Message-ID: <1232676.1075862093739.JavaMail.evans@thyme> Date: Mon, 26 Nov 2001 12:59:06 -0800 (PST) From: kcarter@simmonsco-intl.com To: e.taylor@enron.com Subject: Thoughts on the world of energy (OSX $77, XNG $183, XOI 496) Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: KCarter@simmonsco-intl.com X-To: Taylor, Michael E X-cc: X-bcc: X-Folder: \MTAYLOR5 (Non-Privileged)\Taylor, Michael E\Inbox X-Origin: Taylor-M X-FileName: MTAYLOR5 (Non-Privileged).pst Kerry E. Carter Analyst Simmons & Company International (713) 236-9999 ----- Forwarded by Kerry Carter/SCI on 11/26/01 03:02 PM ----- Dan Pickering To: Everyone 11/26/01 cc: 08:30 AM Subject: Thoughts on the world of energy (OSX $77, XNG $183, XOI 496) This went to our institutional clients this morning....DRP Dan Pickering Simmons & Company International 700 Louisiana, Suite 5000 Houston, TX 77002 phone: (713) 223-7861 fax: (713) 223-7845 email: dpickering@simmonsco-intl.com ----- Forwarded by Dan Pickering/SCI on 11/26/01 08:33 AM ----- Dan Pickering To: Sales Trading 11/26/01 cc: 08:30 AM Subject: Thoughts on the world of energy (OSX $77, XNG $183, XOI 496) SUMMARY: At or near inflection points, stock calls are all about the big picture. This is particularly true of cyclicals like energy. Although execution is always important for differentiating between companies, company specifics mean relatively little to investors right now compared to the big picture. We believe the broad market and energy stocks (particularly oil and gas stocks) currently discount an economic recovery in 2H'02 and that commodity prices will not crater and will begin to improve with economic conditions. Valuation for energy stocks is neither particularly cheap nor expensive at this point in the cycle. Hard to hate them; hard to love them. 15% moves in either direction would create more interest from us to buy or to sell. Would call news over the weekend (particularly Russian) as negative, especially in light of the light volume rally on Friday, which has put the stocks ahead of where they should be on a trading basis. THE BIG PICTURE: Crude oil fundamentals and pricing are appropriately the current focus of investors and this has been driving energy stocks on a trading basis. We aren't going to be disappointed by the amount of news flow, as many issues will be relatively quick to play out within the next several months. Russia: Recent news is negative. Promised reduction in output from 30k/day to 50k/day is a disappointment and makes future OPEC cuts and compliance more risky. Volume reductions will be revisited on December 10th, but near-term damage has been done. Conclusion: downward pressure. Iraq: Nothing is obvious about Iraq. Sanctions renewal is coming up in just a few weeks. News is surprisingly quiet on this front - with pricing mechanism complaints the only recent commentary from Iraqi government. Intriguing that Russia scuttled the US/Britain calls for smart sanctions last renewal period, but now have much more to gain by encouraging events that prompt Iraq to leave the export market, boost crude prices and help Russia win on both volume and price. However, Russian companies are the big winners in rejuvenating Iraqi oilfields, so do they want to alienate Iraq here? A blurb over the weekend that Iraq caught some Iranian plotters against Saddam Hussein, which adds to overall confusion on the Iraqi situation. Conclusion: Upside pressure. War In Afghanistan: Current successes are good for the economy and crude demand, but also reduces the near-term risk of supply disruptions. War premium coming out of crude. Conclusion: Downward pressure. Economy/Energy Fundamentals: Recent US economic datapoints appear to be modestly better than experts have predicted. Europe as bad as expected. Japan remains dismal. Lower crude and gasoline prices are nice stimulus for disposable income (just in time for Xmas shopping). However, even if shoppers are mobbing Wal Mart, worldwide energy demand still appears to be falling on the margin. Crude inventories rising at a brisk pace vs. historical norms for this time of year and more OPEC (and non-OPEC) cuts and compliance are needed to maintain a price in the high-teens/low $20/barrel level. Conclusion: Near-term downside pressure but glimmers of hope via economy. US/Europe Political Issues: You have to assume that US and European governments care more about reasonably priced (or cheap) crude oil to stimulate the economy than anything else - but also don't want economic chaos in the Middle East. We continue to gather intelligence from our Washington contacts that the US Strategic Petroleum Reserve will be used to support prices, but not until WTI crude is in the mid-teens. Conclusion: Modest downward pressure. Israel/Palestine: More violence over the long weekend. Still no signs that OPEC countries taking a significant stance on this issue. Watch the rhetoric - that will come before any action on OPEC's part. Conclusion: Neutral with more likely upside pressure than downside pressure. Enron Situation: If ENE craters, the impact on energy markets is unquantified, but certainly significant. Who knows about what ripple effects could (and are) occurring. Conclusion: ???? Natural Gas: Warm weather and weak industrial demand are a bad combo. Thank your lucky stars that it was the Wednesday before Thanksgiving when last week's ugly AGA gas inventory numbers were reported. Falling gas rigcount is the only near term savior and that is occurring. Gas problems will work themselves out faster than crude and hence our bias toward gassy stocks - note that the street has also figured this out as the gassy names have had the best performance off the bottom. Conclusion: Stinky and everyone knows it. Trading influence only. Investors are really watching crude oil for the next big move (in either direction) for the stocks. STOCKS: Overall, incorporating fundamentals, sentiment and valuation, the sector is closer to a buy than a sell. In June 2001, we worried about 3 shoes that could drop as a result of the soft economy. Nat gas prices (and sentiment). Crude oil prices (and sentiment). Earnings expectations. All three have happened and it will take a lot of bad news on the items discussed above to take energy stocks to new lows (OSX <$59, XNG <$167). That doesn't imply a huge run to new highs either. The problems in OPEC have shaken investor confidence and therefore we think that energy will lag in a rally of the cyclicals. It has become boring to write the concluding paragraphs of these notes as the conclusion has not changed much. Big investors should go against the grain and buy the hard down moves. Small investors should be more valuation sensitive on entry points. ***************************************************************************************************** This e-mail is based on information obtained from sources which Simmons & Company International believes to be reliable, but Simmons & Company International does not represent or warrant its accuracy. 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