The Oil & Gas Homestretch
And down the stretch they come!

by Brian Graney (TMFPanic@aol.com)

ALEXANDRIA, VA (Jan. 22, 1999) -- Like a champion racehorse rounding the final turn and heading into the homestretch, the Drip Port is barreling toward an investment decision in the oil and gas industry. The meat of the race has been run, so it's time to start separating the money horses from the also-rans. We're quickly approaching the point where everyone in the grandstand rises and starts to cheer for their favorite pony during the mad dash for the post.

Go Exxon! C'mon Texaco! You can do it, Apache! Daddy needs a new Drip!

In horseracing, most folks seem far more interested in the end of the race than in the start. Very few people seem to keep track of which horse gets out of the gate first. On the other hand, everyone around the track wants to know which horse crossed the finish line ahead of all the others. Being Fools, we don't agree with this way of thinking. The stretch run may be what ultimately makes the highlight reel of the nightly sports report, but it is the beginning portion of the race that often decides who gets to ride into the winner's circle triumphant and who gets to wander back to the stables alone.

With that said, we are prepared to put our three month-long oil and gas fact-finding mission to good use and look at our companies individually. To see what we've covered so far and peek at the initial conclusions we have developed about the industry, click here. This overview leaves out our thoughts on the downstream end of the business, which Jeff (a.k.a. Frenchy) Fischer succinctly outlined yesterday.

Here's our final list of the oil and gas thoroughbreds that are in the running. Since we're either lazy or uninspired (perhaps both), we will simply work our way through the list alphabetically in the days ahead.

Apache (NYSE: APA)
Baker Hughes (NYSE: BHI)
BP Amoco (NYSE: BPA)
Exxon Mobil (NYSE: XON,MOB)
Kerr-McGee (NYSE: KMG)
Pennzoil-Quaker State (NYSE: PZL)
Phillips and Ultramar Diamond Shamrock (NYSE: P,UDS)
Sunoco (NYSE: SUN)
Texaco (NYSE:TX)
USX/Marathon and Ashland (NYSE: MRO,ASH)

This list includes a bunch of very different business models. There is an independent E&P company (Apache), a refining and marketing pure play (Sunoco), an oilfield services company (Baker Hughes), and a motor oil and automotive consumer products company (Pennzoil-Quaker State). The remaining companies reside in the "integrated" category, with some (Exxon Mobil) being much larger than others (Kerr-McGee).

A few quick notes about the companies on our list. BP Amoco has a new Direct Access Plan -- the company's fancy name for its combined Drip and DSP plan. The only fees involve the sale of shares, but there is one big catch -- new shareholders must make an initial $250 investment to join the plan. We don't particularly like that stipulation, but we can live with it. Pennzoil-Quaker State's new Shareholder Investment Plan also has fees for selling shares, but the fees end there.

We've decided to consider USX/Marathon and Ashland together, since they pretty much combined all of their downstream operations last year. Ditto for Phillips and UDS, which formed a big downstream joint venture called Diamond 66 this past October. We will do our best to factor in these deals and the three full-scale mergers on our list during our analysis. This will require combining some financial statements and making some well-informed projections, so things could get a bit messy. However, given our twenty year investment time horizon, we don't really have a choice. This is one of the challenges of examining an industry that is consolidating quickly and undergoing rapid change. We'll have to make the best of it.

Touchstone Friday: We managed to jam quite a bit of info into our columns during this holiday-shortened week. On Tuesday, George offered three different ways that Drippers can choose to make regular contributions to their selected plans, all of which have certain advantages and drawbacks. We don't want to tell you how to allocate each penny of your monthly cash flow -- we'll leave that to your spouse or significant other to decide. But George's suggestions are helpful and worth a look.

Jeff used Wednesday to cover the ever-changing world of portfolio holding Mellon Bank (NYSE: MEL), which last week decided to shed its mortgage business, credit card portfolio, and its network services transaction-processing unit. What does this mean for Mellon Drippers? Where is the company headed in the future? And why is someone trying to revive the lost sport of roller derby? Find out in Wednesday's column.

As mentioned above, Thursday's column was a closer look at the downstream end of the oil and gas business, courtesy of Frenchy. (That nickname is going to stick like road tar to a dirt lane in a Mississippi summer. Feel free to use it gratuitously in your posts this weekend on the message boards linked in the top right of this page.)

Next week, we'll have some more thoughts on the downstream biz and a report on the latest earnings from Johnson and Johnson (NYSE: JNJ). Then, we'll climb aboard the first racehorse on our list, Apache. Until then, have a great weekend!

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