Pumped Up over Energy Stocks

Improving economic growth should increase oil and gas demand, which bodes well for several industry groups

By Tina Vital

On July 9, Standard & Poor's raised its opinion on the energy sector to overweight from market weight. That means we expect the group to outperform the S&P 1,500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600 indexes) in the next three to six months.

What's behind the upgrade? With economic growth picking up -- S&P forecasts U.S. real gross domestic product will rise 2.9% in 2002 and 4.4% in 2003 -- we expect energy stocks to outperform thanks to improved demand and better prices for oil and gas. That should benefit the shares of "supermajor" oil companies (which S&P classifies as international integrated) and smaller North American-focused independent exploration and production outfits.

LEADING NAMES.

  As demand and prices perk up, oil and gas producers will move to rebuild supplies, so earnings of drillers and oil-field service providers should benefit as well. While the S&P 500 has fallen 13.9% so far this year, the energy sector has held up well, with the S&P energy index rising 3.3% as of July 5. Our favorite groups within the sector include the international integrated oils, drillers, and exploration and production companies. The S&P subindexes for those groups are up, 4.5%, 5%, and 2.3%, respectively.

Our 5-STAR names in the group? Among the companies I cover, integrated oil companies ExxonMobil (XOM ) and TotalFinaElf (TOT ) carry S&P's buy ranking. In the drilling and oil-field services segment, buy recommendations include GlobalSantaFe (GSF ), Nabors (NBR ), and Weatherford Intl. (WFT ). Among the exploration and production companies, S&P analyst John Kartsonas' top choices are Apache (APA ) and Ocean Energy (OEI ).

Analyst Vital covers oil and gas stocks for Standard & Poor's

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