The oil industry received a shot in the arm in March when a successful Opec meeting established higher production rates keeping oil prices at the comfortable level of $20-plus per barrel for the near future. And while the connection between gas pump prices and oil stocks has been tenuous recently, the news of the meeting did enough to energize the prospects of oil stocks: corporate IR departments in this industry had their phones ringing off the hook.
‘Investor perception changed in the last ten days,’ announces a visibly pleased Robert Dye, vice president for IR at Apache Corporation, soon after the Opec meeting. Just a few days before the summit, Dye had complained about feeling like the ugly duckling of the investment community. He was not alone. Since 1998, when oil prices dipped, the sector had been feeling completely abandoned by the investment community.
Veteran IR officer Ed Grigsby of Phillips Petroleum says he had ignored Wall Street for some time, since his industry was largely overlooked as investors grew infatuated with high-yield technology stocks. The turn of the tide seems to be here, however. And while analysts and IROs say oil stock prices will not skyrocket to anything comparable to what they were in the past, the per barrel price of oil has reached an attractive level that will bring the sector more attention. It will also help stabilize income for the companies, according to analysts.
The changeover finds IROs across the industry feeling philosophical and strategic about their future. In addition, while the disconnection between a robust commodity price and Wall Street performance still concerns many investor relations officers, most say they’re pleased with the market’s attention.
Some – including Grigsby – say the market will never be the same now that the investor has become so used to the 50-100 percent returns of technology stocks. ‘We have always had good returns in the long run, but our industry will never match high-tech stocks,’ he says.
Good things come
The sector’s IROs exercised a good deal of patience in the last couple of years. Grigsby and Dye, for instance, continued a strong work routine even during the lonely days. They updated their methods of bringing their message to the investment community, using the internet, live webcasts and old-fashioned press releases to stay in the running and wait out the slow periods. No matter how aggressive they were, few analysts came around, says Grigsby. Phillips Petroleum, a major integrated oil company involved in worldwide petroleum exploration and production plus natural gas gathering and petroleum refining, had always received considerable attention. To illustrate the situation, Grigsby relates how at a recent investor conference he attended, he started his presentation with only four people and ended it with 15 in total. ‘We used to pack 100 people at our meetings,’ he says.
Robert Dye agrees the slow period was taxing the IR psyche. Apache Corp, a leading independent oil and gas exploration and development company, had always had robust attention. ‘E & P stocks are sensitive, and we were reminded of that again,’ he says after the Opec meeting. ‘Investor perception changed and our group has performed very well in the last few days.’
The downturn for the oil industry began in 1998, analysts say, when the price of oil plummeted to $10 a barrel. ‘Investors left in droves,’ recalls Paul Taylor of Anadarko Petroleum. Fund tracker Morningstar shows that portfolios in many funds specializing in oil and gas stocks had declines of 4-9 percent. ‘It has really been a bear market for the last few years, except for the tech stocks,’ says Grigsby.
William Randol, senior petroleum analyst at Banc of America Securities, was quoted recently in the New York Times as saying the ‘fundamentals for oil stocks have never been better.’ He predicts that oil stocks will improve as the price of oil settles somewhere around $20-25 a barrel this year, a price that could allow companies much operating room. According to Randol, even in 2001, the average price will be well above $21 per gallon.
Good vibrations
Companies whose stocks have been selected as strong buys by analysts have absorbed the good vibes gingerly. The IR team at Houston-based Conoco is brimming with their good fortune. Many investment analysts have selected the company as a top pick, and the patch is so bountiful that Tom Henkel, vice president of investor relations, even disputes the notion that oil stocks are passe on Wall Street. ‘The market is coming back into oil again,’ he says. ‘These things tend to be cyclical and we are seeing a natural movement out of the high tech. The evidence of what’s coming can be seen in the last couple of days when the oil price has been pretty high.’
Henkel, who runs a two-person department at Conoco, has been with the company for 28 years and is well aware of its strengths and weaknesses. He says one of the reasons he and his teammate Jean Hunter were selected to run the IR department is because they are longtime Conoco employees. ‘An integral part of IR work is knowing the people and where the information is,’ he says. He feels he is well-prepared to face the renewed interest in the industry now that prices have stabilized.
Clear and honest investment information became even more important during the hard days, oil IROs say. ‘You can’t sugarcoat anything,’ warns Henkel. ‘The analysts are well informed.’
He is happy with the new momentum his company is getting. Whenever there is a noteworthy event or an exploration success, he uses a blast fax to inform all analysts and investors who follow his company. In Europe, where Conoco also has a wide following, Henkel and his partner visit investors to familiarize them with the company’s strategies, plans and future operations.
