Oil’s Probably Said and Done

Oil prices have climbed sharply in recent months, as a glimpse at any gasoline pump will tell you. But that’s not enough reason for investors to jump headlong into the oil patch, analysts say.

“There are some timely stocks here, but the group is not timely overall,” analyst Robert Mitkowski Jr. of the Value Line Investment Survey says in a new report.

The reason: Mitkowski and many other analysts don’t expect crude oil prices to keep rising throughout 1997. In fact, they see prices dipping by year’s end.

The benchmark crude known as West Texas Intermediate averaged $22 a barrel in 1996 and recently jumped further, to $26 a barrel--its highest level since Iraq invaded Kuwait in 1990 and raised fears of a Middle East oil shortage.

Prices took off last year in response to generally strong demand, a particularly cold 1995-96 winter, lean inventories and delays in Iraq’s return to the market as a major exporter of oil.

But that tight supply-demand equation is expected to ease this year, and oil prices should fall back to $20 a barrel or less in 1997, some analysts maintain.

And for many oil companies, that means “the strength of [their] ’96 earnings will fade as oil prices return to lower levels,” John Hervey of Donaldson, Lufkin & Jenrette Securities Corp. said in a recent analysis.

In recent weeks, though, the rise in oil prices has prompted Wall Street to bid oil stocks higher. The Standard & Poor’s index of major domestic oil producers has jumped 5.2% in the last month, compared with a 4.1% gain in the broader S&P; 500 index.

The stocks’ gains, in fact, are prompting some analysts to recommend that investors take profits and ease up on buying certain oil shares.

For example, analyst Benjamin Rice Jr. of Brown Bros. Harriman & Co. recently cut his short-term rating on Unocal Corp. (ticker symbol: UCL) to “hold” from “buy” because of the stock’s price run-up; it currently trades at about $43 a share. And Merrill Lynch & Co.’s Constantine Fliakos downgraded Exxon Corp. (XON) because the giant oil company surpassed Merrill’s target price of $100 a share; it was recently at $102.

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To be sure, analysts are still recommending selected stocks even as they predict a downturn in oil prices.

Oppenheimer & Co.’s L. Bruce Lanni likes Amerada Hess Corp. (AHC), Atlantic Richfield Co. (ARC) and USX/Marathon Group (MRO) because all have recently completed “major restructuring initiatives and are continuing to benefit from the associated cost savings,” he said in a recent report.

Speaking of sweeping moves, Amoco Corp. (AN) recently announced several actions designed to boost the value of its shares, which is why “the Amoco story has become the best in the international oil group,” according to Morgan Stanley & Co. analyst Douglas Terreson.

Amoco--now trading at about $85 a share--hiked its quarterly dividend, set enhanced profit and cost-cutting goals and said it plans to buy up to $2 billion of its stock over the next two years.

Terreson also touts USX/Marathon, saying its recent price of about $26.50 a share makes it a bargain at a relatively low 13 to 14 times its estimated 1997 earnings per share.

Elsewhere in the oil sector, some companies that focus on refining oil into gasoline and other products have struggled with the rise in crude oil prices because it has raised the cost of their “raw material” and thus eroded their profit margins.

But one, Tosco Corp. (TOS), is being recommended by Donaldson Lufkin’s Hervey because of the company’s pending acquisition of Unocal’s gasoline retail operations on the West Coast for $2 billion.

The deal will generate “additional earnings, cost-savings opportunities and growth prospects” that bode well for Tosco, which is trading at about $92 a share, he said.

One other smaller player, Apache Corp. (APA), is getting a “buy” recommendation from analyst Thomas Driscoll of Salomon Bros. Apache, currently trading at about $38 a share, recently announced a pact to sell natural gas to Egypt, a deal that carries “significant growth opportunities,” Driscoll said.

Times staff writer James F. Peltz can be reached at [email protected]

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Price Gusher

Oil stocks have risen sharply in recent weeks on the heels of rising oil prices, but analysts see crude prices turning down again later this year. The Standard & Poor’s index of major international oil stocks, weekly closes and latest, and a look at some key oil stocks:

Monday: 654.38

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% change Stock Ticker Recent price from 10/31 Amoco AN $85.50 +13 Exxon XON 102.25 +16 Mobil MOB 130.25 +12 Phillips Petroleum P 46.25 +13 Unocal UCL 43.75 +20 Standard & Poor’s 500 +11

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Source: Bloomberg News