Energy, Energy Service, Natural Gas &amp; Oil Sectors

The Bear Market Has a Slim Silver Lining

Top 650. Aug 22, 2001 6:04 PM

» JenL_2 - Oil Sector - Bear Market Silver Lining?

More Oil Sector TA - excerpts from 8/22 Getting Technical column in Barron's:

By Michael Kahn

For weeks, Getting Technical has been pointing out the less-than-inviting landscape in the stock market -- so much so, in fact, that we have probably sounded like a broken record at times (or a broken CD, for people who are too young to remember Lps).

But so far, events have vindicated our skeptical stance. On Tuesday, the Federal Reserve came through with its seventh interest rate cut of the year -- only to be greeted by a Bronx cheer from the equity markets, which promptly sold off.

Coming on the heels of last week's trading range breakdowns by the Nasdaq Composite index and the Standard & Poor's 500, it may be just a matter of time before other indexes, like the S&P 400 Midcap index, follow suit....

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OK, so where is the silver lining?

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Last week (see Getting Technical, "Charting the Calm Before the Storm," August 16), we highlighted the emerging strength in the crude oil market and said that has lit a fire under the energy sector.

Domestic oil stocks in particular have perked up, and even as the oil drillers languish, stocks like USX Marathon Oil, Occidental Petroleum (see chart 4) and Phillips Petroleum are in short-term rising trends. They have shown good performance since early 2000, too.

Chart 4
<img src="/files/mysites/jen2/ta822-4.gif" width=449 height=310>

Bigger names from the international oil group, such as Texaco, are also up from their July lows, although not as strongly, so there is life in the energy patch. All the talk about energy prices coming down is just not borne out in the charts..

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The point is, there are opportunities within the current bear market in the indexes in the oil sector, real estate and gold. Notice the theme of natural resources and hard assets? Even forest and paper stocks have done fairly well over the past few months.

Just remember that the bear has not yet gone away.

Michael Kahn is Chief Technical Analyst for BridgeNews http://www.bridge.com and the author of two books on technical analysis, most recently Technical Analysis: Plain and Simple. He is also Director of Marketing for the Market Technicians Association http://www.mta.org and can be seen regularly on such financial news broadcasts as PBS's Nightly Business Report and Yahoo! Finance Vision http://www.vision.yahoo.com

Subscribe to WSJ & Barron's Online @ http://www.wsj.com

.....Jen

-- posted by JenL_2

Top 651. Aug 23, 2001 5:53 AM

» lcha - Re: Oil Sector - Bear Market Silver Lining?

In response to message posted by JenL_2:

I posted an article from the Houston Chronicle about the strong Houston housing market.

The Houston housing market is not this strong because oil companies are losing money. Capital budgets are still intact and there are no oil sector layoffs. Capital budgets were increased only modestly the past couple of years and oil companies payrolls are very thin as it is so I would not expect any negative surprises in these critical areas.

Unfortunately, most of my E&P stocks are not showing the short term upward trend as the above graph on Occindental

-- posted by lcha

http://www.suite101.com/discussion.cfm/i...

Top 652. Aug 24, 2001 10:10 PM

» JenL_2 - Lumber & Natural Gas

On the "US Stock Market" thread we've talked about the Tariff that Bush is proposing on import of Canadian softwood into the US...

A Tariff on Canadian Lumber may have an effect on the NG sector as well.... This from 8/20 WSJ:

Canadian Minister Links Gas Pipeline To Resolution of Lumber Trade Dispute

Associated Press

VANCOUVER, Canada -- The U.S. can't expect Canadian cooperation on a natural-gas pipeline from Alaska to the lower 48 states if it continues to restrict trade in Canadian softwood lumber, a senior federal cabinet minister said Monday.

"If the Americans want to continue in this path, it's not going to be business as usual," said Fisheries Minister Herb Dhaliwal, whose Vancouver riding includes a sawmill shut down after a U.S. countervailing duty was imposed on Canadian softwood.

"If the Americans don't want to buy our lumber ... I don't know if we want to let them pump natural gas from Alaska into the U.S., into the southern 48."

It was the strongest statement so far from a federal minister since the U.S. Department of Commerce slapped a preliminary 19.3% punitive tariff on all softwood exports from Canada except from Atlantic provinces.

The U.S. government accepted claims by American lumber producers that Canadian softwood, which takes 34% of the U.S. market, had a price advantage due to subsidies through low provincial timber-cutting fees.

International Trade Minister Pierre Pettigrew, who vowed again Monday that Canada would fight the duty by any judicial means necessary, has balked at linking softwood to other trade issues.

