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The Long and Short of Unocal, Rodney Dangerfield of Stocks

October 06, 1998|James Peltz and Michael Hiltzik

Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks and other investments.

Unocal (UCL)

Jim: Let's delve into a dirty subject, Mike: crude oil. Unocal, which calls El Segundo home, is an exploration and production company that used to peddle the familiar Union 76 gasoline, but it sold that retail business to Tosco Corp. a while back.

Mike: Right, Unocal is what's known in industry parlance as an integrated oil company. I guess that doesn't necessarily mean its race relations are better than Texaco's, but that it also has interests in natural gas, mining and chemicals.

Jim: It hasn't been much fun for Unocal's stockholders in recent years, because oil stocks have been dropping in tandem with crude oil prices. In fact, Unocal is up only 26% for the last four years--a pretty lousy showing relative to the broad market. And the outlook from here doesn't look too hot, either.

Mike: Well, certainly not in the short term. But if you take a contrarian view--that oil prices will turn up just as everyone else is thinking they'll never recover--this could be the time to buy Unocal. In fact, oil prices have been creeping higher in recent weeks. But I admit I'm taking a pretty long-term view.

Jim: You better be. Last month, the company disclosed that its third-quarter profit would sag to the low end of expectations because of low oil prices and its own higher expenses. I'd steer clear of Unocal. Oil prices are not going up significantly any time soon, and neither is this stock.

Mike: I'd buy Unocal simply because it's so disrespected at this point. Many people on Wall Street expect its earnings to keep deteriorating at least through the end of this year. But they also expect profit to start recovering in 1999.

Jim: Why?

Mike: Because they foresee higher oil prices and because Unocal's own strategic actions will start bearing fruit. Look, it sold Union 76 because its profit margins were so thin. Not so in exploration and production, where margins are well into the double-digits. That's Unocal's niche now. And there's something else: Unocal might end up in a merger with somebody.

Jim: You're right on one count. To Unocal's credit, it's spending heavily to enhance its exploration and production, which might start to pay off beginning next year. It's busy in the Gulf of Mexico, Thailand and Indonesia. But I don't have to remind you that drilling wells and finding oil are two separate matters.

Mike: There is always the risk of dry holes, I agree.

Jim: Worse, Unocal's stock simply keeps tracking the price of crude oil. No matter how well Unocal is run, it seems hostage to the price of West Texas intermediate crude, whatever that is.

Mike: I believe that's the stuff that made Jed Clampett's fortune. Anyway, I believe oil prices are destined to rise.

Jim: Yes, they'll rise from the current $15 or $16 a barrel, because that's a historically low level that can't last long. But they won't rise that much. OPEC keeps talking about cutting its production to push prices up, but everyone knows that's meaningless because individual OPEC countries keep cheating--they keep pumping more oil than they're supposed to under OPEC's quotas--because they need the hard currency.

Mike: But that's never not been the case. We're at $15 oil because there's a worldwide recession, outside of the United States. But that situation will gradually improve over the next year.

Jim: Don't bet your mortgage on it.

Mike: In fact, we may see parts of Asia start to recover over the next two to three quarters.

Jim: Those economies, oil demand, oil prices and this stock aren't going to show much upside for at least a year. Now, I admit those trends could play into your earlier point about more oil mergers, but I'm not even sure that would envelop Unocal.

Mike: Why not?

Jim: Tongues wagged about more deals after British Petroleum and Amoco announced their $48-billion marriage in August. And I admit, a merger must look appealing to oil executives who have simply run out of ways to boost profits when oil prices are going nowhere.

Mike: If prices don't go up, as you suggest, that could be the trigger for more mergers.

Jim: Not necessarily. Big Oil has learned to be more careful about doing deals, because they usually don't work out. BP and Amoco appear to be nicely matched in terms of production, refining and marketing activities where cost savings can truly come about, lifting earnings. But those synergies--forgive my language--are rare. It's been pointed out that the last big oil merger that really worked was Chevron and Gulf Oil in the mid-1980s.

Mike: That's true. Regardless, Unocal is trading around $35 a share, or 32 times this year's earnings, which is smack in the range for mid-sized, integrated oil companies. So, if it's going to be a sector performer--and like I said, the sector will improve--Unocal is a buy if you take a long-term view.


Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at James Peltz can be reached at james.peltz Or write to either at Business Section, Times Mirror Square, Los Angeles, CA 90053.

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