Oil Merger May Pump Up Sector

Several mutual fund managers are betting that British Petroleum’s agreement to buy Amoco Corp. will help bring languishing energy and energy services companies back to life.

“Anything that will make people take a closer look at this industry should help,� said Patrick Boyle, one of the managers of the $14-million Icon Energy fund, which has tumbled about 28% this year.

Analysts expect oil companies to get more attention because the $53-billion merger plan announced Tuesday could spark such companies as Mobil Corp., Chevron Corp. and Atlantic Richfield Co. to find partners to keep pace with rivals now twice their size.

And California’s oil companies could be especially ripe for consolidation. High costs, low-quality oil and shrinking production are forcing companies to slash expenses and look outside the state for growth, industry experts say.

“Companies in California are under more pressure because of low oil prices,� said Michael Wang, merger and acquisitions analyst at John S. Herold Inc. of Stamford, Conn. “Their need to diversify risk and reach out to new core areas is stronger than others.�

Companies such as Arco, Chevron, Occidental Petroleum Corp. and Unocal Corp. are strong candidates for mergers, analysts said.

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San Francisco-based Chevron’s broad international holdings, strong management and large size make it a likely buyer as the industry forms supergiants, Wang said. Smaller companies like Southern California-based Arco, Unocal and Occidental, with less cash and more exposure to oil prices, are likely to be bought or enter partnerships, he said.

“I think the mergers we’ve seen the last few months are just the beginning of the changes,� said Doug Henderson, head of the Western States Petroleum Assn., which represents 30 oil firms.

The swoon suffered by oil stocks has been especially rough on the shares of drillers. While the blue-chip Standard & Poor’s 500-stock index has climbed 11.7% this year, the S&P; oil exploration and production index has dropped 28.4%. The oil well equipment and services index is down 32.9% and the oil and gas drilling index has plummeted 51.4%.

Along with mergers, another factor that could help energy companies is that value-fund managers are finally finding the industry attractive, said Boyle of Icon Energy. In fact, oil-related companies have been the worst performers in the S&P; 500 this year, thanks to a drop of almost 30% in crude oil prices.

“The oil services sector is laying on its back,� said Robert Friedman, who will soon become chief investment officer for Franklin Mutual Advisors Inc.

That’s why he’s been buying companies such as Tidewater Inc., a maker of offshore-drilling equipment, which is trading at about 7.6 times this year’s estimated earnings--about one-third the S&P; 500’s average valuation.

Investors who believe in the sector but are nervous about individual stocks might want to consider energy-related mutual funds, which have been trampled this year. The American Century Global Natural Resources fund is the top performer among 44 natural resource funds tracked by Bloomberg Fund Performance, down about 10.6% year-to-date. Fidelity Select Energy Service Portfolio is the worst performer, posting about a 40.8% loss.

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Slippery Slope

Energy company stocks have been beaten down this year. A look at selected energy shares, with Wednesday’s closing prices and decline from 52-week highs:

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% change from Company Wed. close 52-wk high Helmerich & Payne $19.13 --58.0% Union Pacific Resources 12.94 --53.5 Halliburton 31.56 --50.1 Schlumberger 56.00 --40.7 Burlington Resources 33.31 --37.9 Unocal 31.94 --29.4 Occidental 21.94 --28.7 USX-Marathon Group 30.13 --25.6 Arco 65.88 --24.5 Royal Dutch 46.13 --23.7 Mobil 66.75 --20.4 Baker Hughes 6.63 --14.5 Exxon 67.06 --11.8 Chevron 79.88 --11.4 Texaco 59.25 --8.8 S&P; 500 --8.6%

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Source: Bloomberg News