<THE DRIP PORTFOLIO>
Oil Consolidation
...and thoughts on global competition

by Brian Graney (TMFPanic@aol.com)

NORTHVILLE, MI (Dec. 2, 1998) -- While everyone else is hitting the malls in search of that elusive "perfect gift" for the holidays, oil and gas companies are doing some shopping of their own.

By now, you've probably heard about the merger between Exxon (NYSE: XON) and Mobil (NYSE: MOB). A lot of folks on the Street are excited by the deal, which forms the largest U.S. publicly-traded company in terms of annual revenues and the world's largest publicly-traded oil and gas company, ahead of former leader Royal Dutch/Shell Group.

Here at the Drip Port, we're excited, too. Why? Because the Fool plans to appeal to the head honchos of the newly formed Exxon Mobil for the honor of picking a better, more appealing name for the combined company. My personal choice is "Messo," which harkens back to the post-Standard Oil days when Exxon used to market its gas under the Esso name. It also refers to what top U.S. trustbuster Joel Klein's desk must look like now that he has to deal with fears of a resurrected Standard Oil along with the drawn-out legal wrangling of the ongoing Microsoft case. (Oh yeah. Forgot about that, didn't you?)

Nevertheless, we cannot help being somewhat disappointed by Mobil's choice in the lifelong soulmate department. A merger with Chevron, giving birth to an oil titan named "Moron," would have been much more fun. Alas, maybe Chevron can keep the Moron opportunity alive by purchasing Marathon Oil from parent USX someday. Or perhaps a three-way arrangement can be worked out with Marathon and Occidental Petroleum, giving birth to "Oxymoron."

With oil prices currently at a 12-year low, any of these scenarios may be possible. We're not in the business of predicting future mergers, but it seems more consolidation in the oil patch is on the way in the months ahead. While the Exxon Mobil link-up may have come as a shock, the entire oil industry has been in eat-or-be-eaten mode recently and it will probably stay that way for some time.

Over the past year or so, Arco bought Union Texas Petroleum, Kerr-McGee announced plans to acquire Oryx Energy Co., and BP agreed to combine forces with Amoco. Yesterday, France's Total joined the "togetherness" trend by offering to buy Belgium's Petrofina. The consolidation wave has also spilled over into the oil services sector, the contract drilling business, and in the world of the independent oil and gas exploration and production (E&P) companies.

The Exxon Mobil discussions have prompted a deluge of fine articles in the business press seeking to explain why the industry is consolidating. The short, one-sentence explanation goes something like this: Low oil prices are putting pressure on oil companies to cut costs, prompting business combinations, joint ventures, and even mergers in the hope of finding that financial Holy Grail, "synergy." While true, that analysis misses a more subtle -- yet equally important -- reason for the ongoing consolidation. Namely, the oil business is undergoing a fundamental competitive shake-up due to the increasingly global market environment.

Granted, cost-cutting is a big issue right now. The Exxon Mobil combo alone is expected to spit out near-term cost savings of around $2.8 billion through job cuts and the elimination of redundant business units. But as the new company's top boss Lee Raymond pointed out in a press conference yesterday, the global oil business is getting increasingly competitive. In the past, Exxon and Mobil competed mostly with the other integrated multinational firms. In the future, the majors will compete with each other and with the giant state-owned oil firms scattered all over the globe. According to Raymond, the state-owned firms are "rapidly expanding outside of their home base[s], both geographically and functionally."

This emerging future competitive landscape is what interests us the most. We're much more interested in finding out what is going to happen rather than explaining what has happened. This mindset is crucial to our analysis of this industry or any other, since we are working with a 20-year investment time span. We are not interested in compiling a history of oil in the late 20th century. While often fascinating and deserving of study, history contains the investment opportunities of days gone by, not the opportunities of days to come. As Yogi Berra might have put it, "The past is history."

Instead, we want to form a clear, polished, finely tuned lens through which to view the future prospects of the oil and gas companies on our list. In our quest to reach some accurate, well-informed conclusions about the future, Jeff and I will be tearing apart the major business segments of the industry over the next few weeks. We will lead off with a look at the oil and gas exploration and production businesses, emphasizing the outlook for the future. Along the way, we'll meet the world's largest oil production companies -- the massive state-owned entities -- and examine the competitive threat they pose as well as how they may fit into the current consolidation trend.

Our oil and gas analysis would not be complete without a look at how OPEC affects worldwide oil supply. Tomorrow, we'll peer inside the organization and try to determine what the future may hold for the 11-member cartel. Until then, feel free to post your thoughts on the future of oil (and funny suggestions for renaming Exxon Mobil) on the Drip Companies message board.

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12/02/98 Close

Stock Close Change JNJ 80 1/2 -1/2 INTC 113 9/16 -1 7/16 CPB 56 13/16 -7/16 MEL 65 5/8 +2 9/16
Day Month Year History Drip (0.74%) 2.03% 30.22% 10.89% S&P 500 (0.34%) 0.65% 20.69% 23.12% Nasdaq (0.43%) 2.34% 27.05% 25.18% Last Rec'd Total # Security In At Current 11/02/98 8.055 CPB $52.880 $56.813 09/01/98 9.727 INTC $80.238 $113.563 11/09/98 8.578 JNJ $74.090 $80.500 10/07/98 1.000 MEL $48.560 $65.625 Last Rec'd Total # Security In At Value Change 11/02/98 8.055 CPB $425.95 $457.62 $31.67 09/01/98 9.727 INTC $780.50 $1104.66 $324.16 11/09/98 8.578 JNJ $635.55 $690.53 $54.98 10/07/98 1.000 MEL $48.56 $65.63 $17.07 Base: $2200.00 Cash: $262.88** Total: $2581.32

The Drip Portfolio has been divided into 93.111 shares with an average purchase price of $23.628 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
10/24/98: Sent $40 to buy more INTC.
11/24/98: Sent $100 to buy more MEL


</THE DRIP PORTFOLIO>