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Market Watch : Oil Issues Heat Up Again

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A lot of investors became new believers in oil stocks last year, as demand for oil jumped while supply tightened. In fact, 1989 marked a turning point in Wall Street’s view of the energy business in general: Glut was the watchword of the ‘80s, but the ‘90s promise rising demand and rising prices.

That thinking sparked a surge in oil stocks last year, and the rally has carried into ’90. Now comes the test: Can the stocks hold up against an anticipated spring drop in oil and natural gas prices?

Oil has already dropped to $20.39 now from about $23 a barrel in early February. Barry Sahgal, analyst at Ladenburg, Thalmann & Co. in New York, notes that “there’s always a seasonal dip in prices in March and April,” as the heating season ends.

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But some analysts see the potential for a bigger-than-normal drop in prices soon. Richard Pzena, analyst at Sanford C. Bernstein & Co., said oil inventories usually are drained at a brisk pace in winter. That didn’t happen this year, because of the warm winter. Meanwhile, OPEC is pumping 24 million barrels a day--2 million over its limit, he said.

So Pzena thinks that prices are going lower and that oil stocks--most now near their 52-week highs--are vulnerable to a correction. Even if oil just stays at current levels, he warns, the price isn’t high enough for oil companies to show earnings growth versus 1989. And that, he said, will disappoint plenty of investors.

Other analysts say interest in these stocks remains so strong that investors are already looking past any spring weakness in energy prices. “I think that’s why the stocks haven’t been hit” despite oil’s slump, Sahgal said. He sees supply and demand back in sync by summer, as refineries temporarily closed for repair come back on stream and take more crude oil off the market.

Ken Miller, who follows oil drilling and service stocks for Shearson Lehman Hutton, admits that if Wall Street is wrong about spring supply and demand--and oil drops another $3 to $4 -- “the stocks are vulnerable.” Many oil field stocks, such as Baker Hughes and Halliburton, have risen 60% or more in a year.

But Miller believes that many oil investors are taking the long view--that short-term dips notwithstanding, the energy business is in a sustained up trend. “If you look at the worldwide oil demand situation, it’s the early 1970s again,” he argues.

OIL’S SLIDE Weekly close, near-term futures contract, for West Texas intermediate crude, In dollars per barrel. Friday: $30.39 Source: New York Mercantile Exchange

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Unstoppable Boeing? Boeing Co. stock has been on a tear: From $61.125 on Feb. 26, it’s now at $73.25, an all-time high. After Boeing hosted an upbeat meeting for analysts last week, many raised earnings estimates and reiterated “buy” recommendations.

Howard Rubel, analyst at C. J. Lawrence, Morgan Grenfell in New York, notes that Boeing “fits right into the pattern of what investors are looking for these days”: Strong earnings growth and a healthy balance sheet.

Fueled by a huge backlog of jet orders, Boeing should earn about $6 a share this year, versus $2.94 last year, Wall Street figures. In ‘91, Rubel sees at least $7.15.

At $73.25 a share, Boeing’s stock price/earnings ratio based on $6 earnings in 1990 is about 12, versus a market average of 13. So that, too, gives the stock continuing allure.

But how much more potential is left in the stock? At this stage, money managers are already looking out to 1992, when they fear that development costs for a new 777 jet line will begin to crimp profits. Even so, analyst Lawrence Harris at Bateman Eichler, Hill Richards in Los Angeles believes Boeing might reach $87 to $90 a share before big investors begin to feel uncomfortable. That would be a 19% to 23% rise from here.

What’s more, analyst William Deatherage at Dean Witter Reynolds notes that the history of Boeing stock is that “it tends to move for long periods of time in one direction.” In the early 1980s, the stock soared for four straight years. The latest up trend began late in 1987 and so has run a little more than two years. And if Boeing has ever been primed to pleasantly surprise Wall Street on the earnings front, it’s now. The current boom in jet orders “is the most powerful the industry has ever had,” Deatherage said.

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BOEING FLIES AGAIN (High price each year) Boeing stock, a red-hot issue in the early 1980s, is soaring again. Friday: $73.25 Source: Value Line

Briefly: Shares of some Japanese firms traded in this country far outpaced Tokyo’s rebound late last week, suggesting that some U.S. investors believe the plunge there is over. Matsushita jumped $11.625 to $133.75 Friday, TDK rose $1.75 to $38, Canon gained $3.125 to $50 and NEC Corp. soared $6.375 to $62.625.

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