation on both CPN and DUK.
Q: Fuel-cell stocks shot up today -- any comments?
A: Fuel-cell stocks have become the "technology stocks" of the energy industry. At S&P we do not currently follow any of these companies because the technology has yet to prove reliable. However, one should keep an eye on these stocks to see if their businesses prove to be legitimate.
Q: What is your opinion of Phillips Petroleum [P]? One audience member calls it "crap."
A: I would not necessarily use that word. However, I do have an "avoid" recommendation on the stock. We are concerned about the level of debt the company has.... The recent rumors of a merger with Chevron are rumors, at best.
Q: Will SLB [Schlumberger] move on the crisis news?
A: I think Schlumberger is well-positioned to benefit from this up cycle in oil prices. However, the stock itself is trading at a large premium to its peers....
Q: What are your feelings on the merger of RIG [Transocean Sedco Forex] and FLC [R&B Falcon], and how would you rate each of the stocks individually?
A: We have a "hold" recommendation on both RIG and FLC. The acquisition of FLC by RIG has been long-rumored -- and makes some sense due to both companies' position in deep-water drilling. This deal will make RIG the leader in offshore drilling and the leader in deep-water drilling. However, the deal will be dilutive to EPS [earnings per share] in 2001.... Finally, merger synergies are difficult to achieve in a high-fixed-cost business like offshore drilling.
Q: Are there any bargain energy stocks worth buying?
A: If you are a value investor, we would turn your attention toward two of our "accumulate" (recommended) stocks. One major oil company we like is USX Marathon Group [MRO]. The stock is trading at just 10 times our 2001 earnings estimate, which is below the peer-group average. If refining margins improve in the months to come, then MRO should outperform. Likewise, a refining company called Tosco [TOS] should also outperform. That stock is trading at also just 10 times our earnings estimate. TOS, in our opinion, is the best-managed refining company in the U.S.
Q: Jordan, high oil prices lie behind this whole Q&A -- do you expect them to continue, and is it possible that Washington will do something to shield consumers?
A: I now expect oil prices to remain high through the end of February. Previously, I expected oil prices to have calmed down by now. Heating-oil inventories are 40% below last year's level. This will cause high heating-oil prices to support high crude-oil prices, much the way high gasoline prices supported high crude-oil prices this past summer.
In March, I expect crude oil to return to a more normal level of around $26 a barrel.... High oil prices are a hot political issue right now, and the U.S. government may choose to open the Strategic Petroleum Reserve.
Q: What is your feel for OXY [Occidental Petroleum]?
A: We admire OXY's recent acquisitions and narrowing focus on core competencies, but the company is heavily reliant on chemical earnings. Clearly, their oil and gas operations are flourishing, but chemical margins remain a question mark in our minds....
Q: What about the seismic industry, specifically Input/Output [IO]?
A: The seismic industry has really struggled in this recovery. It has struggled so much that SLB and BHI [Baker Hughes] have formed a joint venture between their divisions. Although seismic remains as one of the weakest sectors of the oil-services industry, it seems that business will need to improve in about six to nine months. These stocks could be sleepers worth watching, including IO.
Q: Is this a good time to take profits in Enron [ENE]?
A: The sharp rise in the stock price during the past year may make it seem tempting to take profits. However, we have an "accumulate" rating on this stock, and we believe that the company has several powerful initiatives that will propel the stock price forward. We are particularly bullish on prospects for the new retail-energy division and Enron Broadband Services.
Q: Can oil-service companies prosper at $25-per-barrel oil?
A: We believe they will prosper in both financial results and stock-price performance. If you purchased stocks like Exxon Mobil or Chevron [CHV] back when oil was $12 a barrel, you would have made money, but you would have underperformed the S&P 500. We believe the reason why these stocks have not performed as well as the rise in oil prices has to do with investor sentiment, with oil at $35 a barrel. It seems that no one believes oil will stay at this high price. Therefore, if oil prices pull back to $25 a barrel, which is a healthy level for oil companies, I think investors will feel more confident in investing in these stocks. If we get a more realistic and stable oil price, look for some of the major oil-company stocks to outperform.
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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