Uncertainty surrounds oil producers

Have too much already. Don't need any more, thanks.

Those worldwide sentiments about crude oil have dropped its price below $15 a barrel in 1994, to about the same inflation-adjusted level as before the first Arab oil embargo.


While oil companies' strong dividend yields and acceptable earnings are keeping many stock investors in the fold, worry continues about the uncertainty that surrounds oil pricing.

Saudi Arabia, despite declining global consumption, keeps producing 8 million barrels of crude oil a day to maintain its market share. No one is taking bets on the outcome of a March 25 meeting of the Organization of Petroleum Exporting Countries, at which time it will try to come up with a plan to curb production and boost prices.


Complicating matters, aggressive exploration and production by non-OPEC nations such as Great Britain and Australia are contributing to the bloated world supply. Iraq is waiting in the wings for its opportunity to re-enter the market with its production of 3 million barrels a day.

Oil companies are learning to cope with this dreary scenario.

"Earnings are holding up despite low crude oil prices because the balanced oil companies also have natural gas, chemical, refining and marketing operations, so they do all right whenever one or two segments go well," explained Eugene Nowak, an oil analyst with Dean Witter Reynolds. "Iraq should be out of the oil-producing market for the full year, so I see crude averaging just under $17 a barrel for the year, or $15 if OPEC doesn't reduce production."

There may be little change in the prices motorists see at the pump this year, Mr. Nowak added, the worst possible consequence a gain of only 4 to 6 cents a gallon. Yet within the next three years, pump prices could escalate as OPEC gets closer to its stated target of $21 a barrel.

"Cost-cutting by management and strong dividend yields have helped oil company stocks to be rather resilient," said William Randol, international oil analyst with Salomon Brothers, who believes that if an investor was going to sell oil shares, it should have been done last fall. "There may be a further downside to the oil stocks, especially if interest rates are up, because these are yield vehicles."

At current oil prices, a number of companies may be worth less than their reported assets, which will require them to take write-offs on reserves, Mr. Randol warned.

"I wouldn't commit new sums of money in the oil-company sector, but if you do hold some of these stocks, they still make very sensible core holdings in your portfolio," counseled Thomas Lewis, energy analyst with Duff & Phelps, who sees improvement in U.S. and overseas economies pushing up demand. "The official thought in the industry is that there won't be a crash in oil prices, for oil markets are reacting to a negative perception, rather than actual data or trends."

Crude oil prices have taken a bumpy ride. They averaged about $15 a barrel in 1986, $18 in 1987, $15 in 1988, $18.50 in 1989, $23 in 1990 when Iraq invaded Kuwait, $20 in 1991, $19 in 1992 and $17.50 in 1993.


Some analysts expect a return to higher prices.

"Oil prices will recover in the second half of the year and could rise to $20 a barrel by year's end due to supply and demand," predicted George Baker, domestic oil analyst with Merrill Lynch & Co., who doesn't expect Iraqi oil to enter the market any time soon. "Even if OPEC didn't cut production to raise prices at its March 25 meeting, the subsequent drop in oil prices would be so dramatic that an agreement would come about."