Clerical Medical is overweight in oil stocks, expecting the price of crude in 2000 to remain above t...
Clerical Medical is overweight in oil stocks, expecting the price of crude in 2000 to remain above that being factored in by the market.
Oil has reached $28 a barrel having been only $10 a barrel 12 months ago but the consensus is for it to fall back to $19 during the year, a price which is already being discounted in oil shares.
James McLellan, US fund manager at Clerical Medical, thinks the average oil price during 2000 will be higher than $19 because he says demand and supply for oil are well balanced and this should offer support to current price levels.
He adds that oil shares are currently undervalued and do not reflect the stocks' potential for generating increased profits from the higher price of crude.
McLellan says: "The oil sector has around 6% of the S&P 500 and we are around 1% or so ahead of that. Among the major oil stocks we favour Exxon Mobil as the benefits of its merger deal should start to accrue."
He expects Exxon Mobil to start seeing benefits from cost cutting and the company saw its share price rise by 20.16% in dollar terms in the 12 months to 24 January. The stock is on a P/E ratio of 38.81 times.
McLellan also favours oil groups such as Texaco, which he picks as likely to produce good profits. Texaco saw its share price rise by 19.13% in the 12 months to 24 January and the stock is on a P/E of 35.79 times.
Phil Chappell, US fund manager at Perpetual, is also keen on selected oil stocks, especially those where profits are strongly linked to the price of crude.
He says: "The oil price a year ago was severely depressed and the stocks were performing poorly. Around December last year the sector bottomed out and has performed pretty well since then."
Chappell adds that demand for oil is also tending to rise on the back of improved world growth which should also be a positive for the price of crude.
He favours Texaco which is more focused on the upstream areas of the market such as exploration and production and is also sensitive to oil price changes.
Chappell adds that Texaco has recently made a $1bn oilfield discovery off the coast of Nigeria which he expects to be good for the stock price in news flow terms.
Chappell also favours the oil services sector with exposure to stocks such as Schlumberger and Weatherford International. Weatherford International tends to benefit from any pick-up in oil drilling activity because it is involved in activities including leasing drilling equipment to oil companies.
He says the major oil companies have been tending to budget for an oil price of $18 to $20 this year and with the price significantly above this, the groups are generating excess revenue which they are tending to spend on capital expediter and oil exploration.
Schlumberger saw its share price rise by 43.59% in dollar terms in the 12 months to 24 January and the stock is now on a P/E of 50.87 times.
Weatherford International saw its share price rise by 107.69% in the same time period and is now on a P/E of 144.83 times.
Chappell favours Exxon Mobil too, which he sees as well balanced between upstream activities and downstream areas such as marketing oil products.
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