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‘Smart Money’ Gets Edge With Common Sense

One of the great sources of insecurity in the business of investing is the thought that, somewhere out there, the “smart money” knows something you don’t and is acting while you are missing out. Investors’ paranoia you could call it if you took it seriously, which you shouldn’t. Because the so-called smart money can’t foresee the future any better than you, and most things can be explained by a reasoned analysis of the present.

The current chaos in the oil business provides a couple of cases in point. The other day, for instance, when the Organization of Petroleum Exporting Countries broke up yet another meeting in Geneva without agreeing to stabilize production, the price of oil fell 10%--to less than $11.50 a barrel. Yet on the same day, the stock prices of Exxon and Royal Dutch Shell rose to new highs for the year. Exxon and Royal Dutch are oil companies--the biggest and oldest oil companies, in fact, and the worldwide industry leaders.

Was the “smart money” buying their stock on secret knowledge? Something you missed? No. It was only common sense. When an industry is in chaos, the strong prevail. Exxon and Royal Dutch are strong, not merely because they are big enough to survive no matter what but because they have cash available to buy oil producing properties, to take advantage of opportunities. Simply put, Exxon and Royal Dutch didn’t borrow themselves silly when other oil companies did and now are like the man with cash in the Great Depression who could buy whole buildings for a song. The two giants can buy oil reserves from cash-strapped producers for $4 to $5 a barrel, whereas it still takes $6 to $8 a barrel to go out and explore for new reserves.

A Shrewd Purchase

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But, you ask, is it smart to buy oil today? Sure it is. Think about the implications of the present situation. Does OPEC doubt the long-term value of oil? No, it emphatically believes in it. The whole strategy of OPEC’s leading producers is that if the price falls low enough, production will phase out--or never begin--elsewhere, and they will recapture control of the market. And they’re talking about the 1990s--not some far-off Inshallah but 3 1/2 years from now. Therefore, oil becomes a reasonable, even a shrewd, purchase, with the promise of reward within a reasonable time.

There is a down side, of course. If the strong prevail, the weak expire. Small companies will fail; large ones will have difficulties. And, as Wertheim & Co. analyst Elizabeth Peek points out, if the well-heeled companies can buy reserves cheaper than they can drill for them, the oil services industry is in for several more bad years. That’s ominous for an industry that has already endured four years of what is called a Texas lunch: You go without eating and cinch in your belt another notch.

Yet Coniston Partners, a trio of reputedly smart money men, recently made an offer for NL Industries, a leading oil services company. But they were looking at NL’s titanium pigments business, which accounts for 40% of its sales, and not the oil services that make up 60%. So their $72-million investment turned out more mistaken than smart. After Coniston bought into NL, the oil price declined and so did NL stock, paring $10 million to $15 million off the value of Coniston’s investment.

Still, holders of 8.5% of the stock have weapons that smaller shareholders do not. Coniston threatened a hostile tender to force NL Chairman Theodore C. Rogers to sell the titanium division and use the proceeds to buy back stock. He responded this week with a plan for NL to buy up to 33% of its own stock, allowing Coniston to get out even but paying larger premiums to other NL shareholders wishing to sell. To pay for the stock, NL is recapturing surplus funding from its pension fund and selling 20% of the titanium business as a separate stock to the public.

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Establishing a separate stock for the titanium is important because it appeals to the way the stock market likes to value assets. Follow this if you will: Because a British company last year acquired titanium-owning SCM Corp. at a high price, NL’s titanium assets may be valued by the market at $800 million. Now, the market’s smart money people figure that if NL retains 80% of assets worth $800 million, that’s $640 million, which, divided by 47 million shares outstanding, means the titanium business is worth $13.60 a share. As the whole of NL Industries is selling at around $13.60 a share right now, the smart money reckons that you get its nearly $1 billion in oil services assets for free.

Is the smart money right? Not really; such arithmetic is academic if oil services loses a lot of money for NL. But if arithmetic and titanium can help NL through the bad period to become one of the few survivors in oil services, then you have value indeed. That’s analyzing the present, but it’s not predicting the future.


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