Of the 17 integrated oil companies on the Oil and Gas Investor This Week scoreboard, ConocoPhillips and Hess Corp. led their peers in production growth in the fourth quarter. Meanwhile, Murphy Oil Corp. fell last, reporting some 11% less output company-wide.Bruce Lanni, an analyst with A.G. Edwards & Sons, expects earnings for the group to fall 5% on average this year from 2006, but anticipates a reversal of this trend in 2008 because of production growth and higher commodity-price assumptions.He is most optimistic about Marathon Oil Corp. exceeding consensus expectations in 2007. "All others may fall modestly short-most notably ConocoPhillips, Hess and Murphy by about 7%." He is emphasizing selectivity, particularly companies with strong capital stewardship. He has Buy ratings on BP (price target $78), Chevron ($82), ExxonMobil ($80) and Occidental ($59).Zack's Investment Research senior oil and gas analyst Sheraz Mian is still bullish about the group. "They have been some of the best performers over the broader sector over the last few years, as well as the best performers year to date. "There are a number of contributing factors to this, which makes us think their positive momentum will continue in 2007. They may not be able to beat their performance levels of 2006, but we feel the industry should still perform better than many of the other subsectors within the energy space." The group continues to distribute growing levels of cash to shareholders. "So with uncertain times, when the broader direction of the economy is somewhat uncertain for market participants, investors tend to gravitate toward the safer, more stable names within the energy group. This trend should continue in 2007." Hess is an integrated company to watch, according to Wall Street Access analyst Bernie Picchi. The company is making progress on nearly all fronts in its upstream business, he says. The shares are trading cheaply compared with its peers, he adds. "In the end, it probably matters less why HES shares trade cheaply as the fact that they do-and that therein is opportunity." While the shares were trading in early March at $16 per barrel of oil equivalent of proved reserves (BOE), that valuation gives Hess no credit for its probable reserves in the Gulf of Mexico, North Africa and Southeast Asia, Picchi adds. "We believe the company will steadily and substantially raise its reserve estimates in future years as its discoveries in the Gulf and elsewhere are sanctioned for development...The earnings-per-share outlook for Hess is less important than the notable progress the company is making in its worldwide E&P program. Though it will not show up as production for four or five years-if then-the company is on the cusp of commerciality in its 100%-owned Pony prospect at Green Canyon 468 as well as its nonoperated Tubular Bells prospect at Mississippi Canyon 683/726."Hess replaced 230% of its 2006 production and reported finding, development and acquisition costs of $12.55 per BOE. Picchi has a Buy and $65 target on HES shares.Marathon Oil Corp. and Murphy came in at the bottom of the Oil and Gas Investor This Week fourth-quarter production scoreboard. Jacques Rousseau, analyst with Friedman Billings Ramsey, has a Market Perform and $55 target on Murphy shares. "While Murphy has historically focused on organic growth through high-risk, focused exploration, chief executive Claiborne Deming stated that, given the increased cost of drilling and difficulty accessing new plays, the company would broaden its thinking to include acquisitions," Rousseau says.In 2006, Murphy added 75 million BOE of proved reserves to its asset base-a 200% reserve-replacement rate-at a cost of about $14 per BOE. Production during the quarter averaged 93,500 BOE per day. Paul Sankey, an analyst with Deutsche Bank, says Marathon has corrected sharply in recent months. "With strong growth this year, the best exposure to ethanol of any refiner, and a Canadian heavy-oil deal by midyear, this is a stock we would recommend looking to buy if it shows any further significant weakness. We are neutral on MRO, but have a high regard for the management and asset attractiveness." Rousseau lowered his rating on MRO shares from Market Perform to Underperform. "We recommend Outperform-rated ConocoPhillips, which currently trades at a 30% discount to MRO, based on 2007 estimated earnings per share."
Integrateds' Production Results, Fourth-Quarter 2006 vs. 2005Total (MBOE/d)Liquids (Mbo/d)% Change% Change4Q06from 4Q054Q06from 4Q05ConocoPhillips2,485.232%1,545.019%Hess Corp.366.316%258.012%BG Group621.75%158.710%Occidental615.54%471.04%Royal Dutch Shell3,597.24%2,201.011%Chevron2,620.23%1,812.06%PetroChina2,892.93%2,213.00%Norsk Hydro595.01%NANMENI1,796.0-1%1,079.0-5%ExxonMobil4,228.2-1%2,678.02%Repsol-YPF1,101.1-1%515.8-4%Total SA2,344.5-3%1,513.0-5%BHP Billiton341.2-4%160.6-7%BP3,792.0-5%2,416.0-6%Statoil 1,153.0-6%668.0-7%Marathon357.7-9%212.0-6%Murphy Oil92.5-11%83.1-9%Source: Evaluate Energy, London
