Oil-services stocks are likely to best producer shares

Schlumberger, Nabors, Offshore Logistics are worth a look

But beware a fall in prices

Your Money

May 02, 2004|By Andrew Leckey

About the only way a motorist who just filled the gas tank of his sport-utility vehicle or monster truck could feel good about that experience is if he owned shares of an oil company.

Gas station bills that seem like mortgage payments are a byproduct of this 2004 world of international tensions over whether the global oil supply could be disrupted and crude oil prices sent higher.

Meanwhile, the passenger vehicles in this country get bigger and bigger as oil prices go higher and higher. Demand for oil is also increasing worldwide.

"Oil company stocks have outperformed the market this year because the commodity price is up, which helps both refining and marketing," explained Gene Gillespie, oil analyst with Howard Weil Inc. in New Orleans. "Both parts of the business right now are about as good as I've ever seen them."

Investors should watch to see whether the Organization of Petroleum Exporting Countries is successful in cutting its output to try to keep crude oil prices above $30 a barrel, said Gillespie. At some point, worries about the oil supply should subside along with gasoline prices themselves, but no one knows when exactly that will happen.

There's no denying that when times are good for oil companies, they are really good. And they've been that good lately.

"The average forecast for crude oil this year is about $32 a barrel, and the price continues to stay quite a bit above that, which means earnings expectations for oil companies are going higher," said George Gaspar, oil analyst with Robert W. Baird in Milwaukee. "But we expect that the bloom may be off the rose and oil prices will pull back eventually to the low $30 level, though it may take time because of the situation in Iraq."

Prices at the pump may increase as much as 10 cents a gallon this summer mostly due to seasonal demand, then pull back by late summer, Gaspar predicted. There have been concerns that tighter federal environmental standards for gasoline that go into effect June 1 could slow production and serve to boost prices further, but most experts consider that unlikely.

"We expect oil prices to remain strong, but we also see new supplies from non-OPEC production coming onstream in the second quarter," said Tina Vital, oil analyst with Standard & Poor's Corp. in New York. "Toward the end of the year we expect demand to slacken a bit and supply to build, so prices should moderate somewhat in the second half of this year and in 2005."

Despite the price run-ups in many stocks this year, some oil companies still offer investment opportunities.

For example, ChevronTexaco (CVX), whose recent stock buyback announcement indicates management is confident that it will have excess cash flow, is Gaspar's top pick. There could also be a dividend increase, he believes. This large international oil company, which operates in more than 180 countries, will remain a major player due to its strong focus in West Africa and other important oil-producing regions.

Exxon Mobil (XOM), a diversified company with a strong balance sheet and solid dividend, is recommended by Vital because its stock price offers considerably more upside. It operates in more than 200 countries and territories and also has interests in electric power generation facilities.

Among other choices, ConocoPhillips (COP) and Marathon Oil (MRO), whose stocks are selling at a big discount to the oil company group, are recommended by Gillespie. He also likes Murphy Oil (MUR) because it's the only integrated oil company he covers that offers "meaningful production growth potential."

Those firms that provide services for exploration and drilling have been doing even better than the oil companies.

"Positive pricing trends and increased spending by the oil and gas industry are drivers for oil services, and we believe that oil will stay above $30 a barrel all year," said Kurt Hallead, oil-services analyst with RBC Capital Markets in Austin, Texas. "There's another 20 percent increase on average for the oil-services stocks this year."

Oil-services bellwether Schlumberger (SLB) is recommended by Gaspar and Hallead because it has completed a turnaround and exited all of its non-oil-services businesses. Its return on capital is up to 10 percent vs. 5 percent a couple of years ago. All of its business lines are showing positive growth trends.

Nabors Industries (NBR), the top U.S. land drilling contractor, whose international operations include a 50 percent ownership in a venture in Saudi Arabia, is recommended by Gaspar and Hallead. Its stock is trading at a discount despite strong cash flows and a solid balance sheet.

Offshore Logistics (OLG), which provides helicopter transportation services to the worldwide oil and gas industry, is recommended by Gaspar. It has major operations in the Gulf of Mexico and the North Sea.

BJ Services (BJS), a provider of pressure pumping and other oilfield services for the petroleum industry, is recommended by Hallead. It does 60 percent of its business in North America and 40 percent internationally. It just raised the price for its services for the second year in a row.

Burlington Resources (BR), an exploration and production company well-known as a low-cost producer, is recommended by Vital.

Andrew Leckey is a Tribune Media Services columnist.

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