Sell or be a long-term investor willing to ride out the storm. That's the advice investors are getting about their oil company stocks these days.
Crude oil prices are likely to stay between $18 and $20 a barrel this year, a result of OPEC disarray and the willingness of major producer Saudi Arabia to accept current price levels.
Motorists, happily, will see flat gasoline prices, except for a "business-as-usual" 5-to-7-cent-a-gallon increase between now and the peak summer driving season.
Investors, on the other hand, are left in the lurch. Oil stocks have been a disappointment the past year, and relief isn't clearly in sight. Crude oil prices aren't strong enough to offset weaknesses in energy companies' other businesses, such as natural gas. Dividend cuts are rumored at companies such as Pennzoil Co. and Amerada Hess.
"Once darlings of Wall Street, big oil companies are weaker today than any time in the last 20 years, their growth rates and earnings only so-so," says Philip Dubuque, portfolio manager of Denver-based Financial Strategic Energy Fund, down 9 percent this year in line with the overall industry. "I prefer smaller growth-type energy stocks, which will do well despite weak oil pricing."
The selling is on.
"I'm selling oil stocks because I just don't see oil prices doing anything," says Mark Hinton, analyst with Eppler, Guerin & Turner. "The only good reasons to hold are if you're an investor seeking a good yield or you're banking on the chance some firm will hit a big oil field."
Yet not everyone is bailing out.
"I wouldn't sell, since much of the bad news is already reflected in the stock prices, and I'm not expecting dividend cuts," says Douglas Terreson, analyst with Kemper Financial Services. "Oil companies might be a good place to be in the second half of this year, though I've set a 12- to 18-month time horizon before demand and overall conditions are likely to be better."
The best oil equities to be in until improvement occurs are Royal Dutch Petroleum, Exxon Corp. and Texaco Inc., Mr. Terreson says. They are geographically diversified, and the weakness in the natural gas market won't hurt them as much as it will some competitors. Royal Dutch and Exxon are likely to be the only two major oil companies that will increase their dividends this year, he predicts.
A contrarian choice is British Petroleum. Unlike other experts, Mr. Terreson doesn't believe it will cut its dividend. Ramifications of such a move would be too negative, he says, and the company has the balance sheet strength to keep up the dividend until its financial situation improves.
Schlumberger Ltd. has boosted its standing over the past four years by putting a huge technology gap between itself and competitors, Mr. Terreson says, and, as a result, should be a great stock.
In energy technology, Mr. Dubuque likes Grant Tensor Geophysical in geophysical land mapping and Astrotech International in the retrofitting of seals in oil storage tanks.
His picks in refining are Tosco Corp., a big operation in California benefiting from reduced competition there, and Valero Energy, a specialist in high-grade unleaded gasoline. Oil and gas drilling picks are Parker & Parsley Petroleum, which is buying properties in western Texas from Mobil, and Gerrity Oil & Gas, which is purchasing sites north of Denver.