Recent Performance and Outlook for Petroleum Securities
Authors: Meyer Kenneth E. 
Published: December 2007

The review of investor attitudes towards the petroleum industry during the 1950 decade reveals the fever-pitch attraction experienced in the mid-1950's and the period of selling in oil shares following the Suez crisis. In the last two and a half years, oil shares have experienced renewed interest on the part of the investment community. The growing demand for energy and petroleum should support an anticipated annual growth in oil demand of 5.6 per cent. The problems facing the industry, such as oversupply invasion of natural gas into oil markets, governmental demands, Russian exports, and internal industry competition are all discussed and placed in their proper perspective. A series of figures compares the earnings and dividend progress of domestic integrated a international oil companies with the Dow Jones 30 Industrial Companies. While gasoline price wars and weather cycles still influence earnings of many companies and, in fact, cause them to be somewhat cyclical, the economy measures employed by the larger oil companies in the post-Suez period support the expectation of an upward trend for earnings. Return on borrowed and invested capital has shown slight improvement since 1958. Though it is likely that some differential will continue between the multiple paid for oil earnings and that paid for the Dow-Jones industrial earnings, it is expected that oil earnings may well experience a higher multiple in the foreseeable future. The long range outlook for petroleum companies, particularly those with well diversified markets and supplies, is constructive. The well-guided investor should be amply rewarded in oil shares.

Introduction

During the early and mid-1950's, oils were one of the most favored investment media. It was during this period that the investor, both public and institutional, was captivated by the romance of discovery inherent in the oil industry. It was a seller's market for crude oil, which in the post war period had been enjoying periodic price increases, and demand for petroleum was growing at a rate well in excess of the general economy. Exploration and development activities were watched closely by the investment communities. In fact, during those years, maps of the Williston and Permian Basins and offshore areas of the Gulf of Mexico were almost as commonplace in some brokerage offices as charts of the Dow Jones averages. For the investor such interest did not go unrewarded. Stocks of oil companies, particularly straight producers, often experienced spectacular gains in a few days based on oil discovery news. The international oil companies and many integrated domestic companies, along with the so-called domestic producers, gave significantly better performance than the general stock market. To a degree, the performance was spectacular enough to somewhat spoil the investor. His illusions of grandeur led him to think of a proper oil investment being a stock which would double in price in no more than six months and one day, increase the dividend and possibly split the stock two-for one. Little nuisances inherent in the oil industry were put aside and dismissed as trivial although these same nuisance factors were at a later day to be used as arguments against investing in oil. Even political upheavals were taken in stride. In the period of 1950–55, the Dow Jones averages rose by 108 per cent. During that same period, most of the major oil company securities more than doubled. In fact, a number of these securities more than tripled. While some of the more spectacular rises were shown in some of the smaller producing companies, the larger and more traditional names also participated in this rise. During that period, the stock of Gulf Oil rose 140 per cent -- those of Standard Oil of New Jersey and Texaco tripled in price. The market price of oil shares discounted far in advance earnings that might be forthcoming from announced discoveries which sparked the rise in a security. For instance, Texas Gulf Producing stock rose from $13/share* at the beginning of 1954 to $31/share* at the beginning of 1955. Yet, predicted on developments in the Headley field, the earnings of the company were $1.43* in 1954, $1.72* in 1955, and back to $1.46* in 1956.Amerada, basking in the glory of oil discovery in the Williston Basin, was an outstanding investment. In terms of adjusted price for the stock splits that occurred since 1950, the stock rose from $20/share* at the beginning of 1951 to $58/share* by April, 1952. Yet, the earnings in 1951 were the equivalent of $1.30/ share* and in 1952 were $1.26/share.*

JPT

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