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OPEC pact helps oil stocks
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June 21, 2000: 5:00 p.m. ET
High oil prices should lift oil, drilling stocks while not hitting transports hard
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NEW YORK (CNNfn) - Investors could take cheer from OPEC's decision to modestly increase oil production, even if consumers and other oil users aren't likely to see much relief from prices.
The stocks of oil companies and oil service firms that handle drilling and exploration are well positioned for gains with Wednesday's announcement, according to analysts who follow those sectors. And while some oil-sensitive sectors - like transports - might not see the relief for which they were hoping, analysts in those sectors say there are other issues like mergers that are stirring stocks there.
 The integrated oil companies have seen strong profits since prices started to climb earlier this year, but the markets have yet to fully appreciate those gains due to concerns that prices could come down as fast as they went up, according to oil analysts. That concern should lessen with Wednesday's announcement, they said.
"There's significant upside for the entire sector. The earnings potential will be huge going into next year," said Bruce Lanni, analyst with CIBC World Markets. "They'll be able to pay down a significant part of debt, buy back stock."
Leading U.S. oil stocks started climbing late Wednesday morning in New York, driven by reports out of Vienna ahead of the announcement. Exxon Mobil Corp., Texaco and Chevron all posted gains on the day.
Shares of Dow component Exxon Mobil (XOM: Research, Estimates) gained 11/16 to 83-15/16, while Texaco Inc. (TX: Research, Estimates) rose 7/8 to 57-3/4, and Chevron Corp. (CHV: Research, Estimates) climbed 1 to 91-1/4.
Oil-induced recession could lower demand, prices
The danger for the oil companies and for OPEC is if prices stay above $30 a barrel it could plunge the world's developed economies into recession, driving down oil demand and prices.
"Absolutely, I'm worried about that," Lanni said. But he said as long as prices don't fall below much below OPEC's new target of $25 a barrel, the oil profits and stocks should stay strong. And he doesn't believe that prices are in any immediate danger of going below that level.
Fadel Gheit, oil analyst with Fahnestock & Co., believes that the $25 a barrel target is a realistic one, and that it would not cause a recession if prices stay that high.
"We can live with $25. I think it's good for everyone," he told CNNfn Wednesday afternoon shortly after the announcement. "They do not want to see prices over $30. If we can get prices in $27, $28 range, that will curtail some of the pressure and some of the criticism."
He said no matter what happens with production, it's difficult to forecast prices due to uncertain demand.
"Demand continues to be strong and we're at the beginning of the driving season, and we expect demand to continue to move higher," he said. "I don't think we have a magic formula to guarantee that a million barrel additional production will get us there (to $25 a barrel). The other side of formula is demand and nobody really knows how to forecast demand for sure."
Oil drillers have even more profit upside
Oil service stocks, such as Halliburton Co. (HAL: Research, Estimates), Schlumberger Ltd. (SLB: Research, Estimates), Baker Hughes Inc. (BHI: Research, Estimates) and Weatherford International (WFT: Research, Estimates), are also likely to see gains with the continued strong oil prices, said Robin Shoemaker, an analyst in that sector.
 He said that like investors, oil companies have been cautious about investing in additional exploration this year, waiting to see how well current price increases held. He believes that as long as prices stay above $20 a barrel, the industry will see a 10 to 15 percent increase in exploration and drilling expenditures next year. And he believes there is therefore more upside earnings potential for the service companies than there is even for the oil companies.
"One sector benefited immediately from the increases and is already seeing record profitability," he said. "The other is just starting to benefit from the prices."
The leading stocks in this sector also saw gains on reports of the agreement.
Transports weathering oil prices
One sector that has seen stock prices hurt by the run-up in oil prices is transports, such as airlines, truckers and express delivery companies. But in many cases higher fares or rates have helped many of those companies to recoup some of the higher costs, while others have been able to use long-term fuel contracts to mitigate past increases.
Analysts say that investors generally punished the whole sector earlier in the year when oil prices started to rise, without regard to how each company was positioned to deal with the oil increase. But the worst of that punishment appears to be over, although the Dow Jones transportation average slipped slightly in Wednesday trading.
 While a big drop in fuel prices would spur transport stocks, many believe that current profits and prices can be maintained as long as traffic remains strong.
"When you look at airline industry fundamentals, traffic released a week or so ago is extremely strong," said Ray Neidl, airline analyst with ING Barings. "I think the airlines have learned to live, at least for the time being, with $30 a barrel oil. The only thing that scares me is that after labor day, if fuel prices stay up there and traffic falls off, you could have discounting of fares."
Airline stocks have been roiled since the announcement last month of plans by UAL Corp. (UAL: Research, Estimates), owner of industry leader United Airlines, to buy US Airways Group Inc. (U: Research, Estimates). That has hit UAL's stock along with that of AMR Corp. (AMR: Research, Estimates), owner of American Airlines, and Delta Air Lines (DAL: Research, Estimates), which investors believe will be forced to make acquisitions of their own.
The possibility of mergers is also spooking railroad stocks. The U.S. Court of Appeals heard arguments last week on whether to lift a moratorium on mergers in that sector imposed earlier this year by the Surface Transportation Board when it was asked to consider a deal between Burlington Northern Santa Fe Corp. (BNI: Research, Estimates) and Canadian National Railway Co. (CNI: Research, Estimates).
"The investment community has developed an incredible fear of railroad mergers," said Doug Rockel, another ING analyst. "A lot of people think the court will reverse the moratorium. That's more important than fuel prices right now."
Trucking stocks have the most to gain among transport issues from a large drop in fuel prices, Rockel said. 
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