The Investment Outlook for Oil Stocks -A Panel Discussion

Editor's Note: Four experts discussed "Investment Outlook for Oil Stocks" before the New York Petroleum Section on Sept. 12, and their remarks are presented in the following papers. The fourth panelist, R.J. Burns, summarized their conclusions as follows. "The panelists point out the very favorable outlook for worldwide volume increases in petroleum consumption. They explain the stiff competition brought about by the more than ample supply, with indications that improvement in this situation may be forthcoming. The obstacles plated in the industry's path by various governments are discussed. "On balance, the panel seems to agree that the outlook is improved over the near term and is quite favorable over the longer run. The vitality of the industry is unquestioned; it is growing, vigorous and dynamic. These factors must then be put into investment perspective. "The almost panicky flight of investors from the industry several years ago has ended, and a more orderly procession back has been recently noted. This occurred at a time when ‘glamour’ in the stock market has worn thin. "In short, the investment community is, in a way, putting on an old shoe again. The problems of the industry are well known, but the fact that they are well known apparently is an attraction today because so many people have been burned while rushing to ‘evils they know not of’. Furthermore, while one is not likely to win any 100-yard dashes in oil stocks, he can go a long way, given sufficient time, and perhaps more comfortably than in most investment vehicles." Supply/Demand Balance- What It Means for Earnings On Wall Street, petroleum has had many unkind things said about it over the last few years. Its present troubles have arisen because since the Suez Crisis there has been too much growth of supply and not enough of demand. In spite of this, we are not ashamed to continue to list it as a growth industry. Fig. 1 highlights one problem by showing United States and free foreign percentage annual growth in petroleum demand from 1957 through 1961. This growth rate in the U.S. has been on a downward trend for the last three years -- too low to mop up any but the smallest errors in forward planning. Free foreign growth has been much faster, but it also is on a downtrend. In a capital intensive industry, changes in growth rates are particularly hard to deal with. Anything up to five years may have to pass between the recognition of a new growth trend and the application of appropriate investment policies. Before the end of five years the trend is likely to change again. This difficulty has been at the root of the oil companies' recent tribulations. But Fig. 2 shows that, in dollar terms, there is a great deal to be said for oil. This industry accounts for a quarter of all manufacturing earnings. Its earnings have been trending-very slightly-upward over the last three years. Meanwhile, other manufacturers have started to come down heavily. Recent Securities Exchange Commission reports show them rising again in the second quarter of this year, but still below the 1959 peak. Developments Abroad Fig. 3 highlights dollar earnings changes and the exposure of the oil industry, and the rest of the American economy, to developments abroad. In 1958, when the world was trying to get back to normal after the Suez crisis, a 20 per cent slump in profits occurred, both for the five Internationals and for the domestic oils including integrated companies and producers. The domestics were the first to recover, but from 1959 the Internationals have fared consistently better. P. 1299^