Oil firm stocks impressive but merit caution

Slippery when wet: American investors turning to oil company stocks for some good reasons in 1993 must keep in mind there is also reason to be cautious.

Gains of these issues have been steady and impressive this year, fueled by a number of circumstances:


* Prices of oil stocks were depressed as the year began, thereby positioning them for a comeback.

* Strong dividend yields make them attractive compared with low money-market and certificate-of-deposit rates.


* Negative surprises in other groups, such as Philip Morris Cos. in tobacco and U.S. Surgical in health care, have sent investors running to the relative safety of oil.

* As talk of a possible stock market correction grows louder, oil stocks are considered by more investors because of their long-standing image as a defensive play.

Despite those solid points, however, the task of making predictions about these stocks is always a slippery proposition. Factors such as OPEC production and fuel tax proposals can all play a role.

"Oil companies are a volatile stock group and, when you buy an oil stock, you must learn to accept that volatility," warned Thomas Driscoll, analyst with Salomon Brothers.

Buying and holding oil company stocks is prudent for the average investor, he believes, though sophisticated investors with strong feelings about the future of crude oil or natural gas prices could instead be more active traders.

Right now, the recent run-up in oil stock prices is giving some analysts pause.

"A lot of the current price trend in oil stocks has more to do with investors leaving tobacco, consumer and health-care stocks than actual fundamentals in the industry," said John Hervey, analyst with Donaldson, Lufkin & Jenrette. "Current conditions don't justify prices of many stocks, particularly Amoco and Mobil, whose rises are tied mostly to the fact they have natural gas operations and that area is promising."

Crude oil is expected to stay in the range of $20 to $21 per barrel through this year, so it shouldn't be a factor. OPEC has been a bit more cohesive in its actions lately, in part because Iraq's absence from the market has removed a considerable amount of daily oil exports. The Clinton administration's proposed gasoline tax will hurt oil stocks because companies most likely won't be able to pass all the tax through to consumers, Mr. Hervey said.


"Any tax is obviously going to diminish industry prospects, but I don't feel that the proposed gasoline tax is going to have anywhere near the fallout as, say, the proposed excise tax increase on the tobacco industry," said Byron Wien, analyst with Morgan Stanley.

Oil stocks supposedly benefit from rising inflation, but none of the analysts said they believe inflation will be a big factor this year. The main reason to buy oil company stocks now, some believe, is to balance out your portfolio.

But the defensive consideration is still strong. "Oil stocks tend to fall less in a market correction than other groups do, making them more of a defensive play," said Michael Mayer, analyst with Wertheim Schroder & Co. "I suppose some people would look to them as a place to hide."

Analysts are picky about all energy stocks these days, largely because some prices have gotten out of hand. Dividend yield is important.

In Big Oil, Exxon Corp. (4.5 percent yield), Chevron Corp. (4.3 percent yield), Phillips Petroleum (3.8 percent yield) and British Petroleum (2.9 percent yield) are recommended by Mr. Hervey.

USX-Marathon Group (3.7 percent yield), Texaco Inc. (5.1 percent yield) and Occidental Petroleum (4.6 percent yield) are Wien picks. Atlantic Richfield (4.5 percent yield) is a Driscoll selection, while Unocal Corp.


(dividend yield of around 2.3 percent) is recommended by Mr. Mayer and Mr. Wien.

For investors who aren't seriously seeking dividends, Mr. Wien likes oil and gas firm Burlington Resources (1.2 percent yield) and Anadarko Petroleum (0.8 percent yield). Due to solid natural gas prospects, oil and gas exploration firms Apache Corp. (1.1 percent yield), Maxus Energy (no dividend) and Parker & Parsley Petroleum (0.5 percent yield) are Driscoll picks.