Straining Energy System Points to Rising Stocks

by Rick Olivere, CFA

3:46:00 PM October 10, 2000 GMT

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The International Energy Agency (IEA) stated in its monthly Oil Market Report issued today that the energy system is strained and lacking in flexibility. With inventories of heating oil in the US more than 35% below a year ago, a cold snap occuring in the Northeast, and tensions rising in the Middle East, we believe oil and natural gas prices are likely to remain higher than generally expected. These conditions also suggest the possibility of spikes in energy prices if there are any supply disruptions or extended periods of below normal temperatures.

We are especially drawn to the disconnect between the rise in oil and natural gas prices since the beginning of the year from $25.60 per barrel and $2.32 per million cubic feet respectively, and the unchanged stock prices of Chevron [CHV: NYSE] and Texaco [TX: NYSE].

The IEA said today that the energy system is "stretched and lacks flexibility. Marine freight rates have surged on increased demandRefinery utilization in key markets is running close to capacity, with discretionary maintenance deferred. Major crude oil and product pipelines are full.

Our Buy recommendations and target prices of energy and energy service stocks included in the following table.

Energy and Energy Service Recommendations Ticker Price Price Potential 10/10/2000 Target Gain Oil Producers/Refiners Amerada Hess AHC $68.38 $80.00 17% BurlingtonResources BR $37.38 $71.00 90% Chevron CHV $87.38 $110.00 26% Forest Oil FST $14.94 $32.00 114% Occidental Petroleum OXY $21.50 $40.00 86% Texaco TX $54.75 $75.00 37% Valero Energy VLO $33.25 $50.00 50% Energy Service BakerHughes BHI $36.31 $45.00 24% CooperCameron CAM $73.81 $85.00 15% Diamond Offshore DO $40.13 $55.00 37% Friede Goldman Halter FGH $6.13 $20.00 227% Grey Wolf GW $ 5.44 $12.00 121% Halliburton HAL $46.19 $55.00 19% Marine Drilling MRL $26.38 $35.00 33% Nabors Industries NBR $53.51 $70.00 31% Parker Drilling PKD $6.63 $20.00 202% Pride International PDE $27.13 $52.00 92% Rowan Companies RDC $28.81 $70.00 143% SantaFe Internat. SDC $41.56 $82.00 97% Schlumberger SLB $84.00 $100.00 19% Varco International VRC $19.63 $30.00 53%

The IEA expects global demand to grow by nearly 3m barrels per day (b/d) in the fourth quarter, to 78.4m b/d. Preliminary figures for seven key Organization of Economic Cooperation and Development (OECD) markets showed an increase of 2% (700,000 b/d) in demand. World oil production averaged 77.4m b/d in September, an increase of 380,000 b/d from August.

OPEC crude oil production rose by 290,000 b/d to 29m b/d, accounting for most of the rise in world production. We believe this level of OPEC production points to the vulnerability of the global economy since excess crude oil production capacity is only about 3mm b/d and resides in two countries: Saudi Arabia and the United Arab Emirates (UAE). The Gulf News of Dubai recently reported that the UAE has idle capacity of 500,000 b/d above its current production quota of 2.289m b/d.

http://www.ideaadvisor.com/ig/international.asp

-- Martin Thompson (mthom1927@aol.com), October 10, 2000