The turnaround in oil prices has large companies particularly cheerful. At Chevron, the IR team is busy. ‘We are a large company so we don’t have to go out to find analysts or investors. They come to us. Most financial organizations clamor for big companies to attend their meetings, and we are among the first ones approached,’ says Joellen McGruder, assistant manager of IR.
Slow going
Despite the renewed attention, everybody is aware that the turnaround will not be fast. The price of many oil stocks remains at the same level as when oil was $12 a barrel. It will take some time for the valuation between the commodity price and the oil stock to match up, IROs say.
For instance, many institutional investors were until very recently still divesting their oil portfolios. ‘They would call and say, We are not unhappy with you but we have to sell. They were using the money to buy tech stocks. Sure, somebody is going to own our stocks, but they are getting cheaper every time,’ explains Grigsby. According to AMG Data Services, investors have taken out up to $60 mn a week from value stocks such as oil and gas.
There are some discrepancies among analysts as to whether the IR departments in the oil sector are proactive enough in general. John Kilduff, senior vice president of energy risk management at Fimat USA in New York, feels the increase in oil prices at the pump could give companies a lot of room and the IR departments need to be more active.
According to, Kilduff, many of the IROs in the sector remain old fashioned. ‘Some are like Madonna: they think the only good publicity is no publicity. Others think you just keep your head down and keep doing your work and everything will be fine.’ IROs should be better at explaining what is going on with the sector, Kilduff adds.
Charlie Ober, manager of the T Rowe Price New Era Fund, wants oil IR departments to be more open about past failures in the market. According to him, many investors left the oil stocks not because of the allure of tech returns, but because oil companies made bad financial decisions during the boom years in the mid-1990s.
Leery investors
‘The investment community has grown leery of energy companies because when the market was strong, companies did not do well for their stockholders – they were more interested in raising equity than in providing income to their investors,’ Ober explains. He is cautionary to the IR teams in the oil sector. While a company’s top management is responsible for financial decisions, Ober believes IR departments must address questions about the past with investors. This message is especially pointed since it comes from Ober, a fund manager who is so bullish on the prospects of energy stocks that he has placed 56 percent of his fund’s portfolio in them.
‘Many of these companies have no financial discipline,’ Ober continues. ‘There is a permanent feeling today that many companies have not done well by their shareholders. They are interested in growing for growing’s sake.’
Barbara Forbes, director of investor relations at Nuevo Energy Company, says a good investor relations officer in the oil exploration and production sector had to be effective at ‘communicating good and bad news.’ A former equity analyst, Forbes is keen on open communications with investors and analysts, and says she has a ‘proactive approach’ to her investor relations task.
‘We are the first to admit mistakes, and we are very open with shareholders. I don’t wait for them to call us. I let them know what is going on with operations so that there are no big surprises,’ she says. Forbes’ experience as an analyst is a feather in her cap when she goes before the investment community. But she never tries to sell her company. ‘I have great relations with the sell-side and buy-side analysts,’ she reports. ‘I view my job as educating analysts and shareholders about Nuevo, about our strategy and about what differentiates us from our peers.’
Different strokes
But as always, the key is to be different and catch the attention of those you want to impress. Forbes compiles a 70-page statistical report every year, the only such report published in her group, which she says raises her profile among investors. ‘This is where my background as an equity analyst makes a difference. I know what investors are looking for and I can speak their language, and that’s why Nuevo hired me,’ says Forbes.
Of course, it helps that Nuevo has made some popular financial decisions. For instance, the undervalued price of the stock led management to repurchase 10 percent of its outstanding shares, attracting a lot of positive attention from the investment community, and Nuevo ranked among the best performing oil stocks for 1999. ‘We had a lot of great positive response from investors since we began our buy-back plan. By repurchasing shares we essentially purchased reserves very cheaply and we reinvested in our future,’ Forbes says.
Conoco, which spun off from DuPont, is another example of an innovative company. Even its web site is quite advanced, with videos and audio clips investors can easily download. The company also uses a lot of advertising directly targeted to the US financial community. ‘We are a 125 year-old company, but we have only been public since October 1998. We are a relatively new kid in the block,’ says Henkel. Thus, Conoco is not associated with some of the worst financial excesses of the 1990s, when companies spent much of their money on projects that did not generate income for shareholders.
However, Conoco has attracted attention because it ‘has applied a rigorous set of standards,’ which guarantee that even if oil prices go to their lowest, there is always a set standard for the cost of capital return. ‘Right now we have the highest capital rate of return in the industry,’ says Henkel.