But Mr. Dhaliwal suggested Canada might not cooperate with the proposed gas pipeline, which would run either through the Yukon and northern British Columbia or the Northwest Territories and Alberta.

"Either we have free trade or we don't. I think we have to send a strong message to the Americans that simply this is not acceptable," he said.

Subscribe to WSJ Online @ http://www.wsj.com

.....Jen

-- posted by JenL_2

Top 653. Aug 25, 2001 9:42 AM

» JenL_2 - Oil & NG Service Sector

In 8/27 Barron's this value fund manager is looking for value in the Oil & NG Service Sector rather than E&P:

Troubled Water

By Rhonda Brammer

Promise not to tell anyone and we'll let you in on a secret: This has been one tough year to make money in the stock market. While the bluest of the blue chips in the Dow 30 may be down only 3%, the broader market, as measured by the S&P 500, is 10% lower and the tech-laden Nasdaq is off a very nasty 22%. And if you want to get really depressed, look at the Nasdaq 100, purportedly the biggest and brightest of the Nasdaq crew, down a stupendous 33% so far this year.

So Eric Ende, president and chief investment officer of Los Angeles-based Source Capital, a $470-million closed-end fund, isn't complaining about his portfolio being up 16% as of mid-August, and neither, we imagine, are his shareholders. Helping his performance is that Eric is a value player -- his five-year annualized return is a solid 19.6% -- and, what's more, of the 35 or so names in his portfolio, a healthy chunk of them are small-caps. (He also manages two small open-end funds, FPA Perennial and FPA Paramount.)

When you combine value and small caps, what you get is the place-to-be in the quixotic and treacherous 2001 market. Thus the Russell 2000, a popular proxy for smaller stocks, is off a mere 2% or so for this year. But that comparatively stalwart showing owes everything to the measure's value component: The Russell 2000 growth index is down 14% year-to-date, while the Russell 2000 value index is ahead 10%.

Eric's strength is not simply being in the right place at the right time. More important is his knack of picking the right stocks. For example, his choices for Barron's back in early December -- a little trucking outfit called Knight Transportation and a replacement auto-parts dealer with the moniker O'Reilly Automotive -- by July had doubled and they are still ahead more than 80% and 65%, respectively.

So, what's he buying now? In the past month, he has made new purchases in one and only one area: energy. And what he's buying, as it happens, are not exploration and production outfits but, rather, service companies.

Eric is bullish on the long-term outlook for oil and gas -- "for a long time you've had gradually increasing demand for oil and gas, and a declining reserve base, which ought to lead to lots of exploration activity." He's particularly keen on deep-water drilling.

But he doesn't expect an overnight surge in the price of either oil or gas. In fact, he's more than a little restrained on near-term prospects -- even when he talks about oil, which, though down some 25% from its peak, at around $27 a barrel is hardly a disaster.

Oil could bottom somewhere in the mid-20s, he reckons, but if OPEC "stops sticking together," he wouldn't rule out oil in the low 20s or even a touch lower.

And the price of natural gas, as the accompanying chart so graphically illustrates, has "fallen apart," plunging from nearly $10 per million British thermal units to under $3.

"Companies are building inventory," he notes. The weather hasn't been terribly hot -- winter is months away -- "gas drilling is declining both onshore and in the shallow Gulf." And as utilization falls, "the rates for jackups are just crumbling."

So, why in the world is he buying energy stocks?

"People who buy and sell these stocks are way ahead of the curve," he explains, adding that he believes the price of natural gas may be near its low and that investors are already discounting oil in the low $20s, maybe even the high teens. "I think the long-term trend for energy is intact and that an awful lot of bad news is already in the price of the stocks."

Both of his small-cap favorites are down roughly 40%-45%, and over the next 12-18 months, he believes, both could appreciate sharply, doubling or thereabouts.

<img src="/files/mysites/jen2/ngbarrons8-272.gif" width=238 height=238 align="left"> New Orleans-based Tidewater, with a stock market value of $1.8 billion, is the No. 1 operator of workboats worldwide. The company enjoys a debt-free balance sheet, a solid presence in international waters and a first-class management team, in Eric's view, that has imposed strict financial discipline and has been admirably restrained in adding capacity.

In spite of a blowout first fiscal quarter, ended June -- the company reported 69 cents a share (above Wall Street's estimates) versus 15 cents in the year-earlier span -- shares closed Friday at 33, down from a high of 52.

While Tidewater is hardly immune to weakness in the Gulf of Mexico, day rates there, Eric believes, should continue to rise modestly as below-market contracts are rolled over. Moreover, Tidewater's day rates in international waters, where it has two-thirds of its fleet, show every indication of continuing their steady upward climb.

