Energy stocks reflect market's general gloom

High oil prices don't translate into profits Friday March 28, 2003 By John M. Biers Energy writer

Common sense suggests high oil and natural gas prices should mean robust profits and lofty prices for energy stocks. But as energy companies of all persuasions know all too well, the reception on Wall Street has been stingy of late.

Share prices of leading oil-service companies, more than 30 percent below the level of their mid-2001 peaks, have shown little sign of recovery over the past six months, according to the widely watched Philadelphia Oil Service Sector Index. Independent oil and gas companies -- which explore for and produce energy but don't operate their own refineries -- have fared somewhat better but are hardly trading at boom-time levels. And some companies, including supermajor ChevronTexaco, are actually trading below their value when oil prices languished near $10 in late 1998.

On one level, analysts say, the anemic pricing of shares reflects the stock market's overall slump following the demise of the so-called technology bubble, a global recession and numerous corporate scandals. Merrill Lynch estimates the stock markets -- or equity markets -- have lost more than $100 billion since mid-2002, with investors directing more money to preferred stock, land, income trusts and other investments.

"We have replaced the equity cult with the income cult," said Merrill Lynch chief economist David Rosenberg. "Investors are paying up for the assets that can deliver the upfront income."

With earnings season approaching, the question for many companies concerns just how much money they're going to make. Earnings are expected to rise 168 percent for the current quarter, compared with the 90 percent increase forecast earlier this year, said Joe Cooper, a research analyst with First Call, which tracks analysts' estimates.

"In the grand scheme of things, energy is expected to be the top performer for the first quarter," Cooper said of the earnings.

But exceptional profits don't necessarily mean exceptional share prices, as current stock performance illustrates. Multinational ChevronTexaco closed Thursday at $65.20, down from $103.56 in 1999. Lafayette independent Stone Energy Corp. closed at $32.03, less than half the level it held in 1999. New Orleans oil service company Tidewater Inc. closed at $29.30, compared with $52.15 two years ago.

Analysts point to the peculiarities of the recent price run-up, especially with crude oil. Oil prices soared in the weeks leading into the Iraq war, driven up by uncertainty over the Middle East, labor strife in Venezuela, and, more recently, the suspension of some production in Nigeria.

The cumulative effect is that oil supplies remain low by historical standards. However, many experts believe crude will still retreat soon due to a number of factors, including the sluggishness of the world economy. Predicting a speedy end to the war, some experts foresee oil potentially dropping to the high teens as the world assimilates millions of barrels of extra oil from Saudi Arabia and Kuwait pumped in case of a disruption.

"The prevailing belief is that oil is going under $20," Rosenberg said.

The outlook for natural gas generally is considered to be firmer. Although this winter's price spike was caused in part by the unusually cold weather, gas storage levels remain low by historical standards. Many energy companies only now are beginning to increase drilling, which likely portends a tight supply market even if the weather moderates in 2003.

Wall Street analysts predict a 2003 average natural gas price of $4.71, up from the $3.30 average in 2002. Analysts foresee natural gas trading at $4.27 in 2004, Cooper said. Higher natural gas prices are especially beneficial to energy independents and oil service companies because these firms can enjoy the profits that can come with higher gas prices but don't operate chemical plants and refineries that would require more of the costly fuels.

Houston-based Burlington Resources on Thursday cited lofty natural gas production volumes in alerting investors to potentially higher earnings. The company is using $79 million to repurchase 1.7 million shares. Following up on the news, Merrill Lynch raised its earnings projections and set a 12-month pricing objective of $50, up from $45.56.

Instead of the gas-rich shallow-water Gulf of Mexico, Burlington's production is coming from Canada, onshore U.S. sites and a variety of other prospects. The company sold most of its assets from the Gulf's continental shelf last year.

The count of natural gas land-based rigs jumped by 22 to 776, the highest level since November 2001. The pickup offshore has been far more sluggish, with the Gulf rig count near a 52-week low, according to a rig count by Baker Hughes, an oil service company.

Many analysts expect the offshore market to improve in the coming months.

"You're going to see activity strong this year and you're going to see oil service stocks doing well," predicts Bryan Dutt, a money manager with Ironman Energy Capital, a Houston hedge fund. . . . . . . . John Biers can be reached at jbiers@timespicayune.com or (504) 826-3494.