Barron's Online: INVESTORS' SOAPBOX PM: Valuation Gush for Integrated Oil

INVESTORS' SOAPBOX PM

Valuation Gush for Integrated Oil

Banc of America Securities
9 West 57th St.
New York, N.Y. 10019
(Tel) (212) 583-8000

WE ARE RAISING OUR 2006 OIL-PRICE FORECAST to $65 per barrel from $58 to reflect unexpected strength. Oil prices are supported above the $50-to-$60 per-barrel range on the recognition that near-term geopolitical pressures can sustain petroleum product pricing.

We are lifting the 2007 oil-price forecast to $55 per barrel from $45 as a gradually improving supply/demand balance eases — but does not collapse — prices from this year's peak.

Valuations for the integrated oil sector have not tracked the rise in crude and refining margins, providing a buying opportunity even as the commodity peaks. As oil prices pull back it should offer a catch-up period in performance.

We are increasing our earnings estimates by 6% in 2006 and by 20% in 2007, resulting in sustainable earnings growth through next year. Our higher commodity outlook and year-end reserve valuation result in a 10% lift to price targets in dollar terms.

Despite year-to-date performance, valuations remain compelling even with short-term risk of a pullback in oil prices. We see the best value among the Majors and U.S. integrated oil companies with average upside potential of 10% to 12%, compared to 5% downside potential for the European oil sector based on $45-per-barrel midcycle oil prices. Exxon Mobil is still top pick.

The 9% increase in oil prices over the fourth quarter partially offsets significantly weaker U.S. natural-gas prices and global-refining margins. Accordingly, earnings are expected to be flat from the 2005 fourth quarter but still up 36% year over year. Mostly now unhedged Amerada Hess should see earnings increase 28% quarter over quarter and more than double from last year. Exxon Mobil, BG Group and Eni look poised to beat consensus estimates by more than 5%, while Royal Dutch Shell and Total may modestly disappoint.

We are downgrading Statoil to Neutral from Buy despite the associated price-target increase driven by our higher commodity deck. Year-to-date, Statoil is up 44% versus a 5% rise in the S&P 500, outperforming the 14% increase for the major oil companies and 22% increase for the U.S. integrated oil companies.

— Daniel L. Barcelo, CFA

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