For fiscal 2002, ending March, Eric sees earnings close to $3, compared with last year's $1.35, and something over $3.50 in March '03. "So you're paying a pretty modest multiple for an industry leader."

His 12-18 month target? Something in the mid-60s.

<img src="/files/mysites/jen2/ngbarrons8-273.gif" width=238 height=238 align="right"> Houston-based Cal Dive International, with a stock-market value just over $500 million, boasts an eclectic mix of businesses, a brisk record of growth and, for an oil-service company, surprisingly high returns on capital.

Over the past five years, sales have grown a compounded 24% a year, while net has risen 29% and earnings per share, 17%. Cal Dive's return on the capital used in its business has averaged 18%, nearly three times the 6.5% of its peers.

Such attributes Eric found compelling, particularly when he could buy Cal Dive shares at 17, down from a high of 32.

Focusing on projects in the Gulf of Mexico, in shallow water, Cal Dive performs traditional subsea services, including air and saturation diving and salvage work. In deep water, it operates a fleet of technically advanced dynamically positioned vessels offering everything from pre-drilling to decommissioning services.

Thanks to its expertise in dismantling platforms in depleted fields -- as required by law when sites are abandoned -- Cal Dive has built an oil and gas production company by buying old wells, pumping them for the past year or two and then doing the salvage and abandonment work.

In each of the past two years, Cal Dive has doubled its oil and gas revenues, but being a producer is tough when prices suddenly crater. Cal Dive's second-half earnings are expected to fall a good piece shy of year-ago numbers.

Even so, for all of this year, Eric is looking for 85-90 cents a share, up from last year's 72 cents, and at least $1.20 in 2002.

The balance sheet is solid, with book value north of $6.50 a share and net long-term debt a mere 50 cents a share.

There's a kicker, too, that Eric thinks is largely being ignored. Cal Dive owns a 20% interest in Gunnison, a deep-water discovery of Kerr-McGee, that's slated to begin production in late 2003.

"But insofar as their vessels are used in developing the field and installing the platform," he says, "they'll begin getting revenues much sooner." And this is a significant find -- "the total field is a couple of hundred million barrels." He calculates that the present value of Cal Dive's 20% stake is worth $6, perhaps even $7 a share. So you're essentially buying the stock at $10 or $11.

The company has "made money in industry downturns." Hence, the downside is limited, he argues, "and this stock has lots of upside." In a couple of years, he sees it selling in the $30-$40 range.

Subscribe to WSJ & Barron's Online @ http://www.wsj.com

Lcha - You probably have first-hand knowledge or even working relationship with the companies mentioned in this article. Do you agree with the author?......Jen

-- posted by JenL_2

http://bigcharts.marketwatch.com/industr...

Top 654. Aug 25, 2001 10:17 AM

» JenL_2 - Re: Oil & NG Service Sector

More on Cal Dive (CDIS)

Cal Dive website:
http://www.caldive.com/index.html

Some very nice company videos at the website:
http://www.caldive.com/video.html

<img src="http://chart.bigcharts.com/industry/bigc..." width=527 height=299>
CDIS vs EQS (Oilfield Equipment & Services Index)

At BigCharts.com CDIS is listed in the 10 worst performing stocks in the Oilfield Equipment & Services sector for the last 3 MO:

.....Jen

-- posted by JenL_2

Top 655. Aug 25, 2001 12:02 PM

» JenL_2 - Value vs Growth

Rob Lyon (Institutional Capital value manager)likes large cap value stocks including the energy sector. This from 8/27 Barron's:

No Flash in the Pan

Value stocks will continue to outpace growth, says a money manager who should know

by Sandra Ward

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Barron's: Rob, you picked the inflection point just right last year.

Lyon: On a rolling one-year basis, value has done 29% better than growth. And I think the outlook for value stocks is still better than growth stocks.

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Q: How about another pick?
A: Another low P/E stock that also has a strong prospect of increasing returns is another energy company, Kerr-McGee. The stock is around 60. They are going to earn over $7 this year and over $6 next year. It trades at around 10 times earnings. You can expect double-digit volume growth for the next several years. They've got an excellent deep-water exploration program that spans the Gulf of Mexico, North Sea, Gabon, China and Brazil. These are all hot exploration areas. This has been a sleepy older E&P company that has gotten its act together in the last couple of years. And really has a very exciting exploration program that is coming on a fairly small base compared to the super majors. Given its size, it could also become a takeover candidate if the big oil companies continue to consolidate.

Q: This company is going to have lower earnings next year as well?
A: Yes. That's already been kind of baked into the stock price. What is exciting is the strong volume growth and the possibility for more exploration success.

Q: What's your target price?
A: We are looking for north of 80.

