BRACING FOR AN OIL SHOCK : Crisis Likely to Benefit Oil and Defense Stocks : Fallout: The gains could come at the expense of airline, utility and hotel issues, experts say.
The stocks of some industries seem poised to profit from the misfortune of Kuwait, while others have begun to take what may be a sustained beating, Wall Street analysts said Friday.
Oil stocks headed the list of those likely to see sustained benefits from the situation, even though the shares of the biggest refiners and marketers ended the day down Friday. Natural gas and coal also are likely to gain, and defense stocks continued to rally.
But shares of other companies sensitive to a rise in oil prices fell Friday and may continue to do so, including airline, utility and hotel stocks, Wall Street analysts said. This was in line with the general 54.95-point fall in the Dow Jones industrial average, which reflected concern about general economic data released Friday and the possible inflationary impact of a new oil crisis.
Oil stocks began the day up sharply, mirroring the further rise early Friday in the price of crude oil and seemingly dire news developments, including word that Iraqi troops were massing on the Kuwaiti border with Saudi Arabia. But word later from Soviet Foreign Minister Eduard A. Shevardnadze that Iraq intends to withdraw soon from Kuwait led oil prices to retreat somewhat from their peaks. A round of profit taking in oil stocks quickly set in.
Word from Moscow and other news developments “caused cooler heads to prevail, not necessarily in the Persian Gulf but on the trading desks,” said Bernard J. Picchi, an oil analyst at Salomon Bros.
Atlantic Richfield closed the day off $1.875 at $133.675 in New York Stock Exchange trading. Chevron was off $1.675 to close at $78.75, Texaco closed down $1.25 at $64.675, Exxon dropped 12.5 cents to $53.125 and Mobil slipped 37.5 cents to $66.875.
But Stephen A. Smith, an oil industry analyst for Bear Stearns Cos., said that almost all of the plausible scenarios for what will happen in the Persian Gulf point to higher oil prices, and hence a further substantial rise in stock prices for oil and oil services companies.
If Iraq pulls out of Kuwait, it most likely will leave a puppet government behind, Smith said, one likely to adopt Iraq’s hawkish position on oil prices in meetings of the Organization of Petroleum Exporting Countries. Kuwait had been an important OPEC “dove,” a force for keeping oil prices down. Smith said Iraqi President Saddam Hussein probably also has scared other oil doves, such as the United Arab Emirates, which may now be reluctant to defy him in future OPEC meetings.
“Basically, we’ve lost an extreme price dove in OPEC negotiations and replaced it with a powerful hawk,” Smith said. In addition, “the hawk has probably scared the rest of the chickens up and down the gulf.”
Good news for oil companies, however, is decidedly bad news for airlines. Their earnings are extremely sensitive to the price of jet fuel. The drubbing that airline stocks took Friday helped send the Dow Jones transportation index down 39.23 to 1,039.05.
Samuel Buttrick, an airline analyst at Kidder, Peabody & Co., estimated, for example, that a 10 cents per pound rise in the price of jet fuel could knock as much as $2.50 per share off the annual earnings of AMR Corp., the parent of American Airlines. Buttrick said that until this week he had been predicting total 1990 earnings for AMR of $4.70 per share. AMR stock closed Friday at $54.75, off 62.5 cents.
To some extent, airlines will be able to pass along higher fuel costs to passengers, but the current competitive environment makes it uncertain that the carriers will be able to hike fares enough to cover their increases, he said.
Buttrick said that depending upon how steeply oil prices rise, “it’s not difficult to make a set of assumptions that wipes out the earnings of the (airline) industry” altogether. Airlines with the oldest fleets and highest debt levels may be hurt the most, such as Northwest and TWA, he said. TWA closed at $11.50, off 62.5 cents, while Northwest is privately held.
The hotel and motel industry also may be hurt by higher oil prices. Michael Mueller, an analyst with Montgomery Securities in San Francisco, said higher air fares could translate into lower occupancy rates in hotels. He said a sharp rise in gasoline prices probably wouldn’t have much affect on trips taken by car. However, sudden unavailability of gasoline, as happened during the 1978-79 oil crisis, could cause a substantial drop in motel occupancy rates, Mueller said.
In NYSE trading, Hilton was down $1.75 to $43.50, Marriott was off 75 cents to $19.50, Prime Motor Inns was unchanged at $5.375 and Golden Nugget was down $1.675 to $29.125.
Utility stocks also were off, reflecting general concern about the impact of higher oil prices. However, Barry Abramson, a utilities analyst at Prudential-Bache Securities, said the selloff was mainly an emotional reaction. “Utilities are being dumped along with everything else,” he said, adding that he expects prices will stabilize.
He said the electric power generation industry has substantially dropped its dependence on oil since the early 1970s. He noted that natural gas, an alternative fuel for many generators, probably will rise in price along with oil. But he said price increases, for the most part, can be swiftly passed on to consumers.
