United States energy firms enjoy soaring oil prices - sort of
© 2000 Reuters Limited
September 11, 2000
Story by Paul Thomasch
NEW YORK - At home in Houston, Bob Rose is kept awake at night fretting about high oil prices.
As chairman and chief executive of oil drilling company Global Marine Inc. , his worries may seem out of place. After all, the company's stock has doubled this year thanks to red-hot energy prices, while its offshore oil and natural gas rigs are once more in high demand.But Rose and other industry experts say that soaring oil prices - which hit 10 years highs of more than $35 a barrel this week - aren't necessarily a dream come true for either energy company executives or stock market investors.
For one, the sharp rise in oil prices follows an equally sharp fall in the late '90s, marking one of the most volatile stretches in the industry's history.
"As I stand back, the one thing that seems to have changed most in the last three years is that we've seen a huge and pronounced increase in oil price volatility," said Mark Gilman of ING Barings.
"Investors don't like volatility, which in their minds is tantamount to risk."
DEPRESSING DEMAND
Fadel Gheit, an analyst with Fahnestock & Co, contends that his studies show investors are far less worried about whether oil prices are at $20 or $30 a barrel than they are about the direction in which oil prices are moving.
"At $35 a barrel, if you are a betting man, would you bet on oil going up $5 or down $5?" said Gheit.
Consequently, the largest U.S. oil companies - from Exxon Mobil Corp. to Chevron Corp. to Texaco Inc. - have seen little change in their stock prices even as crude prices hit decade highs.
For Global Marine's Rose and other energy executives, the risks of $35 a barrel crude oil hardly overshadow the benefits of big profits and excess cash.
Nevertheless, Rose said this week, there is a downside. One of his concerns is that high oil prices could slow the economy, not only in the United States but in Asia, where an economic collapse in the late '90s helped send oil prices into a tailspin.
Another is that consumers could respond to high energy costs by easing back on consumption of gasoline or heating oil, which coupled with a rise in production, may lead to trouble for the oil industry.
"All of a sudden if demand declined, it could really send the industry into a tailspin," said Gheit. "The higher prices go, the more risk companies face when they come down. From $33, falling prices could lead to the mid-teens in this environment.
"Not many companies can sustain that drop."
MAKING HAY
Burlington Resources Inc. Chairman and Chief Executive Bobby Shackouls points to another problem associated with high oil and gas prices. "They give us some tremendous opportunities, but they also mean that you can't buy anything right now," he said.
ING Barings' Mark Gilman agrees. "There's no one in their right mind that is going to consider property or company acquisitions in this environment," he said.
But industry experts are also quick to point out the obvious - soaring crude and gas prices also mean big rewards for an oil industry which suffered through oil prices of $11 a barrel in late 1998.
Exxon Mobil, for instance, has seen record profits for two consecutive quarters. Indeed, the $4.15 billion it earned in the second quarter is the highest ever in U.S. corporate history, according to the company.
And while investors have steered clear of the so-called major oil companies, some of the medium-sized exploration and production companies have been stars of the stock market this year.
Raymond Plank, chairman and chief executive of Apache Corp. , said this week that his company's stock could rise to $100 a share. Already this year, it has risen from $36 to $64 on the New York Stock Exchange. Competitors such as Anadarko Petroleum Corp. and Devon Energy Corp. have enjoyed a similar ride.
"This industry is so volatile that it is imperative to make hay while the sun shines," said Michael Young, an analyst with Deutsche Banc Alex.Brown, who adds that it's a once in a lifetime opportunity to have both oil and gas prices at such highs.
But, he noted, "all of these companies also know that at some time the prices are going down."