Oil Stocks May Hold Long-Run Promise

THE oil industry has been out of favor with Wall Street ever since Iraqi strongman Saddam Hussein sent his troops roaring into Kuwait in the summer of 1990 and the world slipped into an economic downturn during 1991.

Since then, Middle East supplies have been disrupted, oil prices have lurched up and down in volatile trading sessions, and oil company stocks have slipped to the bottom-end of their 1990-92 price ranges.

Moreover, barring a dramatic upturn in world economic activity, major new demand for oil appears unlikely.

This unhappy scenario explains why Kidder Peabody & Co., in recently examining the various stock sectors in the Standard & Poor's 500 index, could call the international and domestic oil company sectors "underachievers." Nor is the oil industry alone; the entire energy sector - comprising natural gas companies as well as oil firms - is showing signs of "extraordinary weakness," according to Robert Gay, an analyst for Donaldson, Lufkin & Jenrette Inc., (DLJ), an investment house.

But much of the unhappiness with oil company stocks is based on a short-term view, some analysts say. Looking toward 1993 and beyond, a number of oil stocks seem promising, based on both the underlying value of the companies, and industry fundamentals.

Oil prices "should stabilize" for the next few weeks and then hold at or move higher than current levels during the second quarter of 1992, says Paul Ting, an oil analyst with Oppenheimer & Co., an investment house. Earlier this month, Mr. Ting notes, the members of the Organization of Petroleum Exporting Countries (OPEC), announced that they were reducing output.

So far this year, price pressure has been more downward than upward, stemming from falling demand during the recession. In the US futures market, crude oil prices for April and May deliveries dropped slightly, to the $18.50-to-$18.70 range. The current price for West Texas Intermediate, which is the main benchmark for crude oil in the US, is about $18.50 a barrel.

OPEC, particularly Saudi Arabia, wants to nudge prices above that range. At the least, relatively small existing inventories should help shore up the current trading range, experts say. Kuwait was forced to suspend production for a year after the Iraqi invasion, thus holding down global output. Iraq is exporting erratic amounts of oil. Russian petroleum exports are down sharply following the breakup of the Soviet Union.

Ting says overall global inventories are now fairly tight. Total commercial inventory, he says, may be as much as 30 million barrels lower than for all of 1991.

As a result, minor production cutbacks by Middle East producers - such as 500,000 barrels a day - could help push prices upward, concludes John Hervey, an oil analyst with DLJ.

Mr. Hervey recommends domestic US oil companies over the international firms; domestic firms are expected to benefit from the recovery in the US.

Moreover, most major US domestic companies continue to restructure their management operations, thus reducing internal costs. Frank Knuettel and Timothy Woods, oil analysts for Prudential Securities Inc., note that restructuring under way at Occidental Petroleum is having a positive impact on that company. Occidental, for example, has sold roughly $3 billion worth of assets since late 1990; and it appears able to pare down its overall debt since cash flow is substantial.

Restructuring has also been under way at Amoco Corporation, Sun Company, Unocal, Atlantic Richfield, and Chevron Corporation, among others.

Analysts note that there is a "wild card" in the price equation. Slowing growth in Germany and Japan will mean more oil left in the world inventory pipeline, which would exert downward pressure on prices. Still, Ting believes that Japan will have to rebuild inventories later this year, since supplies there are well below 1991 levels. Thus, the long-range fundamentals for the oil industry "do not justify a 'gloom and doom' scenario," Ting says.