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Q: What's else is in the portfolio?
A: Another stock we like in the same mode of low P/E-improving returns is Entergy. It's the former Middle South Utilities, not one of the new independent power producers. It is one of the 10 largest regulated utilities out there. Their primary service area is Arkansas, Louisiana, Mississippi. We see Entergy earning about $3.45 next year, so it trades at a multiple of about 11 times and it's growing at about 7%-8%. Of the $3.45, about $2.50 should come from the regulated utility, which is very steady. We see them earning around 60 cents from their deregulated nuclear business. They're the No. 2 nuclear producer in the country after Exelon. Originally, they had their own nuclear power in the South, but they very opportunistically bought plants from Con Ed up in your area in the late 1990s. They were actually the first company that bought somebody else's nuclear plant. They bought the Pilgrim plant, I think in 1999, for peanuts and they've added three more to that at very low prices, a fraction of the original cost to build these facilities. By and large, they have locked in the prices for power they are selling for the next couple of years, so you are not going to see any big negative swing if spot prices are going up and down. And they don't have any exposure to California.

Q: Is this also a bet that nuclear power makes a big comeback?
A: Yes. We are not going to see any more nuclear power plants built. But there are countries -- important, civilized countries like France and Japan -- where nuclear power has been the primary source of energy. Public opinion is such now that it's more widely understood to be part of the mix. The incremental cost of nuclear energy is very low, meaning the construction costs are high but the ongoing costs are low. Then, of course, it is extremely clean. And hopefully we have mastered the ability to manage them. You will see more consolidation of the ownership of nuclear power plants, and Entergy has been a very opportunistic buyer. Their profits in the nuclear area have been growing about 25% a year. They also have a very strong joint venture with Koch Industries in energy trading and marketing. That's been growing nicely and is very successful and contributes about 35 cents of earnings. We have a target price of 48, which is 14 times earnings, and that's the kind of relative P/E that's more consistent with where strong electric utilities have sold in the past. That's pedestrian merchandise in a hot dot.com environment, but that is not where we are anymore.

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<img SRC="http://chart.bigcharts.com/industry/bigc... KMG&comp=ONG:171576&rand=8626" width=527 height=316>
Energy Index (ENE), Oil & Gas Index (ONG), Kerr-McGee (KMG), Entergy (ETR), S&P500 3 YR Chart

.....Jen

-- posted by JenL_2

Top 656. Aug 25, 2001 1:38 PM

» lcha - Re: Oil & NG Service Sector

In response to message posted by JenL_2:

No Jen, I'm in onshore seismic and these companies are offshore production/exploration and I don't know much about them. They would not be my clients either. I'm just glad to se someone is bullish on ANY part of energy right now. I'm feeling kinda lonely.

-- posted by lcha

Top 657. Aug 26, 2001 5:09 PM

» lcha - Barrons bear energy report response

To the Editor:

In your August 6 cover story, "Too Much Power," Harlan S. Byrne failed to take several critical factors into account regarding the U.S. energy supply.

Due to limitations in electricity transmission, the supply/demand picture must be viewed regionally and not simply as a national collective of current-generation facilities and announced plans for new plants. Even during a summer of relatively low economic growth and mild weather, several regions have set records for peak demand, and we see strong additional growth in many areas.

The ability of the industry to add new generation is constrained by several factors not mentioned in the article, such as a shrinking pool of skilled labor, financing issues, limited water supply, access to fuels and grid connection -- limitations that have already caused construction delays this summer. Duke Energy estimates that the construction labor shortage severely impairs the ability to build more than 35,000 megawatts of new generation each year in the United States -- far short of the 290,000 new megawatts that Barron's predicts will be built over the next six years.

We must consider the effects of demand growth and the age of current power plants. Even with a slower economy, we see peak electricity demand growing at 2.4% a year. Given reserve margins across the country, Duke Energy forecasts the industry's need to invest over $120 billion to add some 220,000 megawatts of generating capacity by 2010. These estimates do not account for replacement of older, less efficient generating units. Nearly 100,000 megawatts of thermal generation capacity in North America is over 40 years old. Some of this capacity will certainly be retired in the next decade, providing opportunity for additional generation.

Energy supply and economic vitality are inextricably linked. Years of lack of investment in exploration and production, pipelines, power plants and electric transmission have caught up with us. I'd caution against a false sense of complacency.

Richard B. Priory
Chairman, President and CEO
Duke Energy
Charlotte, North Carolina

-- posted by lcha

http://www.thestreet.com/comment/streets...

Top 658. Aug 26, 2001 6:08 PM

» lcha - Energy Roundtable

Below is a link to an energy roundtable discussion from Thestreet.com:

-- posted by lcha