The Surprising Softness in Oil Company Stocks : Energy: Recession fears, a mild winter and a feeling that a Gulf war would not put a dent in world crude supplies have prompted investors to stay away.


Fears of war in the Persian Gulf have kept gasoline and heating oil prices uncomfortably high, but the stocks of some big oil companies have recently been sagging like Iraqi President Saddam Hussein’s popularity ratings around the Saudi royal palace.

Have investors discovered some intelligence to suggest that Saddam Hussein isn’t serious, after all, about a war that could disrupt crucial Mideast oil supplies?

Not quite. The stocks have been drifting downward for a host of reasons, including prospects of a world recession, a re-evaluation of the threat that war may pose to Gulf oil fields and routine, end-of-year stock sales for tax purposes. Together, the factors suggest that the group will probably remain moderately priced for some time, with or without a general conflagration in the Gulf.

Knowledgeable investors in oil stocks are always struggling to look beyond the current market turbulence to the longer-term trend in oil prices. What they see today is the specter of recession at a time when the world is awash in petroleum.


Even with virtually no contribution from Iraqi and Kuwaiti supplies, OPEC countries are now producing some 23.6 million barrels a day, compared to the 22.5 million they were producing before the crisis. And world demand is expected to slide to 52.5 million barrels a day this quarter, from 54 million barrels in the fourth quarter of 1989, notes George Friesen, analyst with Deutsche Bank Capital in New York.

Many analysts believe that oil prices will probably stabilize in the range of $18 to $22 a barrel after the Gulf crisis subsidies, compared to the current $25 to $30 trading range for the benchmark West Texas Intermediate crude.

In addition, the winter has so far been mild.

Oil investors don’t believe, as they did just after the August invasion, that a war would threaten Mideast oil supplies. The prevailing view, says Paul Wright, analyst at One Federal Asset Management in Boston, is that Saudi oil fields aren’t particularly vulnerable and that even if an errant missile did pierce their defenses, the damage could be quickly repaired.

The International Energy Agency, which represents top industrialized nations, has also said its members would release petroleum from reserves if a war broke out. Such a move could further ease any shortage.

For these reasons, “there’s been a general metamorphosis in people’s thinking over the last three months,” Wright said.

Oil stocks have slid too because many institutional investors have decided that they bought more of the shares in the early stages of the crisis than they needed. For many, energy stocks represented 10% to 15% of their portfolios; many of these investors have now trimmed their holdings to 5% to 10%, said a money manager who asked to remain unidentified.

For these reasons, oil stocks that once were trading at price/earnings multiples substantially higher than that of the Standard & Poor’s 500-stock index are now lagging. A number are going for 10 or 11 times projected 1991 earnings, compared to an overall S&P; 500 multiple of 13, according to consensus earnings estimates compiled by Zacks Investment Research in Chicago.


Of course, some oil companies are far more vulnerable than others to falling crude oil prices because they derive more of their revenue from crude production and less from refining and marketing. Unocal and Phillips, both of which fall into this category, have seen their stock prices plunge 30% since August, notes Deutsche Bank’s Friesen.

At the other end of the spectrum are integrated oil companies, which are insulated from the shocks of oil price declines because their refining and marketing profits rise as crude prices fall. In this group are Exxon, Mobil, Chevron, Texaco and Royal Dutch Shell, says analyst Wright.

Atlantic Richfield falls somewhere in between the two categories, he adds.

Friesen notes that on an annualized basis, a $1-a-barrel rise in the price of crude would add 35 cents a share to Chevron’s production earnings. But a $1-a-barrel decline adds $1.38 a share to what the company would earn from refining and marketing--meaning that the company would be ahead by more than $1 a share after such a decline.


For that reason, Chevron might be a good stock bet in the next three to six months, he says. On the other hand, a longer-term investor might be tempted to buy Unocal and Phillips, he says, because of the widely held expectations that over a period of years, increased world industrialization and diminished oil supplies can only mean higher oil prices.

In Wright’s view, the oil stocks “are now about fairly priced.”

And institutional investors are more bullish. Paul Borenstein, with Travelers Insurance Management Co. in Hartford, Conn., believes that through mid-1991 oil stocks will perform well relative to others in the floundering economy. He expects also to see good dividend increases soon, including one from Arco, which he believes may soon hike its dividend to $5.50 or so from the current $5.

The oil stocks “are a good defensive bet for your portfolio,” he says.



How key oil company stocks have fared this year compared to the Standard & Poor’s 500 index of major stocks.

52-week Fri. Change Div. Stock high/low close yr. to date yld. Atlantic Richfield 142 1/4-105 1/2 122 +9.5% 4.1% Chevron 81 5/8-63 1/8 71 1/2 +5.5% 4.3% Phillips 31 1/8-22 1/2 26 3/8 +4.5% 4.3% Exxon 55 1/8-44 7/8 50 3/4 +1.5% 5.3% Royal Dutch 87-70 1/2 76 3/4 -1.0% 5.6% Texaco 68 1/2-55 58 1/8 -1.3% 5.5% Unocal 34 1/2-24 5/8 27 -9.2% 2.6% Mobil 69 1/2-55 7/8 56 1/2 -9.8% 5.1% S&P; 500 369-295 332 -6.1% 3.7%